May 20, 2024

Illustration: Ajay Mohanty

The Indian engineering research and development (ER&D) players, such as Tata Technologies, Tata Elxsi and Cyient among others had a subdued January-March quarter (Q4) of fiscal year 2023-24 (FY24). And, as outlook for FY25 also remains unexciting amidst weak discretionary spends, analysts have cut their growth expectations for the ongoing financial year (FY25).

“We have cut FY25 earnings across companies by 2-9 per cent. The near term is not very encouraging with moderate growth outlook due to weak spends by clients, elongated sales cycles and limited visibility on conversion of order book,” Kawaljeet Saluja, Vamshi Krishna, and Sathishkumar S of Kotak Institutional Equities wrote in a recent report.

Except KPIT, which is continuing to benefit from tailwinds in the automotive sector and strategic partnerships with OEMs (Original equipment manufacturer), most E&RD players saw either flat or declining margins on a sequential basis. Tata Elxsi and LTTS earnings before interest and tax (Ebit) margins fell by 100 basis points (bps) and 30 bps, respectively. Others including Tata Technologies, Cyient and KPIT largely recorded flattish Ebit margins on a quarter on quarter basis.  

This, coupled with disappointing FY25 guidance from the management, threw caution to the wind, said analysts.

Tata Elxsi and Cyient constant currency revenues, at Rs 905 crore and Rs 1,489 crore, respectively, were lower than expected while KPIT Tech, LTTS, and Tata Technologies reported in line numbers.

InCred Capital, too has cut its FY25 earnings estimates from a mid-double digit growth to high single-digit growth for companies under their coverage.

“High single-digit growth takes into account the companies’ FY25 order book, macroeconomic environment, and our interactions with the management. KPIT Tech, followed by Persistent Systems, may outperform,” said Abhishek Shindadkr, equity analyst at InCred Capital.

Analysts believe companies having higher exposure to auto and aero space may shine amid a weak environment in FY25, but those with higher exposure to telecom service providers may remain on the weaker side.

Valuation play

On the bourses, stock prices of pure play ER&D players like Cyient, Tata Elxsi, LTTS, Tata Technologies, and KPIT Tech have seen a deep correction of 24.8 per cent, 18.6 per cent, 17 per cent, 14.4 per cent and 3.3 per cent, respectively, so far in the current calendar year (Cy24). By comparison, the S&P BSE Sensex has gained 0.5 per cent during the period.

Yet, most of the ER&D players are commanding price-to-earnings (P/E) multiples of 20-25 times as, post-Covid, these companies saw a significant re-rating.

At present, Cyient is trading at a P/E multiple of 38.39 times, KPIT at 122.71 times, LTTS at 36.66 times, and Tata Elxsi at 56 times, shows BSE data. By comparison, their 5-year P/E averages were in the range of 20-71 times.

Given this, analysts at Kotak Institutional Equities have maintained their ‘Sell’ rating on LTTS, KPIT, Tata Elxsi, and Tata Technologies factoring in unrealistic long-term growth expectations.

Shindadkr of InCred Capital, however, has a ‘Hold’ rating for LTTS and ‘Add’ for Cyient.

“In my opinion, one should consider higher exposure to larger, diversified and reasonably valued names like LTTS, and Cyient, and then top-up with concentrated, high growth and expensive names like KPIT, and TataElxsi,” said Mohit Jain, Research Analyst, Anand Rathi Institutional Equities.

First Published: May 13 2024 | 10:17 AM IST