EV slump hits big IT, but smaller research services companies shine

KPIT, LTTS, and Tata Elxsi, which get between 35% and 97% of their total business from car manufacturers, saw their revenues from the transportation vertical jump 3.7%, 6.5%, and 4.4%, respectively, on a sequential basis for the quarter ended June 2024, according to data from the companies' quarterly financial results.

“Growth was concentrated, driven by the ramp-up of large deals across companies–Forvia at LTTS, JLR and others at TELX (Tata Elxsi) and Japanese OEM engagements for KPIT," said Kotak analysts Kawaljeet Saluja, Vamshi Krishna, and Sathishkumar S. in a note dated 29 July.

KPIT is a Pune-headquartered ER&D firm that provides its services to automotive companies. It reported $165 million in revenue for the June 2024 quarter, almost all of which came from passenger cars and commercial vehicles.

LTTS is a Vadodara-headquartered ER&D company that counts a little more than a third of its revenues from the mobility segment including commercial and personal vehicles. Tata Elxsi is a Bengaluru-headquartered design and technology service provider to automotive companies with the latter making up more than half its ₹926.5 crore ($111 million) revenue in the quarter ended June 2024.

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To be sure, two of India’s largest software services companies have sounded a cautionary note on the auto sector.

“We saw in fact a significant weakness in the automotive segment, contrary to all the expectations, because we see a lot of stress with the automotive firms in Europe," said C. Vijayakumar, chief executive officer of Noida-based IT services company HCL Technologies Ltd, in a post-earnings interaction with analysts on 12 July.

K. Krithivasan, chief executive of TCS, mirrored similar caution on headwinds in the company’s manufacturing sector.

“By and large, we are fine. But that (headwind) could be in terms of, like, if you take automotive industry with the advent of EVs coming in, the whole industry is getting reshaped. So there would be some changes in the spending priority or investment priority in this industry," Krithivasan said post-earnings interaction with analysts on 11 July.

"So that would be something to watch out for, like adoption of EVs and how the OEMs themselves are going towards vertical integration. How much they do that vertical integration, how much they impact the tier 1s. Those are the areas that we have to watch out for," Krithivasan added.

A report by accounting firm Ernst & Young dated 6 June suggests EV adoption in Europe is slowing because of high prices, economic uncertainty and inadequate infrastructure.

The general feeling from the automotive industry is that the EV transition will happen at a slower pace than expected.

Tata Motors, India’s largest EV maker, witnessed a 21% decline in EV sales on a yearly basis in July.

To be sure, homegrown software services companies do not call out revenues specifically for automotive companies. They club it under the manufacturing vertical or the ER&D units.

While TCS reported a 1.9% increase in sequential revenue from its manufacturing vertical to $660 million, HCLTech reported a 6.7% decline to $653 million for the quarter ended June 2024.

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High growth

Even as India’s largest software service exporters were cautious, ER&D companies’ growth from the sector was unabated.

A second analyst attributed the growth of these automotive ER&D companies to deals signed and specific clients.

“Growth for much of these automotive ER&D companies is client-specific or driven by mega deals, which is why their revenue from this sector has gone up despite peers ringing alarm bells on slow demand from the automotive sector," said Apurva Prasad, vice-president of institutional research at brokerage firm HDFC Securities.

“Electrification is a significant trend and is here to stay. EV sales could have turned out to be different than expectations owing to multiple macroeconomic factors, consumer preferences, and features performance vs expectations. But it’s a matter of time before electric vehicles, hybrids, and new energy vehicles gain momentum, and the trend will expand," said Sachin Tikekar, president & joint MD, KPIT Technologies, in a mailed response to Mint’s queries.

“Currently, hybrid vehicles are seeing an uptick while the electric infrastructure across the globe for mobility develops and matures," an LTTS spokesperson said on email. “Our strategic investments in EV, hybridization, vehicle engineering, and SDV have been yielding returns, with significant large-scale deals across these areas."

Although the management believes growth from car manufacturers will continue and that the automotive sector presents the biggest growth opportunities, analysts aren’t sure.

“Automotive R&D spends were expected to remain at elevated levels in 2024, as OEMs initially planned to continue their aggressive CASE investments. However, this now appears to be slowing down. Few peers highlighted an abrupt and sharp weakening in demand in the industry, especially in Europe, due to slower-than-anticipated adoption of EVs and rising cost pressures from increasing competition," said the Kotak analysts.

CASE is an acronym that refers to four major trends in the automobile sector including integration of digital systems in vehicles like navigation and infotainment systems, development of self-driving vehicles, rise of ride hailing services, and transition to electric vehicles.

Large IT services companies have acquired ER&D companies focusing on the automotive sector over the past 12 months, with an eye to scale up business from the automobile space.

India’s second biggest IT services company, Infosys Ltd. announced the completion of its largest-ever acquisition, that of In-Tech, a German ER&D firm focused on the country’s automotive industry, for $480 million in June.

HCLTech had also made strides in the auto ER&D space, having acquired ASAP Group, a German automotive engineering services provider on 31 August 2023.

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