Tata Elxsi Shares Face Pressure as Brokerage Flags Steep Valuation
Overview
Tata Elxsi's Q3 FY26 results showed improved execution but uneven growth, heavily reliant on transportation. Motilal Oswal maintained a 'Sell' rating, citing expensive valuations at 43x forward P/E and warning of a potential 19% downside to ₹4,700, despite management optimism.
Stocks Mentioned
Q3 Results Amidst Valuation Concerns
Shares of Tata Elxsi Ltd. are under scrutiny following the company's third-quarter earnings for fiscal year 2026. While the engineering and design services firm reported improved operational execution, the overall growth picture remains patchy. Motilal Oswal, a prominent brokerage firm, has reiterated its 'Sell' recommendation on the stock, setting a price target of ₹4,700, which implies a significant 19% decline from current trading levels.
Valuation Red Flag
The brokerage firm pointed to persistently high valuations, noting the stock trades at 43 times its one-year forward price-to-earnings (P/E) ratio. Motilal Oswal finds this valuation difficult to justify without clear visibility of sustained, broad-based growth across all business segments. This sentiment suggests that the market may be pricing in an overly optimistic future scenario for Tata Elxsi.
Segmental Performance and Outlook
In the third quarter, constant currency revenue increased by 3.2% sequentially, surpassing expectations of 2.7%. The EBITDA margin also saw an uptick, moving to 23.3% from 21.05% in the prior quarter. However, reported profit after tax (PAT) saw a sharp decline of 29% quarter-on-quarter and 44% year-on-year, largely due to an exceptional charge of ₹95.8 crore related to new labor codes.
Adjusted PAT rose 15.7% sequentially to ₹179.1 crore but fell 10% year-on-year. Management expressed optimism for incremental growth in the fourth quarter and sees potential for further margin expansion through efficiency initiatives. The transportation segment emerged as a key driver, with revenue up 7.7% sequentially, and is projected to be the main growth engine in FY27. Media and communications revenue saw a slight dip, while healthcare revenue declined, though management anticipates a recovery from the fourth quarter.
Market Reaction
Tata Elxsi shares closed Tuesday's session 1.75% higher at ₹5,793. The stock has seen a modest gain of 5% in the preceding five trading sessions. Investors will be closely watching how the market digests Motilal Oswal's valuation concerns against the company's forward-looking guidance.
