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Demand continues to be soft

Management guides for double-digit growth in FY27

* Tata Elxsi (TELX) reported revenue of USD105m in 2QFY26, up 1% QoQ in CC terms, in line with our estimate. Growth was led by Media and Communications (up 3.7% QoQ CC), whereas Transportation/HLS declined 0.5%/4.6% QoQ CC. EBIT margin was 18.5% (up 30bp QoQ), below our estimate of 20.3%. PAT was up 7.2% QoQ and down 32.5% YoY at INR1,548m (below our est. of INR1,662m).

* For 1HFY26, revenue/EBIT/PAT declined 4%/28%/28% YoY in INR terms compared to 1HFY25. We expect revenue to grow by 4% and EBIT/PAT to decline by 9%/4% YoY in 2HFY26.

* Muted tech spends across Automotive and Media are weighing on the nearterm momentum. Margins, once a defining strength for TELX, have come under meaningful pressure. We value TELX at 31x Jun’27E EPS to arrive at a target price of INR4,400. Reiterate Sell rating.

Our view: Headwinds persist in Media and Healthcare verticals

* While management commentary on a better 2H and double-digit FY27 growth appears encouraging, the near-term growth momentum remains patchy. 2Q growth was modest at 1% QoQ in CC, largely aided by the rampup of previously won deals rather than a broad-based recovery. We think execution delays, sluggish tech spending in the Automotive segment, and continued pressure in the Media vertical are weighing on the company’s growth trajectory.

* We view the medium-term story as increasingly dependent on a Transportation OEM-led recovery, which, although visible in pipeline commentary, remains back-ended with multi-quarter ramp-up timelines (Suzuki). The Media vertical continues to face industry-level volatility and consolidation headwinds. In the Healthcare vertical, the softness from regulatory program completion is yet to normalize.

* On margins, we note that the uptick was driven largely by forex gains, while underlying cost pressures (campus onboarding, sales investments, AI infra) remain. Although management’s utilization targets (75% by FY26, 80% thereafter) could drive a gradual recovery, we think structural headwinds such as wage pressures, sub-optimal utilization, and slower volume growth may cap a meaningful upside to the earlier margin trajectory in the near term.

* Overall, we maintain a cautious stance. In our view, TELX’s growth revival hinges on a sustained pick-up in OEM spend and the ramp-up of large deals over the next 6-8 quarters. Until then, margin normalization is likely to be gradual, and valuations appear steep given modest near-term growth visibility.

Valuations and changes to our estimates

* Muted tech spends across Automotive and Media are weighing on the nearterm momentum. Growth remains concentrated in a few top accounts that are facing spending constraints. We expect USD revenue to grow modestly at a CAGR of ~6% over FY25-28.

* Margins, once a defining strength, have come under pressure due to weak revenue growth and pricing resets during deal renewals. We reduce our estimates for FY26/FY27/FY28 by 5%/2%/2%. We expect margins to gradually improve to 22.7% in FY2YE, with an EPS CAGR of ~7.4% through FY28.

* Valuations remain steep at ~52x 12M FWD P/E, which we see as difficult to justify given current headwinds. We value the stock at 31x Jun’27E EPS, with a TP of INR4,400. We maintain our Sell rating.

In-line revenue and miss on margins; Media & Comms. led growth

* USD revenue came in at USD105m, up 1.0% QoQ in CC terms, in line with our estimate.

* Growth was led by Media and Communications (up 3.7% QoQ CC), whereas Transportation/HLS declined 0.5%/4.6% QoQ CC.

* In terms of geographies, America/RoW rose 5.4%/2.3% QoQ in USD terms, while India/Europe were down 3.7%/1.7% QoQ.

* EBIT margin was 18.5% (up 30bp QoQ), below our estimate of 20.3%.

* PAT was up 7.2% QoQ and down 32.5% YoY at INR1,548m (below our est. of INR1,662m).

* The net headcount decreased by 176 employees to 11,951 (down 1.5% QoQ) in 2QFY26. Attrition (LTM) increased by 40bp QoQ to 15.4%.

Key highlights from the management commentary

* Global macroeconomic and geopolitical uncertainty continued to hurt demand.

* Delays in decision-making persisted and even intensified during the quarter.

* Confident that international revenue in FY26 will surpass FY25 levels, backed by strong client conversations in AI & data modernization and cost optimization.

* High single-digit growth for FY26 looks challenging.

* Sequential CC decline was 3.3%, driven by a 2.8% impact from BSNL ramp-down and 0.5% from international business.

* Deal pipeline remains healthy and geographically diversified. Key win themes: operating model transformation, vendor consolidation, AI-powered intelligent automation, and SAP S4/HANA transformation.

* New BSNL deal is not included in TCV yet; execution will begin post PO and will be similar to the previous deal.

* No decision yet on wage hikes.

Valuation and view

* Muted tech spends across Automotive and Media are weighing on the nearterm momentum. Margins, once a defining strength for TELX, have come under meaningful pressure. Accordingly, we value TELX at 31x Jun’27E EPS to arrive at a target price of INR4,400. Reiterate Sell rating.

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