Sell Tata Elxsi Ltd for the Target Rs.4,700 by Motilal Oswal Financial Services Ltd
Execution improves; broader recovery yet to follow
Vertical divergence persists in 3Q
* Tata Elxsi (TELX) reported revenue of USD107m in 3QFY26, up 3.2% QoQ in CC terms, above our estimate of 1.8% CC. Growth was led by transportation business (up 7.3% QoQ CC), whereas HLS/Media & Communications declined 4.3%/1.3% QoQ CC. EBIT margin was 20.9% (up 240bp QoQ), above our estimate of 18.8%. Adj. PAT was up 15.7% QoQ and down 10.0% YoY at INR1,791m (above our est. of INR1,701m).
* For 9MFY26, revenue/EBIT/adj. PAT declined 2%/22%/22% YoY in INR terms compared to 9MFY25. We expect revenue/EBIT/adj. PAT to grow by 9.1%/10.5%/10% YoY in 4QFY26.
* While 3Q execution improved, TELX’s growth remains uneven and largely reliant on Transportation-led ramp-ups, with Media and Healthcare continuing to lag amid cautious client spending. We value the stock at 30x FY28E EPS, with a TP of INR4,700. We maintain our Sell ratin
Our view: Transportation strength helps; HLS is likely to be bottomed out
* Growth improving but still uneven across verticals: 3Q revenue growth of 3.2% QoQ CC was ahead of estimates, largely led by Transportation, which grew 7.3% QoQ CC on the back of SDV-led OEM ramp-ups and normalization at a key strategic client.
* However, growth remains uneven, with Media & Comms and Healthcare & Life Sciences down sequentially due to furloughs and delayed deal awards. While management reiterated its aspiration for double-digit growth in Transportation and HLS in FY27, we think near-term growth continues to depend on deal-specific ramp-ups in selective verticals rather than a broadbased demand recovery.
* Transportation strength does not fully offset softness elsewhere: Transportation continues to be the key growth driver, supported by SDV programs, electrification initiatives, and rising traction in off-road vehicles and aerospace & defense. Media continues to be impacted by industry consolidation and cautious client spending. Healthcare appears to have bottomed out following regulatory program run-offs, with growth expected to resume in 4Q. We see early signs of stabilization, but consistency across verticals remains a key monitorable.
* Margins benefited from utilization and cost control; wage headwinds ahead: EBIT margin expanded by 240bp QoQ to 20.9%, ahead of expectations, driven by higher utilization, operating leverage, cost discipline, and a modest forex tailwind. Headcount reduction during the quarter further supported margins. However, a portion of this benefit is likely to reverse in 4Q due to the remaining wage hike impact (~65-70bp). While management targets a return to historical margins by FY27 exit through utilization improvement and efficiency gains, we expect margin normalization to be gradual as deal ramp-ups, hiring, and continued investments in GenAI and domain capabilities resume.
* Overall, we acknowledge improved execution in 3Q and visibility in Transportation. However, TELX’s growth trajectory remains dependent on sustained OEM ramp-ups and normalization in Media and Healthcare. With ER&D demand still cautious and margin recovery back-ended, we remain watchful for sustained, broad-based consistency before turning more constructive.
Valuations and changes to our estimates
* While 3Q execution improved, TELX’s growth remains uneven and largely reliant on Transportation-led ramp-ups, with Media and Healthcare continuing to lag amid cautious client spending. With demand recovery still selective rather than broad-based, we expect a modest ~6% CAGR in USD revenue over FY25-28.
* We keep our FY27 estimates unchanged but raise our FY26/FY28 by 3%/1%, reflecting stronger-than-expected 3Q execution and better near-term visibility in the Transportation vertical. However, margin expansion is expected to be gradual and back-ended, with EBIT margins improving to 22.4%. This translates into an EPS CAGR of ~7.5% over FY25-28.
* Valuations remain steep at ~43x 12-month forward P/E, which we view as difficult to justify given the lack of sustainable cross-vertical growth visibility. We value the stock at 30x FY28E EPS, with a TP of INR4,700. We maintain our Sell rating.
Beat on revenues and margins; Transportation vertical led growth
* USD revenue came in at USD107m, up 3.2% QoQ CC, above our estimate of 1.8% QoQ CC growth.
* Growth was led by transportation business (up 7.3% QoQ CC), whereas HLS/ Media & Communications declined 4.3%/1.3% QoQ CC.
* In terms of geographies, America/Europe rose 10.7%/3.1% QoQ in USD terms, while India/RoW fell 10.5%/11.5%.
* EBIT margin was 20.9% (up 240bp QoQ), above our estimate of 18.8%.
* Adj. PAT was up 15.7% QoQ and down 10% YoY at INR1,791m (above our est. of INR1,701m). This excluded the one-time impact of INR957m due to new labor code.
* The net headcount decreased by 357 employees to 11,594 (down 2.9% QoQ) in 3QFY26. Attrition (LTM) increased by 20bp QoQ to 15.6%
Key highlights from the management commentary
* Industry headwinds persist. Customers are making decisions, but they are cautious and carefully calibrated.
* In Automotive and Media, profitability pressures have remained intact, keeping cost takeout and profit improvement as key areas.
* Growth was driven by the Transportation business, aided by accelerated rampups in SDV-led OEM deals won earlier in the year and the normalization of workstreams with a strategic OEM client that was impacted in the last quarter.
* There is scope to improve utilization, with large-scale hiring likely a quarter or two away, though calibrated hiring will continue for select clients.
* The company plans to reach ~80% utilization before initiating broader hiring, compared to ~75% currently.
* Management is confident of returning to historical margin levels by FY27 end.
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