Sell Tata Technologies, LTTS, KPIT Tech & Tata Elxsi shares, says Kotak. Here's why
Kotak Institutional Equities retained its 'Sell' rating on shares of KPIT Technologies Ltd, L&T Technology Services Ltd (LTTS), Tata Elxsi Ltd and Tata Technologies Ltd. It prefers Cyient, Infosys and TCS.
- Mar 26, 2024,
- Updated Mar 26, 2024 10:10 AM IST
Kotak Institutional Equities said the spend intensity by automotive clients may get peaked in 2024 but the prevailing valuations of ERD services IT players suggest optimistic growth estimates. It has retained its 'Sell' rating on shares of KPIT Technologies Ltd, L&T Technology Services Ltd (LTTS), Tata Elxsi Ltd and Tata Technologies Ltd.
"Outlook on R&D spends by most automotive clients suggests continued spends on electrification, autonomous and softwarisation initiatives. However, spend intensity is expected to peak in CY2024, with few OEMs indicating decline in spends from CY2025. Auto OEMs are likely to outpace Tier-1 suppliers on R&D investments in CY2024E. ERD services having higher exposure to Tier-1 suppliers are likely to underperform," it said.
Kotak said valuations imply sustained elevated growth over the long term, which is unlikely in its view. The domestic brokerage noted that tier-1 suppliers have been hit due to evolving business dynamics. Suppliers of mechatronics components used in ICE powertrain have been impacted, it said, as it is reflected in the focus on R&D efficiency and subdued incremental investments.
ERD vendors such as Tata Elxsi and LTTS with higher exposure to auto Tier-1 suppliers are likely to underperform on growth in the vertical, Kotak said.
"Strong growth rate in the transportation vertical across companies has led to increased optimism on sustenance of growth at elevated levels. Current valuations imply a revenue CAGR of 18-20 per cent over the next 10 years at KPIT Tech, Tata Technologies and Tata Elxsi. We remain cautious, given indications of moderating spends by automotive clients. We prefer Cyient, Infosys (BUY) and TCS (ADD), which appear attractive picks within our coverage," Kotak said.
Investments by automotive clients in multiple areas such as technology transition, exploring emerging technologies and maintenance of existing platforms led to robust double-digit growth in R&D spends across most OEMs. "However, R&D expenditures at US OEMs such as GM and Ford were relatively subdued. In contrast, R&D spends growth was muted at Tier-1 suppliers such as Continental and ZF, given business challenges and focus on R&D efficiency," Kotak said.
Kotak Institutional Equities said the spend intensity by automotive clients may get peaked in 2024 but the prevailing valuations of ERD services IT players suggest optimistic growth estimates. It has retained its 'Sell' rating on shares of KPIT Technologies Ltd, L&T Technology Services Ltd (LTTS), Tata Elxsi Ltd and Tata Technologies Ltd.
"Outlook on R&D spends by most automotive clients suggests continued spends on electrification, autonomous and softwarisation initiatives. However, spend intensity is expected to peak in CY2024, with few OEMs indicating decline in spends from CY2025. Auto OEMs are likely to outpace Tier-1 suppliers on R&D investments in CY2024E. ERD services having higher exposure to Tier-1 suppliers are likely to underperform," it said.
Kotak said valuations imply sustained elevated growth over the long term, which is unlikely in its view. The domestic brokerage noted that tier-1 suppliers have been hit due to evolving business dynamics. Suppliers of mechatronics components used in ICE powertrain have been impacted, it said, as it is reflected in the focus on R&D efficiency and subdued incremental investments.
ERD vendors such as Tata Elxsi and LTTS with higher exposure to auto Tier-1 suppliers are likely to underperform on growth in the vertical, Kotak said.
"Strong growth rate in the transportation vertical across companies has led to increased optimism on sustenance of growth at elevated levels. Current valuations imply a revenue CAGR of 18-20 per cent over the next 10 years at KPIT Tech, Tata Technologies and Tata Elxsi. We remain cautious, given indications of moderating spends by automotive clients. We prefer Cyient, Infosys (BUY) and TCS (ADD), which appear attractive picks within our coverage," Kotak said.
Investments by automotive clients in multiple areas such as technology transition, exploring emerging technologies and maintenance of existing platforms led to robust double-digit growth in R&D spends across most OEMs. "However, R&D expenditures at US OEMs such as GM and Ford were relatively subdued. In contrast, R&D spends growth was muted at Tier-1 suppliers such as Continental and ZF, given business challenges and focus on R&D efficiency," Kotak said.