Near-term worries for Tata Elxsi stock on weak transportation outlook

Tata Elxsi (TelX) reported a weak Q3FY25, with a sharp deceleration in the transportation vertical.

 

However, recent deals in the Asia-Pacific (APAC), higher mix of original equipment makers (OEMs) and partnership with Qualcomm will improve growth.

 

FY25 is the third successive financial year of revenue growth deceleration and second successive financial year of profit deceleration.

 

Q3FY25 revenue of $111 million was flat sequentially and 2 per cent higher year-on-year (Y-o-Y) on constant currency (CC) terms. It decelerated from +8.4 per cent Y-o-Y CC and +5.1 per cent Y-o-Y in Q1 and Q2, respectively.

 

The transportation vertical (55 per cent of revenue) decelerated from mid-single digit growth trajectory to flat sequentially. The media & communication vertical (32 per cent of revenue) improved. Healthcare & lifesciences vertical stabilised after a steep decline in Q1/Q2FY25.

 

Key deal wins during the quarter included an offshore development centre set up for Suzuki Motors to accelerate software development for the next generation. The OEM mix in the transportation vertical increased to 72 per cent.

 

TelX’s earnings before interest and tax (EBIT) margin came in at 23.5 per cent, -156 basis points (bps) Q-o-Q.

 

The adjusted net profit was Rs 199 crore down 3.6 per cent Y-o-Y. 

 

The European market (largest contributor to auto) may take longer to recover, according to management. TelX sees greenshoots in the rest of its portfolio. Healthcare (1.1 per cent Q-o-Q CC) seems to be on the road to recovery. Media & communication (0.4 per cent Q-o-Q CC) saw soft growth, affected by furloughs.

 

Operating profit margin came in at 26.3 per cent, -163 bps Q-o-Q due to headwinds from volatile currency movements.

 

TelX is also looking to increase its exposure to commercial vehicles, aerospace and defence. The management expects steady revenue growth in healthcare & lifesciences and media & communication for two quarters followed by acceleration.

 

In healthcare, it is winning marquee logos and its Gen AI-powered regulatory, digital engineering and sustainable offerings are witnessing traction.

 

In media & communication, there is a pipeline of large deals. It won a large multi-year deal with a leading US headquartered multi-system operator (MSO) to develop and manage its portfolio of applications and expects to ramp this up.

 

In dollar terms, the top 5 clients declined 3 per cent Q-o-Q and top 6 to 10 declined 12.6 per cent Q-o-Q.

 

The effective tax rate (ETR) was low at 22 per cent in Q3FY25 due to one-off items. Normalised ETR from Q4FY25 is likely to be 25-26 per cent.

 

The downside risks include high top 5 client concentration, worsening challenges in the auto segment, delay in recovery in media & communication and healthcare segments. However there may be an upside from faster ramp ups of existing and new large deal wins.

 

A challenging operating environment has led to reprioritisation of R&D spends, and in some cases, the deferral of existing programmes.

 

Slower-than-expected adoption of electric vehicles (EVs) has resulted in a few clients pivoting towards increasing investments in internal combustion engine (ICE) and hybrid vehicles.

 

TelX has increased its exposure to auto OEMs. Diversifying the client base with the ramp-up of deals such as Suzuki could partly offset the impact of weaker European clients.

 

The management aspires to exit FY25 at around 25 per cent EBIT margin.

 

Employee headcount increased by 85 people (up 0.7 per cent Q-o-Q) to 12,900. On a Y-o-Y basis, employee headcount declined 2.6 per cent.

 

The management believes that working with Chinese clients directly is challenging and prefers to work with global OEMs on products for the Chinese market.

 

TelX is also looking at the aero and defence vertical with a focus on avionics.

 

The near-term outlook remains weak, due to low demand in the automotive vertical, despite green shoots in other segments.

 

Analysts are cutting earnings estimates as a result; the stock fell nearly 7 per cent in trade on Friday.