Tata Technologies Early Green Shoots, Yet To Pan Put

Rating: SELL | CMP: Rs717 | TP: Rs570

Q1FY26 Result Update

Quick Pointers:

*     Services segment declined due to project ramp up delays & deferrals

*     EBIT Margins declined by 210 bps QoQ due to missing operating leverage

The Services revenue de-growth (7.6% CC QoQ) was below our estimates (5.1% CC QoQ), largely due to delayed ramp ups and slower decision making within automotive vertical. Although the aerospace momentum continued through Q1, the weakness in the Heavy-Machinery segment led the decline (4.7% QoQ) in non-Auto business. The management anticipates recovery in Q2 on the back of strategic deals signings, while early green shoots are visible in term of improved client sentiment and robust order book, hinting to a better H2 over H1. We believe, with improved client confidence, the earlier investments that were kept on hold would get prioritized first, while the new projects would continue to be pushed for further clarity on the trade war. Given the Q1 drag and volatility in the non-Auto business, the ask-rate for the Service business seems to be meaningfully high (~5% CQGR) to deliver flat growth in FY26. The reported margins were tad below our estimates by 30bps QoQ due to lower employee utilization and operating de-leverage. We are keeping our margin estimates broadly unchanged, while baking in revenue decline of 3.0% and 1.2% for Service/Consol business in FY26E followed by 11.5% growth in FY27E for both Service/Consol. We are assigning 28x PE to FY27E, translating a TP of 570 and maintain our SELL rating.

Revenue: Tata Tech reported a revenue of USD 145.3 mn, down 4.6% QoQ in CC & 2% in reported terms. The revenue decline was above estimate of 5.7% QoQ CC due to strong performance in tech solutions. Services segment revenue came at USD 112.5 mn, down 7.6% QoQ CC was below our estimate of 5.1% due to continued weakness in automotive segment and heavy machinery segment due to macro uncertainties. Among services segment, both auto business (83% of mix) and non-auto business (17% of mix) declined by 4.7% QoQ each.

Operating Margin: Tata Tech reported EBIT margin of 13.6%, down 210 bps QoQ lower than our & consensus estimate of 13.9% & 14.7% respectively. The margin miss was largely due to missing leverage on account of weak performance. Segment wise, Services segments EBITDA margin declined by 630 bps QoQ while Tech Solutions EBITDA margin declined by 80 bps QoQ. Company reported PAT of INR 1.7 bn above our estimate of INR 1.4 bn due to higher other income.

Deal Wins: Tata Tech during the quarter won 6 large deals including 4 large deals of USD 10 mn+ and 2 deals with TCV of USD 5-10 bn. Management indicated that the deal wins in Q1FY26 is materially better than Q1FY25, with the strong deal closure observed at the end of June quarter.

Valuations and outlook: We estimate USD revenue/earnings CAGR of 5.1%/10.2% over FY25-FY27E. The stock is currently trading at a PE of 35x FY27E earnings, we are assigning P/E of 28x to FY27E with a target price of INR 570. We maintain our “SELL” rating.