Buy This Tata Group Multibagger Stock For A Target Price of Rs. 9,000: Sharekhan

Tata Elxsi Ltd (TEL) is a global leader in design and technology services, with a focus on the automotive, broadcast, communications, healthcare, and transportation industries. This Tata Group stock has risen from Rs 3202 on April 26, 2021 to Rs 8358 on April 24, 2022, representing a 156 per cent growth in that period. According to Tata Elxsi's share price history, this multibagger stock has climbed from Rs 922 on April 26, 2019 to the current market price of Rs 8358. Thus, during the last three years, this multibagger stock has returned 776 per cent to its stockholders. On a year-to-date (YTD) basis, the stock is up by 42 per cent, with a 44 per cent rise in the previous six months. In the previous month, the stock has gained by 10.40 per cent, and in the last five trading days, it has climbed by 4.31 per cent. Sharekhan, a brokerage company, believes the stock has more upside potential and has given it a buy call rating with a target price of Rs 9000 per share.

Key investment rationale

According to Sharekhan "Tata Elxsi Limited (TEL) another quarter of impressive revenue growth of 7.4% q-o-q on constant currency (CC) terms led by increasing spend on digital engineering technologies across verticals and ramp-up of deals, while EBIT margin remained in-line with our expectations. Q4 witnessed healthy net hiring, strong deal intake across verticals, expansion into new geographies and good client mining. EBITDA margin declined by 73 bps q-o-q to 32.5%, in line with our estimates, owing to wage hike to junior employees (-150 bps), partially offset by operating leverage from strong revenue growth and operational efficiencies."

The brokerage has said "We expect TEL is well placed to deliver another year of strong growth in FY2023E, given strong order intake compared to the beginning of FY2022, excellent digital capability across verticals, entry into new geographies and increasing spends in digital engineering. Though management remains confident in maintaining operating profitability (31% in FY2022) in FY2023E on the back of pricing leverage, a favourable offshore mix, pyramid balancing, increasing annuity revenue contribution and currency tailwinds, we believe its operating profitability would remain under pressure because of wage revisions, investments in building capability and increasing discretionary spends in the area of travel and facility."

Buy for a target price of Rs 9000

"We expect TEL is well placed to deliver another year of strong growth in FY2023E, given strong order intake as compared to the beginning of FY2022, excellent digital capability across verticals, expanding new geographies and increasing spends in digital engineering. TEL's USD revenue and earnings are likely to post a CAGR of 23% and 20%, respectively, over FY2022-FY2024E," the brokerage has highlighted.

"At the CMP, stock is trading at 72x/62x its FY2023E/FY2024E earnings, which although expensive, is justified given a long runway for growth. We continue to prefer TEL, given its market share gains, long-standing client relationships, superior margin profile, consistent large deal wins, differentiated capabilities in digital engineering and presence in the fast-growing ERD space. We maintain our Buy rating on TEL with a revised a price target (PT) of Rs. 9,000," the brokerage has claimed.

Key positives as per the brokerage: 

• Strategic large deal wins in transport & media vertical.
• Customer additions were strong in new regions especially in media segment.
• Continued robust growth in embedded product design (EPD) segment, up 7.6% q-o-q on CC.
• Company plans to add ~2,500 - 3,000 fresher in FY2023E (up 1.3x-1.7x y-o-y), indicate strong
• underlying demand.
• The newly launched platform (TEngage) has garnered brilliant response in the US.
• Remains confident in maintaining EBITDA margin (31% in FY2022) in FY2023E despite headwinds.
• The revenue contribution from the adjacencies would improve to 20% of total segment's revenue from 5% currently.

Key negatives: 

• System integration & support (SIS) revenue declined by 3.8% q-o-q on CC basis.
• Slowdown in the global economy especially in the automotive industry might affect growth momentum. 
• Currency risks
• Slower growth in the broadcast sectors.

Disclaimer

The stock has been picked from the brokerage report of Sharekhan Ltd. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.