Tata Elxsi Q3 margins expand, growth uneven; brokerages maintain 'Sell'

The Bengaluru-based design and engineering solutions firm posted revenue of $107 million in Q3, up 3.2% Q-o-Q in constant currency (CC) terms, ahead of estimates of 1.8 per cent Q-o-Q.

Tata Elxsi reported a better-than-expected performance in the December quarter (Q3FY26), driven by strong execution in its transportation vertical, even as growth in media and healthcare remained uneven. While revenues and margins surprised positively, analysts caution that the company’s overall growth trajectory continues to hinge on selective verticals, limiting broader optimism.

 

The Bengaluru-based design and engineering solutions firm posted revenue of $107 million in Q3, up 3.2 per cent quarter-on-quarter (Q-o-Q) in constant currency (CC) terms, ahead of estimates of 1.8 per cent Q-o-Q. Sequential growth was largely led by the transportation business, which surged 7.3 per cent Q-o-Q CC, supported by ramp-ups in software-defined vehicle (SDV) programmes for original equipment manufacturers (OEMs) and normalisation of workstreams with a key strategic client. In contrast, the healthcare and life sciences (HLS) and media & communications verticals saw declines of 4.3 per cent and 1.3 per cent Q-o-Q CC, respectively.

 

 

Geographically, the Americas and Europe recorded strong sequential growth of 10.7 per cent and 3.1 per cent Q-o-Q in USD terms, while India and the rest of the world markets faced headwinds, declining 10.5 per cent and 11.5 per cent, respectively.  ALSO READ | ICICI Pru Life Q3 margins expand despite slow premium growth, say analysts 

The company’s operational efficiency was reflected in margin expansion. Ebit margin rose 240 basis points Q-o-Q to 20.9 per cent, comfortably ahead of the 18.8 per cent estimate, driven by higher utilisation, operating leverage, cost discipline, and a modest forex tailwind. Adjusted PAT came in at ₹179.1 crore, up 15.7 per cent Q-o-Q but down 10 per cent year-on-year (Y-o-Y), surpassing estimates of ₹170.1 crore. A one-time ₹95.7 crore impact related to the new labor code was excluded from this figure. Headcount fell by 357 employees to 11,594, while annualised attrition increased slightly to 15.6 per cent.

 

Brokerages noted that while transportation-led growth is encouraging, demand recovery remains selective and uneven across verticals. Motilal Oswal highlighted that media and healthcare continue to lag due to cautious client spending, furloughs, and delayed deal awards. Analysts see early signs of stabilisation in healthcare, but broad-based recovery across verticals is still some way off.

 

Elara Capital pointed out that double-digit growth in transportation appears achievable, considering recent deal wins and improved performance from key clients. However, achieving similar growth in healthcare remains challenging. Both brokers underscored that TELX’s near-term growth will depend on OEM ramp-ups rather than a broad rebound in engineering, research & development (ER&D) spending.  ALSO READ | JM Financial bullish on Just Dial post Q3 results; retains 'Buy'; check why 

Looking ahead, the company expects revenue, Ebit, and PAT to recover gradually in Q4FY26, with estimates of 9.1 per cent, 10.5 per cent, and 10 per cent Y-o-Y growth, respectively. While management targets a return to historical margin levels by FY27-end through improved utilisation and efficiency, brokerages note that wage headwinds and renewed investments in GenAI and domain capabilities could moderate the pace of margin recovery.

 

Valuations remain steep, with Tata Elxsi trading at approximately 43x 12-month forward P/E. Motilal Oswal values the stock at 30x FY28E EPS, assigning a target price of ₹4,700, while Elara Capital maintains a target of ₹4,520. Both brokerages retain a ‘Sell’ rating, reflecting concerns over uneven vertical performance, selective demand recovery, and full valuations.

 

Q3FY26 marked a quarter of execution improvement for Tata Elxsi, led by transportation strength and margin expansion. Yet, analysts remain cautious, stressing that consistent cross-vertical growth and broader recovery in ER&D spending are crucial before turning more constructive on the stock.    Disclaimer: The views or investment tips expressed by the brokerage in this article are their own and not those of the website or its management. Business Standard advises users to check with certified experts before taking any investment decisions.