With demand uncertainties in the IT services industry from H2CY24 having trickled into CY2025 budgets, Kotak Institutional Equities (KIE) said, the weakness will continue in FY2026. The demand pipeline has built up well at most ERD service providers with exposure to the automotive vertical. However, it added, deferral of decision-making by German OEMs has impacted conversion. Demand outlook at other manufacturing-focused industries is also yet to improve. “We bake in a moderate demand outlook, leading to cuts to earnings estimates across companies. We retain our cautious view owing to slowing macro and weak demand outlook despite a ~14-40 per cent decline in stock prices over the past three months,” KIE report said.
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Healthy pipeline but conversion stuck in a limbo
Per the analysis report, automobile OEMs are realigning their investments to meet evolving demand patterns. “While new platform development-related spends remain relatively resilient, OEMs are at a crossroads to either double down on electrification initiatives or channel investments toward alternate powertrains (hybrid/ICE). Auto OEMs realize the need to invest in new technologies to ensure business relevance,” the Kotak report stated.
The pipeline, the report said, has built up to record levels across most Indian and European players, as more RFQs (Request for Quotation) are floated by clients. The uncertainty around the medium-term strategy has impacted decision-making and as a consequence, conversion into the order book.
Kotak said that impact has been more severe for German OEMs and has percolated down to the spending outlook by these clients. “We believe spending would remain weak in H1CY25, but the recovery is likely to be gradual, resulting in a weak growth outlook for the year,” it said.
Pricing pressure might stem from increased competitive intensity for large deals
Auto OEM R&D spending growth in CY2025 will be modest, with a focus on efficiency and shifting investments to low-cost countries from nearshore locations. Kotak Equities said that ESPs with strong embedded engineering and offshore capabilities could benefit from large deals, but intense competition and cost pressures may impact pricing in new contracts.
Overview on weak demand outlook
Kotak Equities lowered revenue growth estimates for KPIT, TELX, and TTL for FY2026-27E due to delayed pipeline conversion and JLR exposure,
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