India's largest engineering, research, and development (ER&D) companies hit a growth wall last fiscal year as car companies tightened their purse strings, hurting revenues and margins.
Three of India’s four largest ER&D companies—L&T Technology Services Ltd (LTTS), KPIT Technologies Ltd and Tata Elxsi Ltd—reported their slowest annual revenue growth in at least five years in FY26.
LTTS ended the year with $1.23 billion in revenue, up 8.35% year-on-year, while KPIT's revenue rose 4.8% to $724.8 million and Tata Elxsi's increased just 0.8% to $437 million.
“Global auto OEM are reprioritizing R&D spends, shifting focus away from new EV (electric vehicle) and SDV (software-defined vehicles)platform development toward sustaining existing model portfolios and extending platform lifecycle," said Kotak Institutional Equities analysts Kawaljeet Saluja, Vamshi Krishna, and Sathishkumar S., in a note dated 11 May. "This will likely result in smaller deal sizes and higher pricing scrutiny as part of cost-optimization efforts,” they said.
Tata Technologies Ltd was the only exception. The company reversed a revenue decline to post 1.5% growth, ending FY26 with revenue of $619.8 million. However, much of that increase came from its largest client, Jaguar Land Rover, which contributes roughly a quarter of its business.
Last year's slow growth is in stark contrast to five years ago, when each of these companies reported double-digit growth. In FY22, LTTS, KPIT, Tata Technologies, and Tata Elxsi grew by 20%, 19.5%, 47% and 35.3%, respectively. Each of these companies gets at least a fourth of its revenue from car companies.
ER&D firms are classified as IT firms but they specialise in providing niche engineering services to companies rather than managing the core software as tech services firms do.
LTTS does not disclose revenue from automotive customers separately; instead, it reports it under its ‘mobility segment’, which accounts for nearly one-third of total revenue.
For the Vadodara-based company, growth was driven by technology and industrial clients that together account for one-third of its business.
KPIT, meanwhile, benefited from demand for cloud-related services, which account for about a fifth of its business.
Tata Elxsi’s growth came largely from developing and maintaining software for transport companies, which account for a little more than half of its business. Still, this segment reported its slowest growth in the last five years.
Manoj Raghavan, CEO of Tata Elxsi, during the company’s post-earnings conference call on 21 April, said, "…given the current geopolitical and all the war and all that, while we have the deals in hand and we will definitely look at ramping up and so on, there could be some amount of uncertainty. We are still talking to customers on that. Having said that, I think maybe we would look at a high-single digit exit, may not get into a double-digit for automotive.”
The slowdown marks a reversal for a segment that had been one of the brightest spots in India's technology industry. HCL Technologies Ltd's engineering services arm, for example, has been the company's fastest-growing business in four of the past five years and now contributes nearly a fifth of its $14.66 billion revenue.
The appeal of automotive engineering also drove a wave of acquisitions. The country’s second-largest IT services company, Infosys Ltd, made one of its largest-ever acquisitions in June 2024 when it acquired In-Tech, a German ER&D firm focused on the country’s automotive industry, for $480 million. HCLTech bought Germany's ASAP Group in August 2023 for about $280 million.
For now, ER&D firms are beginning to resemble their larger IT services peers, which have struggled with weak technology spending, AI-led revenue deflation and geopolitical uncertainty. Three of India's five largest IT services companies reported revenue growth of just 1-6% last fiscal year, while two posted revenue declines.
Margins came under pressure
Profitability also deteriorated across the ER&D sector. LTTS, KPIT, Tata Technologies and Tata Elxsi’s operating margins fell 90 bps, 100 bps, 220 bps, and 330 bps to 14.5%, 16.2%, 13.9%, and 20%, respectively, whereas shares of Tata Technologies rose 0.64%.
“We believe KPIT remains well-positioned to benefit from the long-term shift toward SDVs (software-defined vehicles), supported by its capabilities, end-to-end automotive software stack, and increasing focus on products and solutions,” said Motilal Oswal Financial Services analysts Abhishek Pathak and Keval Bhagat, in a note dated 7 May.
“While near-term demand remains uneven due to delays in OEM platform programs and the ramp-down of two large SDV engagements in 1HFY27, we believe that automotive ER&D spending is nearing a bottom, with medium-term software demand remaining structurally intact.”
The sector retains one advantage over traditional IT services firms: lower coding-led revenue in their mix, according to a Mint report dated 7 March.
