KPIT Tech, Persistent Systems, Tata Elxsi, L&T Tech shares: JPMorgan says ER&D spend slowdown structural

Shares of KPIT Technologies Ltd, Persistent Systems Ltd, Tata Elxsi Ltd and L&T Technology Services Ltd saw a sharp selling in Tuesday's trade after JPMorgan said ER&D spend slowdown seen over the last six months is structural in nature and not cyclical.

The foreign brokerage continued to see derating potential from here. The brokerage has a target of Rs 4,100 for Persistent Systems, Rs 4,500 for Tata Elxsi, Rs 2,500 for L&T Technology and Rs 540 for KPIT Technologies, as per reports. Shares of KPIT Tech fell 3.08 per cent to Rs 1,028. Persistent Systems declined 1.28 per cent to Rs 4,684.15, Tata Elxsi dropped 1.81 per cent to Rs 7,343.55 while L&T Technology slipped 1.89 per cent YoY to Rs 3,845.

JPMorgan said its channel checks suggest there is no urgency among enterprises to spend on ER&D areas. Reopening post-Covid requires less need for spends on connected and smart products, JPMorgan said.

"We believe the ER&D spends slowdown seen over the last six months is structural and not cyclical, which makes current valuations super rich. ER&D services firms benefitted from increased digital spends in areas of Industry 4.0, factory automation, OTTs and connected health over the last three years, but the current tough macro has questioned the trajectory of these spends," it said.

JPMorgan said its channel checks suggest that there is no urgency amongst enterprises to spend on these areas, not only in this environment, but also beyond that, thanks to reopening that requires less need for spends on connected and smart products.

"This we believe puts the high teen revenue growth assumptions over the next decade priced into current stock valuations at risk, and we continue to see derating potential from here. We reiterate our UW stance on ER&D stocks LTTS, TELX, PSYS and KPITTECH," it said.

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