Accumulate Tata Elxsi for target Rs. 8,610 - Elara Capitals
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In-line Q3;
building hope on Q4 In-line Q3;
delayed ramp-ups to likely ensue in Q4 Tata Elxsi (TELX IN) posted an in-line Q3, with QoQ dollar growth at 2.8%, slightly ahead of consensus estimates by 0.7%. EBIT margin at 26.8% was a tad miss on streets expectations by 30bps and in line with ours. Growth was broad-based, except for Media & Communications, wherein spending was laggard, and thus the caution on demand. But this was offset by robust demand in Lifesciences (+3.9% QoQ CC). Transportation saw a steady performance of 1.9% QoQ CC growth. Softness in growth was due to delayed ramp-ups and Q3 weakness. But talent addition (+350 employees QoQ) in a weak Q3 is possibly a reflection of ramp-ups finally ensuing in Q4.
Design-led growth and AI-led capabilities prop deal momentum
Digital propelled the Industrial Design business that saw sharp 11.7% QoQ and 17.9% YoY CC growth. This also paves way for downstream value in Systems Integration business, reflecting in related 11.7% QoQ / 20% YoY CC growth. TELX is building capabilities in AI via new deals. It already has an AI component in its automation and ADAS offerings and adding gAI aids faster time to market. TELX bagged four key deals in Q3, one in design services, two in product engineering and one in Lifesciences, thus backing demand momentum.
Valuations: Maintain Accumulate;
TP raised to INR 8,610 We favor TELX given: a) its digital design prowess, b) industry-leading operating margin (~30% EBITDA), c) marquee clientele (75% offshore mix) and d) strong return ratios (RoE/RoIC at 41%/93%). Orderbook continues to be robust in Transportation and Medical verticals. However, the soft outlook for Media and Telecom sector may continue to weigh on growth. We slightly raise FY25E/ 26E earnings by 0.6% / 1.7% respectively. We maintain Accumulate with raised TP of INR 8,610 (earlier INR 8,490, on 51x Dec-25E EPS of INR 168 (five-year average + 0.5std. deviation). In FY23-26E, expect USD revenue/EBIT CAGRs of ~16%/18%, implying an EPS CAGR of ~15%.
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SEBI Registration number is INH000000933
