Tata Tech shares: Elara retains 'Sell', flags margin pressure, cuts target price

Elara Capital has retained its 'Sell' rating on Tata Technologies Ltd while cutting the target price to Rs 490 from Rs 515 (earlier), citing margin pressures and medium-term risks to auto services revenue despite near-term growth visibility.

"Tata Technologies' Q3 revenue was aided by non-auto services, while margins were impacted by wage hike and a cybersecurity incident at JLR. The company is aiming for sequential growth of 10 per cent in Q4 in the services segment, led by normalisation of revenues at JLR, integration of ES-TEC numbers and continued growth in non-auto services revenues, which should not be challenging in our view. Tata Tech is aiming for normalisation of margin in Q4 and margin may revert to Q2 level of 16 per cent. We maintain our view that in the medium term, due to planned scaling down of product investments by its anchor clients, JLR and Tata Motors, auto services revenue may come under pressure. We retain Sell with a lower TP of Rs 490 on 22x FY28E P/E," the brokerage stated.

In the December quarter (Q3), Elara said Tata Tech reported 1.2 per cent quarter-on-quarter (QoQ) revenue growth in US dollar terms and 2.3 per cent growth in constant currency (CC) terms, while revenue declined 2 per cent year-on-year (YoY) in dollar terms. In rupee terms, revenue rose 3.2 per cent sequentially and 3.7 per cent YoY, aided by rupee depreciation.

It said that growth was driven by the services segment, which contributes 78 per cent of overall revenue, rising 2.6 per cent QoQ in US dollar terms. Aerospace and industrial heavy machinery recorded 10 per cent and 19 per cent sequential growth, respectively. The technology solutions segment declined 3.4 per cent QoQ as weakness in the education business offset growth in products.

EBITDA margin fell 160 basis points (bps) QoQ to 14.1 per cent, impacted by annual wage revisions, a temporary revenue shortfall following a cybersecurity incident, and integration-related costs. Elara raised its FY27–28 revenue estimates modestly but retained its cautious stance, citing continued dependence on anchor clients.