Tata Tech Shares Outlook: Margin Pressure Prompts Elara to Cut Target Price
Citing margin difficulties and medium-term risks to auto services revenue despite near-term growth visibility, Elara Capital has maintained its “Sell” rating on Tata Technologies Ltd. while lowering the target price to Rs 490 from Rs 515 (before).
Non-auto services contributed to Tata Technologies’ Q3 revenue, but wage hikes and a cybersecurity issue at JLR had an impact on margins. With the normalization of JLR’s sales, the integration of ES-TEC figures, and the ongoing development in non-auto services revenues, the firm hopes to achieve a sequential growth of 10% in the services sector in Q4. These goals shouldn’t be difficult, in our opinion.
In Q4, Tata Tech expects to normalize its margin, which might return to its Q2 level of 16%. We continue to believe that auto services revenue may face pressure in the medium term owing to the projected reduction of product investments by its core clients, JLR and Tata Motors. The brokerage said, “We keep Sell with a lower TP of Rs 490 on 22x FY28E P/E.”
A report by Elara, Tata Tech reported 1.2% quarter-over-quarter (QoQ) revenue increase in US dollars and 2.3% growth in constant currency (CC) terms for the December quarter (Q3), although revenue fell 2% year-over-year (YoY) in dollars. Due to rupee appreciation, sales increased 3.2% sequentially and 3.7% year over year.
The services sector, which accounts for 78% of total revenue and increased 2.6% QoQ in US dollars, was cited as the main driver of growth. Industrial heavy machinery and aerospace both had sequential increase of 10% and 19%, respectively. The education business’s weekness exceeded product growth, leading in a 3.4% QoQ loss in the technological solutions category.
The impact of annual pay adjustments, a brief revenue shortfall after a cybersecurity issue, and integration-related costs, EBITDA margin dropped 160 basis points (bps) QoQ to 14.1%. Citing its ongoing reliance on anchor clients, Elara slightly raised its FY27–28 revenue projections while maintaining its conservative approach.
FAQs
Why did Elara Capital retain the ‘Sell’ rating on Tata Technologies shares?
Elara retained the ‘Sell’ rating citing margin pressures and medium-term risks to auto services revenue despite near-term growth visibility.
What target price did Elara Capital set for Tata Tech?
Elara lowered the target price from Rs 515 to Rs 490, based on 22x FY28E P/E.
How did Tata Tech perform in Q3FY26?
Tata Tech reported a 1.2% quarter-over-quarter revenue increase in USD and 2.3% growth in constant currency terms. However, revenue fell 2% year-over-year in dollars.
Which segment contributed most to Tata Tech’s growth?
The services sector, accounting for 78% of total revenue, was the primary growth driver, with industrial heavy machinery and aerospace showing sequential increases of 10% and 19%, respectively.
What impacted Tata Tech’s margins in Q3FY26?
EBITDA margin dropped 160 basis points QoQ to 14.1% due to annual pay adjustments, a brief revenue shortfall from a cybersecurity issue at JLR, and integration-related costs.
What is the outlook for Tata Tech in Q4 and FY27–28?
The company expects margin normalization in Q4, with auto services revenue facing medium-term pressure. Elara slightly raised revenue projections for FY27–28 while maintaining a conservative approach.
How are Tata Tech’s anchor clients affecting its growth?
Tata Tech’s reliance on anchor clients like JLR and Tata Motors is significant, and reduced product investments by these clients could impact auto services revenue in the medium term.
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