- Goldman Sachs rates Tata Technologies as sell with a 12-month target of Rs 550
- Tata Tech shifts focus to embedded and digital services amid Chinese OEM competition
- One-third revenue from Tata Motors and JLR limits Tata Tech's customer base expansion
Tata Technologies Ltd. has received a 'sell' rating from global financial services firm Goldman Sachs, whose 12-month target price for the company stands at Rs 550, implying an over 32% downside to the current market price.
The stock is up 42% in the last six months and 26% year-to-date. So, what makes Goldman Sachs cautious? The brokerage has underlined that Tata Tech's management sees a major shift towards embedded and digital services, while Chinese OEMs are resetting cost and development benchmarks.
Tata Technologies is moving more into embedded and digital services, the brokerage said, even as Chinese carmakers push down costs and speed up development — forcing rivals to keep pace.
However, there are a host of factors that may strain the stock's future as outlined by GS:
1. The company is over-indexed on moderate-growth, low-margin body engineering/ mechanical projects compared to fast-growing high-margin Computer-Aided Software Engineering (CASE) software related Research and Development (R&D) spending
2. It is generating nearly one-third of revenue from parent entities (Tata Motors and JLR), which could make broadening the customer base harder, especially with peers of JLR who are large auto R&D spenders.
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3. Finally, Tata Tech is witnessing normalisation in engineering revenue from the VinFast account. While the stock is generally trading at a slight premium with listed peers on one year forward price to earnings ratio in its short trading history, Goldman Sachs finds this valuation premium unwarranted given the more normalised growth opportunity ahead compared to peers.
"Catalysts include scarcity of software deals with JLR competitors, ramp down in the VinFast account and continued pickup in EV spending on software vs body engineering," the brokerage highlighted.
Tata Tech Q1FY27 Recap
Tata Technologies reported a decline in net profit for the June quarter even as revenue and operating margins improved sequentially, supported by continued momentum in its services business.
The Tata Motors subsidiary posted a consolidated net profit of Rs 181 crore for the first quarter of fiscal 2027, down 11.5% from Rs 204 crore in the preceding quarter.
Revenue from operations rose 5.9% quarter-on-quarter to Rs 1,665 crore from Rs 1,572 crore. Operating performance also improved during the quarter. EBIT increased 7.5% sequentially to Rs 221 crore from Rs 205 crore, while the EBIT margin expanded to 13.25% from 13.06% in the March quarter.
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