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.

Tata Elxsi shares faced selling pressure on Wednesday, declining 2.5% to ₹5,649 from the previous day's closing price of ₹5,793, despite reporting strong third-quarter earnings that exceeded market expectations. The stock's decline highlights the ongoing concern over expensive valuations in the face of solid operational performance.

Financial Performance Overview

The company delivered a mixed but largely positive quarterly performance, with key metrics showing both growth and some areas of concern:

While net profit declined significantly by 29.7%, the company demonstrated strong operational efficiency with EBIT growing 17.4% and margins expanding substantially to 20.9% from 18.5% in the previous quarter.

Segment-wise Performance

The transportation business emerged as the primary growth driver, registering 7.7% sequential growth. However, other key segments faced challenges during the quarter:

CEO Manoj Raghavan attributed the decline in Media and Communications, and Healthcare and Life Sciences verticals to seasonal furloughs and delayed key deal awards at the quarter's end. He expressed confidence in recovery and growth for both verticals starting in Q4 of the current financial year.

Margin Expansion and Regional Growth

The software segment led the margin expansion story, with margins rising by 318 basis points, contributing significantly to the overall EBIT margin improvement. From a geographical perspective, Europe and the United States drove regional growth, indicating strong demand in these key markets.

Valuation Concerns and Market Sentiment

Despite the positive operational metrics, valuation concerns continue to weigh heavily on investor sentiment. The stock currently trades at 52 times price-to-earnings multiple, significantly higher than the Nifty 50's average of 22 times. Additionally, the relative strength index of 70 suggests the stock may be in overbought territory.

Analyst sentiment reflects cautious optimism, with 2 out of 51 analysts maintaining 'buy' ratings, 4 recommending 'hold,' and 12 suggesting 'sell' according to Bloomberg data. The average 12-month consensus price target of ₹5,051.06 implies a potential downside of 10.9% from current levels.