Tata Elxsi faced a challenging third quarter with net profit declining 45.3% year-on-year to ₹1.09 billion, primarily impacted by exceptional charges related to India's evolving labour law landscape. The significant profit drop was attributed to a one-time exceptional charge of ₹956.9 million arising from employee benefit provision increases mandated under revised wage structures in the new labour codes.

Financial Performance Overview

Despite the profit decline, the company demonstrated resilience in operational metrics. Revenue performance exceeded expectations with 3.2% quarter-on-quarter growth in constant currency terms, driven primarily by strong momentum in the Transportation vertical. The earnings disappointment led to immediate market reaction, with shares falling 3.2% to an intraday low of ₹5,609.15.

Operational Highlights and Challenges

The company showed mixed performance across business segments. The Transportation vertical emerged as a key growth driver, supported by anchor account ramp-ups and recovery in strategic top clients. However, this positive momentum was offset by persistent weakness in Media & Communications and Healthcare segments, which reported another quarter of decline.

Utilisation rates improved to 75%, ahead of earlier estimates, contributing to better-than-expected margin performance. The margin beat estimates by 140 basis points quarter-on-quarter, demonstrating effective cost control measures despite wage increases.

Brokerage Recommendations and Price Targets

Brokerages remain divided on the stock's outlook, with target prices ranging significantly based on different valuation approaches and growth expectations.

Detailed Brokerage Analysis

Morgan Stanley maintained its cautious stance despite acknowledging better-than-expected growth trends and positive margin surprises. The brokerage highlighted management's optimism in the automotive sector and potential recovery in healthcare and media segments from Q4 FY26, supported by large media deal wins. However, concerns about rich valuations and unfavourable risk-reward profile without material signs of sustainable growth persist.

PL Capital adopted a more balanced view, raising its target price while maintaining a Hold rating. The firm credited strong Transportation vertical performance but flagged ongoing weakness in Media & Communications and Healthcare segments. It expects margin expansion of 70bps/40bps/20bps over FY26–FY28 and projects 9.8–11.6% revenue growth in FY27–FY28.

Elara Capital and Choice Broking both maintained Sell ratings, citing valuation concerns despite acknowledging operational improvements. Both brokerages noted that much of the fundamental improvement appears already priced in, requiring consistent double-digit growth in Transportation and Healthcare verticals for sustainable re-rating.

Market Outlook and Key Factors

The company faces a mixed outlook with several key factors influencing future performance. Positive indicators include improved utilisation rates, strong Transportation vertical momentum, and effective margin management. However, challenges persist in Media & Communications and Healthcare segments, along with concerns about sustaining growth momentum and current valuation levels.

Management's optimism about automotive sector recovery and potential healthcare and media segment improvements from Q4 FY26 provides some hope for future quarters. The company's ability to maintain margin expansion while navigating demand headwinds in key segments will be crucial for investor confidence going forward.

Tata Elxsi has received a 'Sell' rating from brokerage firm Motilal Oswal following the release of its third-quarter financial results for FY26. The IT services and design company's mixed performance across business segments has prompted the cautious outlook from analysts.

Q3 FY26 Financial Performance

The company reported quarterly revenue of $107.00 million for Q3 FY26, marking a 3.20% quarter-on-quarter growth in constant currency terms. This performance exceeded analyst expectations, surpassing Motilal Oswal's estimate of 1.80% constant currency growth for the quarter.

Segment-wise Performance Analysis

The quarterly results revealed a mixed performance across Tata Elxsi's key business verticals. The transportation segment emerged as the primary growth driver, while other divisions faced headwinds during the quarter.

Transportation Business Leads Growth

The transportation vertical demonstrated strong momentum with a 7.30% quarter-on-quarter growth in constant currency terms. This segment's robust performance was the key contributor to the company's overall revenue growth during Q3 FY26.

Decline in Other Key Segments

However, other business segments showed contrasting trends:

The Healthcare & Life Sciences division experienced a notable decline of 4.30% quarter-on-quarter in constant currency, while the Media & Communications segment contracted by 1.30% QoQ in constant currency terms.

Analyst Outlook

Despite the company beating revenue growth estimates for the quarter, Motilal Oswal has maintained a cautious stance on the stock. The brokerage's 'Sell' rating reflects concerns about the mixed segment performance and the sustainability of growth momentum across all business verticals.

The contrasting performance between the transportation segment's strong growth and the decline in HLS and Media & Communications divisions highlights the uneven recovery across Tata Elxsi's business portfolio during the third quarter of FY26.