SynopsisKPIT Technologies shares tumbled nearly 17% after issuing a weaker-than-expected outlook for FY27. European automakers, facing profitability pressures from Chinese competition, are delaying project approvals and capital allocation, leading to a slower growth forecast. Analysts have revised earnings expectations downwards, anticipating a gradual recovery and subdued performance across the ER&D sector.iStockWhile artificial intelligence is helping companies improve implementation and move towards solution-led offerings, Bajaj believes it cannot fully offset weak client spending in the near term. He expects meaningful growth to shift into the next financial year.KPIT Technologies came under heavy selling pressure after issuing weaker-than-expected guidance for FY27, with the stock plunging nearly 17% yesterday as investors reacted to a slower growth outlook. The company's expectation that the second quarter will mirror the first has also dampened hopes of a quick recovery, prompting analysts to reassess earnings expectations.Commenting on the market reaction, Kunal Bajaj from Choice Institutional Equities said, "The price reaction has been pretty aggressive today. This is on the back of the guidance for Q1 FY27, and the company has also indicated that Q2 FY27 is expected to be on similar lines as Q1."European OEMs Delay SpendingAccording to Bajaj, the slowdown stems from reduced spending by major European automakers, which are becoming more cautious after making significant investments in electric vehicles. Profitability pressures, particularly from rising Chinese competition, have led customers to delay project approvals and capital allocation.He said, "European OEMs have invested aggressively in the EV space, but profitability pressures have made them more selective in capital allocation. Order books remain healthy, but deal-to-revenue conversion is slowing as project approvals and ramp-ups get deferred."Growth Recovery Now Expected to Be GradualThe weaker guidance has forced analysts to trim their revenue expectations. Bajaj noted that while the Street had anticipated a sequential decline, the company's outlook suggests an even steeper slowdown, making a strong recovery in the second half less likely.He said, "The company's guidance implies around a 4.5% to 4.8% quarter-on-quarter decline, which is much lower than our estimates. We now expect FY27 to be much more gradual than we had anticipated earlier."Margins Also Face PressureThe slower revenue trajectory is also expected to impact profitability. Analysts have revised both revenue and EBITDA margin estimates lower, reflecting weaker operating leverage.Bajaj said, "We have lowered our FY27 revenue estimates by around 6% and cut EBITDA margin estimates by nearly 150 basis points."Pressure May Extend Across the ER&D SectorThe cautious demand environment is expected to affect other engineering R&D companies with automotive exposure, including Tata Elxsi, Tata Technologies and LTTS. Although margins could remain supported by cost discipline and favourable currency movements, growth is likely to stay subdued.According to Bajaj, "Companies with automotive exposure are expected to have subdued performance going forward. We expect FY27 to be a gradual and moderate year for the ER&D sector."AI Is a Positive, But Not Enough to Offset Weak DemandWhile artificial intelligence is helping companies improve implementation and move towards solution-led offerings, Bajaj believes it cannot fully offset weak client spending in the near term. He expects meaningful growth to shift into the next financial year.He said, "AI is helping in terms of implementation, but there is also a deflationary impact. Overall, we expect FY27 to remain a pressured year, with growth now deferred to FY28."Near-Term Recovery Remains UncertainAlthough KPIT management has expressed confidence about stronger sequential growth by the fourth quarter of FY27, Bajaj remains cautious, citing macroeconomic uncertainty and restrained customer spending.He concluded, "Clients are still in wait-and-watch mode. We expect gradual spending rather than strong incremental spending, so H2 FY27 may not be as strong as we had expected earlier."Read More News on(What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2025, Share Market on Budget 2025 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .) 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