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Despite macro challenges revenue moderated QoQ.

During Q3FY24, TELX’s revenue grew 12% YoY to Rs. 914 crore (3.7% QoQ). EPD, the company’s largest division, grew by 1.5% QoQ CC, the SIS (system integration and support) division grew by 14.6% CC, and IDV (industrial design and visualization) grew by 11.7% QoQ CC. PAT growth was 6.1% YoY. Margin came marginally below estimate at 29.6% (-62 bps) due to wage hikes, sales promotions, and training. However, a reduction in outsourcing contracts and a lower attrition rate will support margin. Despite weak macro headwinds, overall hiring improved by 2.7% QoQ, with a net headcount of 13,221 as of December 24. Management plans to add 2,000–2,300 new employees this year. The company also stated that 1,800 will be fresh graduates and 450–500 will be experienced hires. The hiring plan reflects the company’s outlook regarding growth aspirations and expansion. Unlike the industry trend, the attrition rate was low, at 12.9% sequentially.

Strong growth across all verticals.

In CC terms, all three verticals of the EPD division reported moderate growth. The transportation vertical (contributing 46.2% of total revenue) grew by 6.9% QoQ, while the media and communication vertical (contributing 38.4% of total revenue) de-grew by marginally -0.4% QoQ due to the deferment of some new projects. and Healthcare & Medical Devices (contributing 15.4% of total revenue) reported 3.2%. The company’s onsite-offshore mix was reported at 25.3%–74.2%, helping TELX to maintain high margins. TELX’s revenue mix from Europe, India, and RoW improved, while that from the United States declined by 5.5% QoQ. The deals from the top five and top ten clients came in marginally lower due to furloughs and holidays

Strong deal momentum and new strategic partnerships.

We expect the business outlook to continue to be strong for transportation, with multimillion-dollar wins from leading Japanese automotive suppliers for connected infotainment and digital cockpits. Order from the leading multination medical device leader for leveraging the latest AI technology and algorithms to enhance their efficiency in the global regulatory service and identify potential risks and anomalies. Despite the global headwinds, the company’s hiring plan to continue to be optimal with a blend of freshmen and lateral employees will be ready in the next 6 months for newer project developments in transport, medical, and media.

Outlook and valuation

We believe that the growth in the transportation vertical will persist in the coming years, given the need for transformation 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 IDV, and a positive outlook on the EPD division is likely to support valuation. We expect that the industry is likely to witness pick-up by second half of the year on account of increase in US IT spending. We rollover and value at 45x FY26E EPS, factoring in strong earnings CAGR growth over FY24E-26E

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