Tata Technologies net profit up 6.1% sequentially to ₹170.2 crore in Q3

Tata Technologies, the pure-play automotive and engineering, research and development (ER&D) services firm, on Thursday announced a 1.6% sequential growth in its rupee revenue to ₹1,289.5 crore, while net profit rose 6.1% sequentially to ₹170.2 crore. Dollar revenue was up 0.9% sequentially to $154.8 million, while its earnings before interest and taxes (ebit) margin remain constant year-on-year at 16.2%. 

Dollar revenue of its services vertical, which contributes 78% of its overall operating revenue, dropped 1.7% sequentially, which Warren Harris, managing director and chief executive, said was due to seasonality of the traditionally weak quarter, as well as the completion of a large deal.

Tata Technologies did not make any net additions to its large clients with deal value of over $5 million during the period. However, it added 172 employees to its net headcount, even as attrition dropped by 1.8 percentage points toQ3 earnings 15.4%.

In a post-earnings interview with Mint, Harris, signalled a potentially muted end to the ongoing financial year, albeit long-term bullishness.

“Our quarterly performance was as we expected. The growth rate was somewhat muted, given that Q3 is typically soft because of festivals and holidays. We’re also coming to the end of an engagement with a south-east Asian OEM, for whom we finished engineering, and test and validation for two electric vehicles. We’re now transitioning to launch support, as a result we’re blowing our resources, but that’s impacting the growth we’ve recorded over the last couple of years,” Harris said.

The executive added that the ongoing March quarter is expected to be the last of when the end of the previous deal affects the company. “Beyond that, we’re extremely bullish about FY25. We announced five key deal signings, and partnerships and alliances such as the one with Agratas (a Tata Sons subsidiary) on battery technology, and another with Intel and Arm. These augur well for our electric and software-driven vehicle (SDV) propositions,” he said.

“However, the deal run-off with the south-east Asian OEM will continue in Q4, so we’ll have to find a way to back-fill that. This will likely taper growth in Q4. By Q1FY25, we’ll be back to stronger sequential growth.”

Tata Technologies, on 30 November became the first Tata group company to list on a public exchange since Tata Consultancy Services in 2004, and became the best initial public offering (IPO) in over two years in India. The company’s shares opened at ₹1,200 on the National Stock Exchange—a 2.4x rise from its IPO price of ₹500. However, the stocks have remained tepid since then, closing at ₹1,144.20 on Thursday—down from a high of ₹1,400 just after its public listing.

Investors and analysts had, at the time of listing, raised concerns around the company’s clear dependence on its parent group for a large part of its business.

“We’re presently drawing under 33% of our operating revenue from Tata Motors and Jaguar-Land Rover as of last year. However, this will increase in the short term,” Harris said, attributing it to increasing electrification bets made by Tata Motors. “However, this will come down in the medium to long term.”

Other concerns highlighted by analysts in the short term include recurring client concentrations, as well as macroeconomic headwinds. Harris, however, said that one of the factors that will fuel the company’s FY25 growth is its ability to retain clients. “Nearly 98% of our annual revenue typically comes from existing customers. We are going after new clients in automotive, aerospace, transport, construction and machinery areas. This is working, at this time last year, we had 34 $1 million-plus clients. In the December quarter, we had 39 of them. But, our primary focus will remain on realizing opportunities with existing customers,” he said.

Harris also said that the company does not see direct pressure from geopolitical concerns, such as any potential impact on Taiwan, since automakers typically invest in R&D three to four years in advance.

Analysts, however, are taking a mixed view. A senior equity analyst at a top Mumbai-based brokerage firm, who requested anonymity, said that Tata Technologies’ IPO gains brought the company to a valuation that will likely remain at par over the next few quarters. “If client distribution improves, Tata Technologies could see some steady growth in the next few quarters. But we do not see a stellar growth rate in the coming quarters,” the analyst said.

A second analyst said that the overall automotive and ER&D market is a bullish vertical at the moment. “More than resilience to macroeconomic headwinds, the automotive and ER&D (engineering research & development) sectors are seeing strong pockets of spending that are driving growth for companies catering to automakers. This is coming from large contracts, which makes these sectors that could potentially grow at a premium to IT services. KPIT Technologies, for instance, is seeing organic growth of 25% this quarter, which is terrific growth in a year like this. Tailwinds like software demand from auto OEMs is creating a lot of work. Overall, it seems to be demand that will sustain beyond the short term,” the analyst said.

It is this that is seeing larger players, such as HCL Technologies, also tap into the segment, as C. Vijayakumar, chief executive of HCL Technologies said in a post-earnings interview with Mint on 15 January. Harris, too, acknowledged this as a factor that could add to market competition. “We don’t underestimate the large IT services firms with large capitals and willingness to invest in the automotive and ER&D space. But, we have domain knowledge, which should matter to the market and clients in the long run,” he said.