Tata Technologies faces continued selling pressure from Motilal Oswal, which has maintained its 'Sell' rating on the engineering services company with a target price of ₹550.00. The brokerage's stance comes despite mixed quarterly results that showed revenue growth but margin compression.

Q3 FY26 Financial Performance

The company's third-quarter performance presented a mixed picture with revenue growth offset by profitability concerns:

The revenue performance exceeded Motilal Oswal's expectations, with the company achieving 2.3% quarter-on-quarter growth in constant currency terms against the brokerage's estimate of 1.0% QoQ growth. The services segment, which forms the core of the business, contributed $118.60 million with 3.8% QoQ growth in constant currency terms.

Margin Pressure and Profitability Concerns

Despite revenue growth, Tata Technologies faced significant margin compression during the quarter. EBIT margins declined to 11.5%, representing a substantial 190 basis points drop quarter-on-quarter, though this aligned with Motilal Oswal's estimate of 11.4%.

Adjusted profit after tax fell to ₹1,350.00 million, declining 18% quarter-on-quarter and 19% year-on-year. This performance fell short of the brokerage's estimate of ₹1,466.00 million. The company excluded one-time impacts totaling ₹1,284.00 million post-tax, attributed to changes in labor codes and business combination costs.

Valuation Concerns Drive Sell Rating

Motilal Oswal's bearish stance stems primarily from valuation concerns rather than operational performance. The brokerage highlighted that at approximately 33x 12-month forward price-to-earnings ratio, Tata Technologies trades at premium valuations relative to both its growth prospects and peer companies in the sector.

The target price of ₹550.00 reflects the brokerage's view that the current market valuation does not adequately account for the company's growth trajectory and competitive positioning within the engineering services sector.

Tata Technologies has received a Hold rating from Prabhudas Lilladher with a target price of ₹660, as the brokerage highlighted mixed performance indicators and sector-specific challenges facing the engineering services company.

Revenue Performance Exceeds Expectations

The company delivered stronger-than-anticipated revenue growth in the latest quarter, with performance metrics showing encouraging trends across key business segments.

The outperformance was primarily attributed to strong growth in non-Auto services and a lower than anticipated ramp-down in the anchor account, which helped offset weakness in other areas.

Aerospace Segment Shows Strong Growth Trajectory

The aerospace division continues to demonstrate robust progress, with management highlighting significant developments in this high-potential segment. The engagement within aerospace is progressing well and moving upstream to more complex engineering activities. Management anticipates the aerospace segment to generate $40 million in revenue by FY26, representing a substantial growth opportunity for the company.

The continued momentum in aerospace and Industrial Heavy Machinery (IHM), along with securing large programs for full-vehicle development, provides confidence for future growth prospects.

Management Outlook and Growth Projections

Management expressed confidence in reversing Q3 weakness and delivering double-digit growth in Q4, supported by several key factors:

• Stabilizing operations of the anchor account
• Ramp-up in automotive programs signed during Q3
• Early signs of spending recovery among automotive OEMs
• Strong progress in the BMW joint venture with 1000+ employees deployed

For the medium term, management expects to drive double-digit organic growth in FY27, backed by continued aerospace momentum and automotive sector recovery.

Revised Financial Estimates and Concerns

Prabhudas Lilladher has updated its organic growth projections while expressing caution about certain risk factors.

The brokerage has reduced EBIT margin estimates by 40 basis points each for FY27E and FY28E due to higher depreciation and amortization from ES-Tec integration. Key risk factors identified include the high base effect in Q4, lumpiness in technology solutions, and uncertainty around automotive sector recovery timing.

Investment Recommendation

Prabhudas Lilladher maintains its Hold rating on Tata Technologies, assigning a 27x multiple to FY28E EPS, which translates to a target price of ₹660. While the company shows promise in aerospace and has demonstrated revenue resilience, the mixed automotive sector outlook and margin pressure from integration costs warrant a cautious approach.