Company beats estimates with 220bps margin expansion, but trades at steep 45x FY27 earnings
ata Elxsi delivered a better-than-expected third quarter, but the stock’s rich valuations have left analysts divided on whether investors should bet on the recovery story.
The IT services firm reported revenue of Rs 954 crore, growing 3.9% sequentially. Operating margins expanded sharply by 220 basis points to 20.9%, beating Street estimates. Adjusted profit came in at Rs 181 crore, up 30% from the previous quarter.
While the numbers impressed, Elara Securities maintained its Sell rating with a target price of Rs 4,520. That implies a 22% downside from the current price of Rs 5,793. The brokerage raised its target from Rs 4,390 but said valuations remain stretched.
Nirmal Bang took a different view. The brokerage upgraded the stock to Hold from Sell earlier, setting a target of Rs 5,764. It raised its FY26 earnings estimate by 3% while trimming outer-year forecasts.
“We believe double-digit growth in transportation is achievable considering recent deal wins,” Elara wrote. However, it expressed skepticism about management’s double-digit growth target for healthcare given continued weakness.
The transportation vertical, which contributes 55% of revenue, grew 7.2% sequentially in constant currency. Growth came from ramping up software-defined vehicle deals and normalization of work with anchor client JLR. However, JLR hasn’t returned to peak levels and may take another two quarters.
Media and communications declined 1.2% on seasonal furloughs and delayed deal closures. Healthcare fell 4.3%, which management called the bottom. Both segments are expected to grow double digits in FY27.
“Transportation growth was driven by ramp-ups in SDV programs,” Nirmal Bang noted. European OEMs are spending aggressively while Japan remains in consolidation mode.
Deal wins provided a bright spot. The company secured $4.8 billion in large deals, up 92% year-on-year. Even excluding the NHS contract, wins totaled $3.2 billion. Management highlighted traction in AI-led modernization and vendor consolidation despite firm pricing.
But headcount continues declining. The company reduced staff by 357 employees in the quarter, the sixth consecutive reduction. Total headcount has fallen by 1,805 or about 14% from peak levels. Utilization stands at 75% with scope to reach 80-85%.
“The company indicated revenue growth and headcount should not be correlated,” Nirmal Bang stated. AI productivity is enabling non-linear growth, reducing the need for proportional hiring.
Margins got a boost from multiple factors. Operating leverage and utilization gains added 200 basis points. Cost discipline contributed 80-85 basis points while currency helped by 35 basis points. However, wage hikes for junior staff reduced margins by 110 basis points.
A one-time labor code provision of Rs 96 crore hit reported profit. Management expects a recurring 15-20 basis point impact going forward. The Q4 wage hike impact will be lower than Q3.
Client concentration reached record highs. Top five clients now account for 49% of revenue while top ten contribute 59%. This shows deepening relationships but also increases dependency risk.
Geography-wise, Europe rebounded strongly with 11% growth after three weak quarters. Americas grew 3.7% while India fell 10%. Management said European OEMs are ramping up while Japanese clients remain cautious.
The company is investing in new areas. Defense and aerospace are emerging focus segments despite regulatory hurdles. Off-highway business currently contributes 7-8% of transportation revenue. Management targets 20% within three years.
On AI, the company serves as a partner for 15 of its top 25 clients. About 90% of top 200 clients are engaged on AI initiatives. The Topaz platform is gaining traction in helping clients deploy agents at scale.
Management maintained its long-term margin target of 26-28% EBIT by FY27 exit. Current utilization improvements and Project Maximus initiatives should support expansion. However, analysts believe this requires significant revenue uptick.
Elara values the stock at 30 times FY28 earnings. The brokerage worries about planned reduction in auto OEM spending affecting revenue. “Revenue growth may unlikely reach prior levels,” it wrote.
Nirmal Bang values at 37 times December 2027 earnings, a 10% premium to ten-year average. The firm expects 16% earnings CAGR over FY26-28 despite near-term pressure.
The stock currently trades at 45 times FY27 earnings and 38 times FY28 earnings. This compares to historical average of around 37 times one-year forward earnings.
For FY27, Elara estimates revenue of Rs 4,192 crore, up 12% from FY26. Nirmal Bang projects Rs 4,271 crore, implying 14% growth. Both see margins expanding to 22-23% range.
Key risks include automotive sector headwinds, delayed JLR recovery, uncertain healthcare turnaround, and high client concentration. Macro challenges persist with slow decision-making by clients.
Industry watchers say the quarter shows Tata Elxsi has turned the corner after a weak first half. Large deal ramps and margin recovery provide comfort. However, valuations price in significant growth that needs flawless execution.
The company faces a crucial test in coming quarters. Healthcare must show recovery. JLR needs to return to peak levels. And new areas like defense must start contributing. Margin expansion to 26-28% will require both revenue growth and efficiency gains.
