Indian Engineering Research and Development (ER&D) companies are bracing for a mixed performance in the third quarter of fiscal year 2026, as they navigate headwinds in the automotive sector. While some firms with a strong focus on Europe may see modest growth, those more exposed to the US market could face challenges.
Auto Sector Woes Weigh on Growth
The downturn in the European automotive sector continues to cast a shadow over the auto engineering business for Indian software service providers and ER&D firms. Key IT services players have reported weaker demand from their automotive clients, driven by challenges in the European market including supply chain disruptions, shifts in regulatory needs, poor macroeconomic conditions, and rising cost pressures. The increasing costs, competition and regulatory changes are reducing client spends impacting the automotive manufacturing sector in key European regions. The automotive industry is experiencing declining demand, escalating costs, and intensified competition. Slower EV adoption, removal of EV subsidies, and rising vehicle prices have dampened sales, particularly in Europe.
Modest Growth Expected
Analysts anticipate modest revenue growth of 1–2.8% for Indian ER&D companies in Q3. However, some brokerages expect improvement in the coming months as greater clarity emerges on R&D spending. Macro uncertainties impacted spending in calendar year 2025, but the absence of those uncertainties could be a marginal positive for calendar year 2026. HCL Technologies is expected to post strong revenue performance in the December quarter, aided by seasonality in products and ER&D services, currency tailwinds and ramp-up of large deals.
Electric Vehicles and R&D Offer a Silver Lining
Despite the challenges, rising R&D in electric vehicles (EVs) and hybrids offers some support to Indian ER&D firms. The shift of global capability centers (GCCs) from cost to product ownership, and expanding digital-engineering demand from electric-vehicle (EV) programs are amplifying growth.
Broader Trends in the ER&D Sector
The ER&D sector accounts for a significant portion of the software exported from India. The India Engineering R&D Services market is experiencing robust growth, projected to reach $121.27 million in 2025. The market is further expected to reach USD 133.71 billion in 2025 and grow at a CAGR of 10.26% to reach USD 217.90 billion by 2030. This expansion is driven by increasing adoption of advanced technologies like AI, ML, and IoT across various industries fuels significant demand for ER&D services.
Looking Ahead
While Q3 presents a mixed picture, the long-term outlook for Indian ER&D companies remains positive. These firms' fiscal year 2026 growth could reach 15–20%. The absence of macro uncertainties could be a marginal positive for CY2026. The Indian ER&D services market is expected to grow at a CAGR of 10.26% from 2025 to 2030.
