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Accumulate This Multibagger Mid Cap Tata Group Stock, Shares Can Surge 22%: KR Choksey
Leading brokerage firm KR Choksey in its latest report on TATA Elxsi Ltd has recommended "Accumulate" the stock for a target price of Rs. 8,884 per share. If purchased at the current market price while taking the estimated target price into account, the stock is expected to gain 22% over the course of a year.
Tata Elxsi is a mid cap IT Software company of Tata Group (having a market cap of Rs 45,550.23 crore). It is amongst the world's leading providers of design and technology services across industries including Automotive, Communications, Broadcast, Healthcare, and Transportation.
CMP, 52-week low & high, and Returns
The Current Market Price (CMP) of Tata Elxsi stood at Rs 7,314.20 per share on NSE after gaining 1.52%. The stock touched its fresh 52 week high in August 2022 at Rs 10,760, while the 52-week low-level stock hit in November 2021 at Rs 5,263.40.
In terms of return on investments, the stock didn't perform well over the past 3 months as it fell 9.47%. In the past 1 week, the stock fell 12.52%. However, it has given 16.3% in the past 1 year. In the past 3 years, it has given a whooping 932.64% returns. In the past 5 years, it has given 773.55% multibagger returns.
Moderated growth during the quarter as Media/Communication sees weakness
TATA Elxsi Ltd Q2FY23 performance was lower than our estimate. Rupee revenue grew by 5.1% QoQ to INR 7,632Mn and retains it's dominance among the peers and showed strength for the eight straight quarter with a growth run rate of ~6% CC growth. Revenue came in at USD 95mn, +4.7% QoQ CC and 27.8% YoY CC, supported by EPD segment (87.6% of revenue) growth at 3.1% QoQ CC and IDV segment (9.7% of revenue) growth at 15.5% QoQ CC. Within the EPD segment, growth was led by the transportation vertical (41.5% of EPD revenue and 4.6% QoQ CC) and healthcare & medical devices (16.1% of EPD rev and 5.1% QoQ CC) while Media & Communication reported muted growth (42.4% of EPD revenue and 1% QoQ CC). Offshoring stood at 75.2%, up ~30bps & attrition came to 18.7%, down 30 bps QoQ, in Q2FY23 which is the lowest among the industry peers.
Deal momentum continues across geographies
TATA Elxsi growth was broad based, fueled by EPD and ISV segment. The outlook on transportation vertical and IDV division remains strong, supported by the deal velocity. Europe plays a key role in Transportation. Strong head count addition on quarterly basis indicates that there is no change in growth trajectory and the near term growth outlook remains intact. "We see a drag in Media/Communication vertical due to some slowdown or deferments in some accounts. TATA Elxsi added net headcount of 1,532 in Q2 (1,150 fresher and 350 lateral) and plans to onboard ~1,500 fresher in H2FY23. TELX is uniquely positioned with the clients for digital transformation/customer experience capabilities. Deeper customer engagement/mining of Top 10 clients have played well for TELX and has contributed ~48.3% of the total revenue," the brokerage has said.
Contraction in margin is a near term phenomena
In Q2FY23, the company registered EBIT margin of 26.8% which was down +360 bps QoQ, on the back of lower utilization (-120bps), lateral impact (-60bps) and higher facility/travel/recruitment/visa expenses.
Key Concall Highlights
(i) Transportation/medical (IDV) witnessed a decent growth & the pipeline is quite strong.
(ii) Apart from some deferment in projects, we have noticed a weakness in Top 5 Clients.
(iii) Macro-economic scenario/inflation plays key role in Europe/USA which has dragged down Media & Communication vertical.
(iv) Company has successfully added facilities (Chennai/Calicut/Kodzhikode).
(v) Company continue to close deals on the back of ramp up in customer engagements (especially in including Transportation, Medical, even IDV and SIS).
(vi) Company has added +1100 fresher & +350 laterals.
(vii) Campus hiring impacted the margin by +120bps; On-site cost impacted +60bps & remaining of the margin involve facility expansion, incremental operational cost due to lower WFH model, travel related cost & training/recruitment.
Valuation and view
TATA Elxsi is currently trading at a valuation with a P/E multiple of 69.2x/56x on FY23E/FY24E earnings. "We expect strong deal momentum across verticals, addition of new clients from newer geographies, higher focus on IDV especially in design-led digital projects, and multi-year tailwind in EPD and hence we are assigning a P/E multiple of 64x to the FY24 estimated EPS of INR 138.8 to arrive at a target price of INR 8,884 per share, an upside of 14.1% over the CMP. Accordingly, we maintain our rating to an "ACCUMULATE" to the stock," the brokerage has said.
Disclaimer
The stock has been picked from the brokerage report of KR Choksey. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.
