PL Capital has initiated coverage on KPIT Technologies, L&T Technology Services (LTTS), Tata Elxsi, and Tata Technologies, amidst a backdrop of caution among Original Equipment Manufacturers (OEMs) due to tariff uncertainties. PL Capital noted that OEMs are conserving cash by pausing or delaying non-critical programmes, a trend expected to last until the first half of FY26. This strategic conservation is a response to recent changes in trade policies that have impacted automotive outsourcing spends.
Outsourcing players with comprehensive automotive capabilities, from legacy to digital and embedded systems, are better positioned to meet OEM needs. PL Capital specifically highlighted KPIT and Tata Technologies as vendors likely to see better earnings growth, owing to their established joint ventures with key players. The report suggests that while the tariff-oriented uncertainties are likely to impact topline growth in FY26, these partnerships might cushion the effects.
The global outsourced Engineering, Research, and Development (ER&D) spend is projected to grow at a compound annual growth rate (CAGR) of approximately 10% over CY22-26, with long-term growth estimates even more promising at 18% over CY23-30. Manufacturing commands a significant portion of this spend, with automotive representing 20% of the pie. Indian engineering service providers (ESPs) and Global Capability Centres (GCCs) are expected to grow at a 21% CAGR over CY23-30, with automotive ESPs outpacing GCCs.
KPIT Technologies is emphasised for its focus on the Chinese market and middleware innovation, such as QORIX. The company is projected to achieve a USD revenue/EBIT/PAT CAGR of 12.3%/16.9%/14.1% over FY25-27, with a ‘HOLD’ rating and target price of Rs. 1,410. LTTS, with its full-vehicle architecture capabilities, is anticipated to face growth challenges in its Mobility segment due to tariff uncertainties, despite a recent acquisition potentially broadening its service lines.
Tata Elxsi’s focus on the transportation vertical, alongside media, entertainment, and healthcare, positions it to benefit from increasing ER&D spends. However, PL Capital initiated a ‘SELL’ rating on Tata Elxsi, projecting a USD revenue/EBITDA/PAT CAGR of 5.3%/9.8%/9.1% over FY25-27, with a target price of Rs. 4,950.
Tata Technologies, meanwhile, is well-positioned to assist OEMs in advanced markets, particularly with EV projects. The company’s joint venture with BMW enhances its offerings in new-age mobility solutions. PL Capital’s report estimates a USD revenue/EBITDA/PAT CAGR of 4.7%/8.4%/12.3% over FY25-27, with a ‘SELL’ rating and a target price of Rs. 590.
The transition from Internal Combustion Engine (ICE) vehicles to EVs and hybrids is reshaping vehicle architecture, increasing the focus on electronic components and E/E architecture. The share of ICE vehicles is projected to decline significantly from 70% in CY24 to 38% by CY30, driven by environmental goals and increasing EV acceptance.
Heightened tariff uncertainties and the dominance of Chinese players are influencing the growth profiles of US and European automotive OEMs. This has led to corrections in the valuations of ER&D players, as these regions’ fortunes are closely tied with ESPs. Despite this, Indian ER&D providers continue to trade at a premium compared to global peers, attributed to their performance and growth potential in the expanding outsourcing market.
As the industry continues to navigate uncertainties, PL Capital remains selective in the space, favouring companies with a comprehensive playbook in engineering practices capable of operating within a narrow margin band. This cautious approach is reflective of the broader market conditions and the ongoing transformation within the automotive sector.
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