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Big miss on estimates: Rev -2.0%, EBIT -15.7%, PAT -17.6% vs. Consensus

* Revenue for Q1FY26 came at INR 8.9Bn down 1.8% QoQ and 3.7% YoY (vs Consensus est. at INR 9.1Bn).

* EBIT for Q1FY26 came at INR 1.6Bn, down 11.2% QoQ and 27.9% YoY (vs Consensus est. at INR 1.9Bn). EBIT margin was down 193bps QoQ and 610bps YoY to 18.2% (vs Consensus est. at 20.9%).

* PAT for Q1FY26 stood at INR 1.4Bn, down 16.3% QoQ and 21.6% YoY (vs Consensus est. at INR 1.7Bn).

Market headwinds persist despite healthy pipeline and new deals: TELX has reported a muted Q1FY26 with revenue contraction of 3.9% QoQ CC, below our expectations, driven by continued softness across key verticals. Transportation segment remained flat amid tariff uncertainties & Chinese competition, impacting Tier-1 R&D spends, though recent large deal wins & a strong pipeline offer growth visibility. Media & Communication declined 5.5% due to weak demand environment & ongoing industry consolidation, with recovery expected in Q2 on deal ramp-ups. HLS declined 6.7% QoQ due to project pauses amid macro uncertainty, but management expects H2 growth driven by recent wins, including a European Pharma major & a Japanese Medtech leader. We believe that near-term growth remains challenging, however recent large deal wins & a strong pipeline across Transportation & HLS will provide revenue visibility for recovery from H2FY26. We remain watchful on execution and ramp-up timelines.

Margins shrink amid weak revenue growth; Attrition rate spikes to 15%: TELX reported an EBIT margin of 18.2% in Q1FY26, down 190 bps QoQ from 20.1% in Q4FY25, primarily impacted by weak revenue performance & transition costs associated with ramping up large consolidation deals. Wage hikes are expected to roll out in Q3, while the focus is on utilizing all available operational levers to steadily improve the margin profile as revenues pick up. While management is confident of margin recovery driven by revenue growth & operational efficiencies, we expect the improvement likely to be gradual. As a result, we anticipate FY26 EBIT margin to moderate to ~21.7%, compared to 23.3% in FY25, largely due to the drag from a soft Q1. Moreover, TELX registered net headcount reduction of 287 employees in Q1, marking second consecutive quarter of employee decline. Further, attrition also inched up to 15%, an increase of 170 bps QoQ. We anticipate modest headcount additions going forward, with management maintaining a cautious hiring approach given adequate bench strength & preference for aligning recruitment with tangible demand recovery.

View and Valuation: TELX’s performance lagged expectations, with broad-based weakness across key segments. The stock trades at an extremely expensive PE of 46x on FY27E EPS. Near-term challenges across Automotive and Media & Communications verticals remain. We expect a pickup in growth toward H2FY26, with the ramp-up of large deal wins in Auto. TELX’s utilization has been impacted by significant volume build-up in anticipation of the ramp-up of large deals, which is likely to be more gradual than expected. We have lowered our estimates by approximately 3.5% for FY26E and FY27E, and have introduced FY28E projections. Our revised target price is INR 4,165, which implies a PE multiple of 28x (unchanged) as we roll forward our valuation to H2FY28E earnings. We maintain a SELL rating due to rich valuations.

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