Tata Technologies reported mixed Q2 FY27 results, balancing a significant USD 138 million contract win against rising wage and subcontracting costs. Brokerage firm Prabhudas Lilladher maintains a cautious stance, citing high stock valuations and margin compression. Investors are monitoring whether the company can balance its strong order pipeline with the cost of execution in the competitive engineering services sector.
Tata Technologies reported mixed performance for the second quarter of the fiscal year 2027. The company's revenue growth, which stood at 1.9% in constant currency terms, met analyst expectations. However, the firm faced difficulties on the profitability front, with operating margins missing projections by 70 basis points.
The margin shortfall was primarily driven by two factors: an annual wage increase and rising subcontracting expenses, which together impacted the EBITDA margins by 100 basis points. Furthermore, the company continues to invest heavily in ramping up its operations to meet the requirements of its growing order book.
Despite the margin challenges, the company’s ability to secure large-scale contracts remains a highlight. During the second quarter, Tata Technologies won five significant contracts. The most notable of these is a USD 138 million full-vehicle engineering program for a major European luxury original equipment manufacturer. This is the second consecutive quarter where the company has successfully closed a deal valued at over USD 100 million, showcasing its strong position in the engineering, research, and development space.
While deal momentum remains strong, the firm's ES-Tec segment is currently experiencing a period of weakness. Management has indicated that this segment-specific challenge is expected to persist in the near term before showing signs of stabilization early in the next fiscal year.
Following these results, analysts at Prabhudas Lilladher have updated their outlook for the firm. They have increased revenue growth estimates for fiscal years 2027 and 2028 to 21.7% and 13.0%, respectively. Despite the optimistic revenue outlook, the brokerage has lowered its EBITDA margin estimates for the next three years, reflecting the persistent costs associated with large project execution and necessary infrastructure investments.
Brokerage firm Prabhudas Lilladher has maintained a 'Reduce' rating on the stock. Their assessment is based on the view that the company's current market valuation, which trades at 28x and 24x projected earnings for FY28 and FY29, remains ahead of its fundamental profit growth potential. While they have raised the target price to Rs 670, the brokerage noted that the stock currently offers limited immediate upside for investors based on its price-to-earnings multiples.
Looking ahead, the key monitorables for investors will be the company’s ability to manage its rising subcontracting and wage costs against its deal pipeline. Success in stabilizing the ES-Tec division and achieving better operational efficiency will be crucial for the firm to align its profitability with the revenue growth seen in its order book.