Tata Elxsi (TELX IN) – Q1FY27 Result Update – Powering investments to drive future growth – Downgrade to ‘REDUCE’

TELX delivered a mixed Q1FY27 performance. Revenue grew by 1.3% QoQ CC, while EBIT margin declined sharply by 330 bps QoQ to 19.0%, below our and consensus estimates. Revenue growth was driven by the ramp-up of earlier wins in M&C vertical, which grew +2.9% QoQ CC vs +5.6% QoQ CC in Q4FY26. Transportation continued to show weak performance, attributed to European auto market (Germany) due to slower decision-making and weaker OEM spending. The management expects Transportation growth to be supported by Americas and APAC regions on the back strategic large wins, which is expected to see ramps in the coming quarters. Large deal ramps require higher upfront investments through increased onsite presence, elevated subcon costs and transition expenses, which impacted margins by ~150 bps QoQ in Q1 and are expected to recover by Q4FY27. Margins were further impacted by 220–230 bps QoQ owing to structural investments in: (1) Onsite sales and delivery personnel, (2) AI infra and tools, (3) higher provisioning related to a client bankruptcy, and (4) elevated visa-related costs, which should recoup gradually over medium to long-term. Factoring in the weak margin performance and continued investments, we reduce our FY27E/FY28E EBIT margin estimates by 130 bps/110 bps to 20.0%/21.3%, respectively. We largely maintain our FY27E revenue growth estimate at 6.0% CC but lower our FY28E growth estimate to 8.8% CC (from 10.0%), reflecting slower recovery in the European auto market. Considering the growth uncertainty and incremental margin pressure, we downgrade the stock to REDUCE (HOLD Earlier). We revise our target multiple to 23x FY28E EPS (24x earlier), that translates our revised target price of INR 3,350.