Tata Elxsi (TELX IN) – Management Meet Update – Key segment outlook improves, but broader pain continues – Upgrade to ‘HOLD’

We interacted with the CFO of TELX to reaffirm progress within automotive and structural recovery beyond Transportation. The R&D budgets are still being prioritized to improve cost parameters, while fixing the current vehicle architecture instead of new product development initiatives. The decision-making cycle has progressed, with a notable recovery in client sentiment and limited budget constraints. Optimizing software (for efficiency) and time-to-market (new features) have become extremely critical to stay competitive against Chinese OEMs, which is equally balancing vehicle pricing and cost equations. Although the company hasn’t made any notable breakthroughs in Chinese market but have secured a handful of engagement with local players. The overall deal constructs have not seen any material change in terms of pricing or tenure; the overall ACV is still comparable to the earlier engagements while pricing plays a trade off against right-shoring. The demand beyond Transportation still looks moderate. Beyond a couple of deals within media & communications, the pocket seems to be weak, attributed to consolidation effects. Healthcare sees strong deal pipeline within Providers and Medical Devices segments, but elongated deal cycle would make the revenue stream slightly unpredictable. The operational glitch within its top account has largely been stabilized and it doesn’t anticipate any notable impact on Q3 performance. We believe the demand recovery within Automotive is still defensive and yet not achieved its full potential to drive design-oriented architecture, while beyond Transportation the verticals look unstable. We are not making any changes to our estimates, our CC revenue and margin estimates stand at 9.4%/11.2% and 20.6%/22.0% in FY27E/FY28E, which translates to an earnings CAGR of 24% (26-28E). The stock hammered notably by ~33%/~2% in FY25/YTDFY26, meanwhile Nifty IT saw an improvement of 5.3%/5.5% during the same period. Valuation remains expensive, trading at 35x (Sep-27 EPS). We assign 36x to Sep-27 EPS. The stock price correction is leading to change our rating to HOLD (REDUCE earlier).