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Gradual Demand Recovery Ahead

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.

• Tata Elxsi posted a 2% YoY revenue decline in 9MFY26, while sequential recovery was visible with 3.9% growth, led by a 7.7% rebound in Transportation on SDV-driven OEM ramp-ups and normalization of key client engagements.

• In 9MFY26, most of the geographies posted YoY declines; however, sequential recovery was led by Europe (+5%) and North America (+13%) on broad-based traction across accounts and verticals, while India fell 9% due to weaker automotive supplier demand.

• EBITDA margin declined 534 bps YoY to 22% in 9MFY26, though it expanded 220 bps QoQ. The sequential improvement was driven by ~200 bps utilization-led operating leverage, ~80–85 bps cost discipline, and ~35 bps forex gains, partly offset by a ~110 bps wage hike impact.

• Anchor client recovery is expected over the next 1–2 quarters. While OEM decisionmaking remains cautious, strong value propositions and offshore execution continue to support deal wins and a gradual demand recovery.

Outlook & Valuation

We believe, Tata Elxsi is entering a recovery phase, driven by strong transportation growth from SDV-led deal ramp-ups, new OEM wins, & expansion into off-road segments. Continued investments in SDV, electrification, ADAS, & connected platforms support medium-term growth. Margins may face near-term pressure from wage hikes & Chinese competition, but rising utilization & operating leverage provide expansion potential without large-scale hiring. Slow OEM decision-making in Europe, the US, and Japan may delay deals, while Media & Communication and Healthcare are expected to recover gradually from Q4FY26. Despite macro and competitive pressures, Tata Elxsi’s domain expertise, design-led approach, and offshore execution position it for steady recovery, Hence, we value TELX at 33x FY28E EPS and recommend Buy rating with a target price of Rs.5,135 at CMP.

Key Highlights

• Transportation grew 7.7% QoQ and now contributes over 55% of revenue, driven by large deal ramp-ups and recovery in a strategic client. In contrast. The healthcare and Media & Communications verticals saw QoQ contractions of 3.6% and 0.3% in CC terms, driven by seasonal furloughs, deal delays, and regulatory program run-offs, though recovery is anticipated from Q4FY26 supported by deal wins, pipeline strength, and GenAI-led offerings.

• Headcount stood at 11,594, down 2.9% QoQ and 9.9% YoY, with attrition at 15.6% (+320 bps YoY). Management remains cautious on hiring, with utilization at ~75% and potential to reach 80–85% via automation, AI, and GenAI. Hiring will be selective, focusing on niche skills, as near-term growth is expected from productivity gains rather than headcount expansion.

• Automotive demand discussions have strengthened over the past 2–3 quarters, with new deals and customer additions underway. Over the next two quarters, the company expects clearer recovery across Transportation, Media & Communications, and Healthcare, supporting higher utilization, improved profitability, and sustained growth momentum.

• In non-passenger vehicle transportation (off-highway, construction equipment, railways), Tata Elxsi currently derives ~7–8% of revenue and continues to target 20% over the next 2–3 years. Management highlighted stronger customer logos and rising industry spend as key enablers for meaningful scale up in this segment. • High growth areas such as electrification (EVs and hybrids), ADAS, and connected car platforms continue to see strong customer spending. Growth momentum is largely driven by the top 5–10 automotive accounts and is well distributed across geographies, reducing regional concentration risk and supporting sustained growth visibility.

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