ICICI Securities sees recovery in ER&D stocks in Q2; Tata Tech, Netweb, IKS, Cyient among top picks

Indian engineering research and development companies are likely to report a better September quarter, with firms that have shifted towards high-growth areas expected to lead the recovery, according to ICICI Securities’ Q2FY27 preview note. Limited Middle East exposure for most players and stronger demand from the US are expected to support order books, it said.

After several quarters of macroeconomic turmoil, the brokerage said the segment is 'gaining momentum', supported by demand in automotive, aerospace and defence, industrial and heavy machinery, rail, and off-highway vehicles. It also pointed to better pipeline visibility for the second half of FY27 than in FY26.

Among the expected growth leaders, Cyient is forecast to post 4.5 per cent quarter-on-quarter (QoQ) growth in dollar revenue to about $170 million. ICICI Securities said only 0.5 per cent of this would be organic, with the rest coming from $6.5 million in inorganic revenue from the partial consolidation of the Tao Digital acquisition.

Aerospace is expected to maintain double-digit growth, while a semiconductor fab modernisation deal won in Q4FY26 is seen adding momentum. However, EBIT margin is expected to fall about 66 basis points to 12.5 per cent because of integration costs.

Tata Technologies is expected to grow 2.7 per cent in dollar terms, or 3.2 per cent in constant currency, to around $180 million on a strong base. It cited support from anchor clients, a deal pipeline that includes a $100 million Tenneco deal and a Japanese OEM opportunity, and traction in its BMW-led joint venture.

EBIT margin is seen rising 54 basis points to 13.8% despite wage hikes. ICICI Securities expects double-digit organic growth from the company in FY27, although Volkswagen’s slowdown may weigh on its ES-Tech revenues. L&T Technology Services is estimated to grow 2 per cent in dollar terms to about $316 million as the impact of the divested low-margin SWC business fades.

The brokerage pointed to traction in sustainability, improved automotive demand and the company’s engineering intelligence pivot. It also noted the recently announced $75 million, five-year engagement with a global technology firm. EBIT margin is expected to rise 31 basis points to 16 per cent, though weak European automotive demand remains a drag.

At the weaker end, Tata Elxsi Ltd is forecast to grow 0.6 per cent in dollar terms to about $108 million as automotive OEMs remain cautious on discretionary spending and large deals are still absent. Indirect exposure to Middle East tensions may affect its luxury auto segment, while healthcare and media are expected to fare better.

Margin is seen expanding 53 basis points to 19.5%, partly offsetting a 150 basis point wage-hike impact. KPIT Technologies Ltd is expected to report a 0.7 per cent decline in dollar revenue to about $175 million, in line with its guidance for a muted quarter.

ICICI Securities said the recovery could be prolonged because of its software-heavy, software-defined-vehicle-led portfolio, which it said is vulnerable to AI-led deflation. EBIT margin is expected to remain flat at 11.4 per cent. The Caresoft acquisition is expected to help, while a possible 1 per cent revenue contraction in FY27 remains a key monitorable.

ICICI Securities’ top picks in the ER&D space are Tata Technologies Ltd and Cyient Ltd, alongside IKS Health, Indegene Ltd and Netweb Technologies India Ltd in its broader coverage. It expects Tata Technologies to benefit from its aerospace pivot and focus on non-anchor clients, and Cyient from its semiconductor push and the Tao Digital deal.

Key monitorables include headwinds from the Middle East, whether the FY27 pipeline matches expectations set in Q4FY26, automotive demand in Europe and the US, the effect of profit warnings from BMW and Volkswagen, traction in defence, aerospace, industrial machinery, plant engineering and micro-mobility, the outlook for battery electric vehicles and signs of AI-led deflation.

The brokerage also expects the wider group to gather momentum through FY27, with LTTS benefiting from engineering intelligence solutions and a recovery in hi-tech. The main risks, it said, are a prolonged West Asia conflict that could disrupt supply chains and delay recovery, and signs of a muted 2026 outlook from large automotive OEMs.