Tata Elxsi (TELX IN) – Q3FY26 Result Update – Transportation drives strong performance, Broader recovery still away – HOLD

The revenue performance (+3.2% QoQ CC) exceeded our estimates (+2.5% QoQ CC), aided by robust growth in Transportation vertical (+7.3% QoQ CC). The sharp uptick in Transportation is a combination of ramp up in anchor account along with a spending recovery in strategic top accounts, ex-top 10 accounts declined 7.5% in USD. The OEMs’ participation is inclined towards costs savings instead of focusing on the innovation and growth areas. The M&C and H&L performance was discouraging and reported third consecutive quarters of decline. We believe the underlying spending pattern within M&C and H&L is sporadic, attributed to the structural issues, and would require couple of more quarters to achieve a steady state. The management was confident of reviving growth within these two verticals on the back of new logo additions and few closures that concluded in Q3. On margin, it exceeded our estimate by 140bps QoQ. At the current margin, the utilization stood at ~75%, it aspires to achieve 85% utilization with a combination of deploying automation and AI. Additionally, we believe the decoupling of revenue growth and talent hiring would provide incremental margins levers. We are revising our margins up by 70bps/40bps/20bps for FY26E/FY27E/FY28E due to beat in Q3. We expect CC revenue to decline by 4.8% (-5.1% QoQ earlier) in FY26E and grow by 9.8%/11.6% YoY in FY27E/FY28E. We are assigning 33x PE to FY28 EPS, translating a TP of 5,500. Valuations capped, retain HOLD.