Motilal Oswal sector of the week: Automotive ER&D; check top stock to buy

According to Motilal Oswal Financial Services Research, the the medium-term outlook for global automotive engineering research and development sector remains robust

The global automotive engineering research and development (ER&D) sector is undergoing a structural transformation, though the journey remains an “incomplete revolution.” Three forces are reshaping the mobility landscape—accelerating adoption of CASE (connected, autonomous, shared, electric) mobility, the transition to centralised electrical/electronic (E/E) architectures enabling software-defined vehicles (SDVs), and regulatory mandates for greener powertrains. Together, these trends are pushing software to the centre of automotive innovation.

 

Yet, the sector faces near-term challenges. Enthusiasm for electric vehicles has moderated, leading to a slowdown in capex cycles among Western automakers. For leading ER&D service players, average organic growth has eased from 17 per cent in FY21–23 to 12 per cent over FY24–25. In Europe, pricing pressures and softer battery electric vehicle (BEV) sales have curbed R&D intensity, while Asian manufacturers are pivoting toward hybrids to address evolving consumer preferences. 

 

Despite this pause, the medium-term outlook remains robust. The shift toward SDVs is set to multiply software complexity, requiring deep expertise in embedded systems, middleware, and integration. This is fostering stronger co-development models between OEMs and specialised engineering partners, as traditional supplier frameworks can no longer keep pace with rising technological demands. Centralised domain controllers and zonal architectures are reducing system complexity but driving a need for advanced validation, system integration, and architecture consulting services. 

 

Regulatory imperatives are another growth lever. The US has set a target for EVs to account for 50 per cent of all new vehicle sales by 2030, while Europe has legislated a push toward zero-emission mobility. Meanwhile, Asian economies, including India and China, have set ambitious decarbonisation goals. These shifts will sustain multi-year investment in electric and hybrid technologies, even if the trajectory remains uneven. 

 

ER&D players with domain depth, global delivery footprints, and proven co-development capabilities are positioned to capture wallet share as OEMs consolidate their vendor bases. While profitability remains differentiated—firms with higher exposure to software enjoy structurally better margins compared to those anchored in mechanical engineering—the sector overall stands to benefit from rising outsourcing intensity and the decoupling of hardware and software lifecycles. 

 

In the medium term, as investment cycles stabilise, ER&D specialists are likely to play a pivotal role in enabling automakers’ transition toward sustainable, software-defined mobility. The opportunity is structural, underpinned by a global shift from hardware-led engineering to a software-first automotive future.

KPIT – Target Price: ₹1,600

KPIT is a pure-play automotive ER&D company focused on software-defined vehicles (SDVs), embedded software, and E/E architecture, which account for over 80 per cent of revenues. Its transformation into a specialist post-demerger has allowed deeper client engagement and domain-led growth, reducing its client base from ~250 to ~60 while significantly increasing revenue per client. KPIT’s revenues grew at a ~18 per cent CAGR over FY20 to FY25 and are projected to reach USD 1 billion by FY28E (~15 per cent CAGR). EBIT margins are expected to expand from 17.1 per cent in FY25 to 17.5 per cent in FY27E, supported by scale benefits and acquisitions like Caresoft, which is expected to contribute ~5 per cent to revenue. With ~85 per cent of revenues derived from top 21 clients, strategic partnerships with global OEMs and ecosystem players in cloud, semiconductors, and middleware enhance its capabilities in electrification, ADAS, and connected solutions. EPS is estimated to compound ~19 per cent over FY25–28E, underpinning a robust growth outlook.  (Disclaimer: This article is by Motilal Oswal Financial Services Research desk. Views expressed are their own.)