
Nirmal Bang Institutional Equities has recently initiated coverage on select IT stocks including KPIT Technologies, Tata Technologies, and Tata Elxsi, identifying Indian Engineering Research & Development (ER&D) Services at a crucial juncture. The firm observes a shift in global ER&D spending from discretionary projects to essential digital investments, with a projected growth of approximately 10% CAGR, reaching USD 3.7 trillion by 2028 from USD 2.5 trillion in 2024. This transition opens a USD 780 billion opportunity as ER&D outsourcing is expected to rise from 12% to 20% of global expenditure by 2030.
India is poised to benefit significantly from this trend, as its share of ER&D outsourcing is expected to climb from 15% (US Dollar 44 billion in 2024) to 20% (US Dollar 130 billion) by 2030, reflecting an 18% CAGR over six years. Pure-play Engineering Service Providers (ESPs) are experiencing substantial growth, with improved client mining and deal tenure being noteworthy achievements, according to Nirmal Bang.
KPIT Technologies, a niche player in automotive software, has been given a 'BUY' rating with a target price of Rs 1,609. The company specialises in embedded systems, AI-driven solutions, and digital transformation for software-defined vehicles (SDVs), electric vehicles (EVs), and autonomous driving technologies. KPIT's solid operational excellence over the last 19 quarters and robust Total Contract Value (TCV) show over the last 13 quarters, alongside continued improvement in return ratios, cash conversion, and margins, have been highlighted by Nirmal Bang. The stock has corrected by approximately 30% over the past year and from its peak in July 2024.
Tata Elxsi, renowned for its premium design-led capabilities, has been initiated with a 'HOLD' rating at a target price of Rs 6,274. This player leads in OTT platforms, automotive SDVs, and healthcare technology, leveraging its highest offshore revenue, differentiated intellectual properties, and top-tier return ratios. Nirmal Bang praises the company's ability to maintain industry-leading performance without acquisitions and by staying organic, highlighting its strong strategic partnership ecosystem with companies like Nvidia, Qualcomm, and Microsoft.
Despite macroeconomic uncertainties posing near-term challenges, Tata Elxsi is projected to achieve CAGRs for FY25-27E over US$ revenue/EBIT/EPS of 10%/16%/14%. The company's stock has seen a correction of approximately 32% over the last six months and around 40% from its peak. Nirmal Bang notes the company's last 5-year US$ revenue CAGR was 15% compared to a 10% CAGR over the last 10 years.
Tata Technologies is another firm under coverage with a 'HOLD' rating and a target price of Rs 775. The company is positioned as a long-term investment option due to its leadership in EV and SDV ER&D, along with benefits from Tata Motors' synergy and JLR's turnaround. Tata Technologies' strengths include its end-to-end product development capabilities, strong client ecosystem, and diversification into high-growth areas such as passenger vehicles, commercial vehicles, and aerospace.
Near-term challenges for Tata Technologies include tariff-led uncertainty and a slowdown in EVs, which could impact earnings growth in FY26. Nirmal Bang expects a CAGR over FY25-27E for US$ revenue at 10%, EBIT at 15%, and EPS at 14%. The stock has corrected approximately 37% from its IPO listing price and 27% over the last year.
Manufacturing, contributing around 51% to the overall ER&D spend, is undergoing a rapid digital transformation, with significant growth anticipated in automotive, industrial, aerospace & defence, telecom, and medical devices sectors. This transformation is driving the demand for large strategic deals, contributing to annuity revenue streams, according to Nirmal Bang.
The sector is experiencing tailwinds from a shift to multi-year strategic deals, increased embedded software outsourcing due to ESG and compliance mandates, and a post-COVID rise in the offshore mix, which has improved delivery margins and profitability.
Overall, the structural change in the demand trend for niche ER&D players is set to continue, as Nirmal Bang expects Indian ESPs to be prime beneficiaries due to their unique partnerships with top global OEMs and higher growth prospects than traditional IT services companies.