KPIT, Tata Tech, LTTS, Tata Elxsi: What Kotak says on ERD services players

Indian pure-play Engineering, Research, and Development (ERD) services players witnessed a subdued performance in the March quarter, aligning with industry estimates. Most companies reported a decline in revenues, although L&T Technology Services (LTTS) and KPIT Technologies registered sequential growth, partly due to seasonality and new client acquisitions, Kotak Institutional Equities said in its latest note.

Despite robust deal wins across companies, the ramp-up phase is expected to be gradual. "The near-term growth outlook will be impacted by demand uncertainties, with hopes pinned on improvement in 2HFY26. EBIT margin was lower than expected across companies, impacted by weak revenue growth. We do not rule out a downside risk, despite significant moderation in FY2026E estimates," Kotak noted.

Among individual performances, Tata Elxsi and Cyient experienced revenue declines of 5.3% and 1.0%, respectively. Tata Technologies maintained flat service revenues but saw an overall decline of 3.3% quarter-on-quarter. LTTS showed a 2.5% growth on an organic basis, aided by Software Components (SWC) seasonality. KPIT experienced a 3% growth, benefitting from new clients, Kotak said.

Profitability took a hit due to weak revenue growth and increased competition. KPIT managed a 60 basis points increase in EBIT margin to 17.3% year-on-year, whereas Tata Technologies, Cyient, LTTS, and Tata Elxsi witnessed declines. LTT's lower-margin acquisitions further impacted profitability. "The near-term outlook remains more volatile while companies expect some improvement in 2HFY26, aided by an incremental contribution from new deal wins," Kotak said.

The demand outlook remains uncertain with higher tariffs adding pressure to the automotive sector. European peers like Alten and Capgemini also face challenges, with Alten's automotive business declining over 10% year-on-year. Both KPIT and Cyient chose not to provide FY2026E guidance due to these uncertainties, though LTTS expects double-digit revenue growth, inclusive of inorganic contributions.

Kotak Institutional Equities has reduced FY2026E earnings estimates across companies by 4-14%, citing lower revenue growth and profitability forecasts. "We maintain a cautious stance due to stretched valuations, despite multiple headwinds across companies," Kotak commented.

While there are challenges, Kotak is hopeful for improvement in the second half of FY2026, driven by new deal wins and a more favourable demand environment.