Tata Elxsi

Tata Elxsi delivered a healthy Q3 FY26, achieving 3.2% growth on a constant currency basis over the previous quarter. This performance was largely volume-led, contributing to better utilization and operating margins. The EBITDA margin improved significantly by 220 basis points to 23.3%, while the PBT margin also saw a 200 basis point improvement to 24.2%, excluding a one-time^📎 exceptional item^📎. This margin expansion was attributed to operational excellence, improved utilization, and cautious expense management, with a net positive movement of 200-210 basis points after accounting for wage hikes.

The transportation business, which now constitutes over 55% of the total revenue, grew robustly by 7.7% quarter-on-quarter. This growth was fueled by accelerated ramp-ups in SDV-led OEM deals won earlier in the year and the normalization of work streams with a strategic OEM client. While the Media and Communication business experienced a marginal decline of 0.3% QoQ due to seasonal furloughs and deal delays, management expects positive signs in Q4. The Healthcare and Life Sciences business has bottomed out in Q3, with growth anticipated to return from Q4 FY26, supported by new customer additions and multiyear deal wins in GenAI-powered regulatory workflows.

The company is currently operating at approximately 75% utilization and aims to reach 80-85% before considering large-scale hiring, which is expected to be 1-2 quarters away. Management emphasized a shift towards a future model where revenue is not linearly tied to headcount, focusing on productivity improvements, including AI. Hiring will be calibrated and selective, targeting specific skill sets and niche expertise. This strategy is expected to help the company return to its previous margin trajectory by the end of the next financial year.

Tata Elxsi maintains an aspiration for double-digit growth in both the transportation and healthcare verticals for FY27, believing that strong momentum in Q4 FY26 will be crucial for achieving these objectives. The company is also actively diversifying its customer base and geographical presence to mitigate concentration risks, with strong performance noted in the US and Europe. The non-PV transportation segment, currently at 7.5-8% of revenue, is targeted to reach 20% within the next 2-3 years, driven by new logos and growing industry spend.

A one-time^📎 exceptional item^📎 related to the new labor code was accounted for in Q3 FY26. Going forward^⏳, the impact from the new labor code is expected to be a manageable 15-20 basis points on margins, which management believes will be compensated by other operational levers and utilization improvements. Despite strong value propositions, client decision-making remains slow, requiring careful and calculated additions to projects. The company continues to sharpen its business model to address customer problems effectively.