Reduce Tata Technologies; target of Rs 640: Prabhudas Lilladher

Prabhudas Lilladher's research report on Tata Technologies

The revenue performance (+4.5% CC QoQ) exceeded our expectation of sequential de-growth (-2.3% CC), attributed to outperformance in non-Auto Service and Passthroughs within Tech Solutions. Aerospace and IHM grew 14.8% QoQ, while the Technology Solutions portfolio rebounded 7.6% QoQ. Surprisingly, Auto segment delivered positive growth despite the operational glitch (limited impact) within its top account, the demand recovery beyond marquee accounts has stabilized and aided growth. The engagement within Aerospace is progressing well and moving upstream to complex engineering activities, ensuring continued steady double-digit growth. Q3 is expected to see a slowdown in the Auto segment due to the phased recovery within topaccount that will partly offset by seasonal uptick in Technology Solutions, before a further rebound in Q4. The BMW JV is also progressing well and deployed 1000+ employees (beyond earlier milestone) in Q2, adding further visibility for next year. We are also factoring in ES-Tec acquisition that is expected to integrate in Q3, with that the organic growth for FY26 revised upward to -1.2%/11.0% (earlier -3.5%/10.1%) YoY CC for FY26E/FY27E. On margins, the beat was notable due to revenue outgrowing our estimates, we are passing on partial benefits due to unanticipated risk in Q3.

Outlook

We are revising our margin estimates upward by 40bps/30bps for FY26E/FY27E, assuming margin profile of ES-Tec is in line with Consol. We upgraded our rating to Reduce (from SELL) and set a revised TP of Rs. 640, valuing stock at 29x Sep27E LTM earnings.