Tata Group stock falls 5% after Q1 results; Here's what is pressuring the share price

Shares of Tata Elxsi Ltd. declined as much as 5% on Wednesday, July 15, after the Tata Group company reported a sharp decline in profitability for the June quarter, despite revenue coming in largely in line with Street estimates. The stock is also the top Nifty 500 loser today.

The engineering and design services firm reported constant currency revenue growth of 1.3% sequentially, broadly matching analysts' expectations of 1.2%. However, EBIT margin contracted 340 basis points quarter-on-quarter to 21.2%, missing the Street estimate of 22%.

The margin decline was primarily driven by large deal transition costs, customer-related expenses, investments in onsite sales and delivery capabilities, higher subcontracting costs, talent investments and certain one-time annual expenses.

Management indicated that the June quarter marked the peak of margin pressure, but also cautioned that the September quarter will be impacted by annual wage hikes.

What brokerages are saying

JPMorgan retained its 'Neutral' rating on Tata Elxsi with a price target of ₹3,500. The brokerage described the quarter as mixed, with revenue exceeding expectations marginally but profitability falling well short.

Revenue growth was led by the Media & Telecom vertical, while the Automotive and Healthcare businesses remained under pressure. Management expects momentum in Media & Telecom to continue, supported by recent deal wins and project ramp-ups.

However, JPMorgan said that the company's target of delivering high single-digit revenue growth in FY27 depends on a recovery in the Healthcare segment, where visibility remains uncertain.

The brokerage also highlighted management's commentary on continued headwinds in the European automotive market, which accounts for more than 40% of Tata Elxsi's automotive business.

On margins, JPMorgan said the sharp contraction was caused by a combination of deal transition costs, ramp-up expenses, onsite delivery investments, talent additions, customer-related provisions and one-off annual costs. While some of these costs are expected to taper off over the next one to two quarters, others may take longer to normalise.

As a result, JPMorgan expects margin expansion only from the third quarter onwards and has cut its earnings estimates by 1-13% for FY27-FY29, largely due to lower margin assumptions.

Kotak Institutional Equities maintained its 'Sell' rating on the stock with a price target of ₹3,000.

The brokerage said Tata Elxsi delivered in-line revenue but disappointed on profitability. While the Media & Communications segment benefited from deal ramp-ups, the Transportation and Medical Devices businesses posted a modest decline.

Kotak attributed the margin miss to deal transition costs and upfront investments in go-to-market (GTM) and delivery capabilities. It believes a significant portion of the cost inflation is structural and could continue to weigh on profitability.

The brokerage also said Tata Elxsi is catching up on investments in its sales organisation, particularly its deal-hunting capabilities, after a period of underinvestment.

On the automotive business, Kotak expects R&D spending by global automakers to remain subdued through calendar year 2026, citing geopolitical uncertainty, an industry downcycle and intensifying competition from Chinese OEMs. It added that several automakers have either delayed or cancelled new vehicle development programmes due to weak demand.

Given the challenging demand environment and moderate margin outlook, Kotak has reduced its earnings estimates by 10-14% for FY27-FY29.

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