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Strong margin resilience, H2 execution remains key

TELX delivered better than expected Q2 performance, with rev. growth of 2.3% QoQ CC, ahead of our estimate of 1.2%, while EBIT margin expanded 70 bps QoQ to 19.7%, exceeded our est. of 18.5%. Revenue growth was broad-based across verticals, led by HLS (+3.5% QoQ CC) and M&C (+3.4% QoQ CC), while Transportation grew +2.0% QoQ CC, aided by deal ramp ups and healthy demand for US auto OEMs. The underperformance in Transportation growth was attributed to weakness in European automotive and slower deal closures in the region, which is partly offset by strong traction in the US and India regions. Management remains optimistic about sustaining Transportation growth momentum in H2, aided by multi-year large deal win from an auto OEM, lower revenue leakages than that of last year and opportunities around adjacencies (Aero & Defense). The 70-bps QoQ EBIT margin expansion in Q2 was driven by 60–70 bps of currency benefits and the absence of one-off costs (~200-220 bps), which largely offset the wage hike impact. Management expects margins to improve gradually through H2, aided by operating leverage, better utilisation and pyramid optimisation. Factoring in the Q2 beat and improved margin trajectory, we raise our FY27E revenue growth estimate to 6.5% YoY CC (5.9% CC earlier), while keeping FY28E/FY29E growth estimates unchanged. We also raise our FY27E/FY28E/FY29E EBIT margin estimates by 30/20/20 bps to 20.3%/21.5%/22.5%, respectively. With improving performance and optimism of auto revival, we revise our target multiple to 24x Sep. 28E EPS (22x earlier), that translates to revised target price of INR 3,790 (earlier 3,480). Maintain our ACCUMULATE rating.

Revenue: TELX reported strong growth of 2.3% QoQ CC in Q2, ahead of our estimate of 1.3% QoQ CC growth. Growth was broad based with Media & Comms, Healthcare & Life Sciences, & Transportation verticals improving by 3.4%, 3.5% and 2.0% QoQ CC respectively. Geographically, Americas & India had strong growth, increasing 7.2% & 3.6% sequentially respectively, while Europe declined for the 2nd consecutive quarter.

Operating Margin: Margin came above our estimates, with EBIT margin improving by 70 bps QoQ, following a 330-bps decline in Q1. Margins improved largely on account of ~60-70bps of currency tailwinds and ~10-20bps of operating leverage playing out. Certain one-off items offset the impact of wage hikes rolled out in Q2

Hiring & Attrition: Net headcount declined by 187 in Q2, marking the seventh consecutive quarter of decline, taking total employee strength to ~11.1k. LTM attrition declined 10 bps QoQ to 15.9% after six consecutive quarters of increase.

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