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Recovery expected in later half.

Tata Elxsi (TELX) is a leading provider of IT ER&D (engineering, research and development) services. TELX has capabilities across Automotive, Broadcast & Communications, and Healthcare industries.

* In Q2FY25, TELX reported an 8% YoY & 3.1% QoQ growth. The growth was aided by large deals in the transportation segment which grew by 4.4% QoQ in constant currency terms. However, the Media & Communication and Healthcare segments were impacted by a delay in the renewal of deals.

* Despite an increase in training expenses, EBITDA margin improved by 70bps to 27.9%, owing to reduction in third party contracts & operational efficiency.

* During Q2FY25, TELX won a landmark $50Mn multi year deal from a Global Automotive OEM in Europe, which includes multiple domains of automotive engineering.

* The growth from India & RoW continue to witness strong double digit growth. While the US contracted by 300bps QoQ in its revenue mix, largely due to a weakness in the Healthcare & Communication segment.

* Currently, we expect most of the slow down has been factored in the price and we expect recovery by the second half of the year on account of increase in US IT spending in healthcare.

Outlook & Valuation

Despite a general slow down in the automotive sector, we believe that the growth in the transportation vertical will persist in the coming years, given the need for digitization in the automobile industry. TELX is well positioned to capture the opportunities due to its deep domain knowledge and work on its clients’ long-term strategic projects. We expect strong deal wins and a focus on specialized SDS, and a pick up in other verticals is likely to support valuation. Hence we maintain our valuation at 48x FY26E EPS and recommend Accumulate rating with a target price of Rs.7,901 at CMP.

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