Sharekhan Retains 'Buy' Call On This Tata Stock, Expects 14% Gains, Given Strong Growth Potential

Stock Overview

Tata Elxsi, on Friday, closed at the Current Market Price (CMP) of Rs 8,602.90/share after a fall of 1.35%. The is currently trading at Rs 5047.85/share below its 52 week low level, and Rs 817.1/share above the 52 week high level. Its 52-week low is Rs 3,555.05/share and its 52-week high is Rs 9420/share. Investors can expect 14% of positive gains in 12 months considering the CMP and the Target Price.

Tata Elxsi on Friday closed after gaining positive returns of 2.10% in the week. Whereas, in one month, it has given positive returns of 26.02%, and in 1 year a positive return of 124.91%. On long-term investments such as 3-year, it has given a whooping 900.34% positive returns and a massive 1,017.48% in 5 years of investment.

Returns

Capitalising on growth opportunities

Among the pure-play Indian ERD companies, Tata Elxsi has been reporting industry-leading USD revenue growth over the last two years (a 24% CAGR despite the fact that 2021 was severely hit by the pandemic). After reporting a decline in transportation revenue (down 4.6% y-o-y) in FY2021 due to significant disruptions in automotive sector, Tata Elxsi reported strong rebound (up 32.3% y-o-y) in transportation segment in FY2022 with the gradual recovery in automobile demand. In addition, the revenue growth in its media, broadcast, communications, and healthcare vertical accelerated in FY2022 given rapid shifts towards digitalisation. This reflects the company's differentiated technology capabilities, domain expertise and strong delivery capability, which enable it to address emerging opportunities across the focused verticals and to drive the transformation program of the customers. 

Strong pick-up in platform segment

Tata Elxsi's investments in both existing and new platforms such as TEPlay, FalconEye, iCX, QoEtient, and Autonomai have increased its ability to scale and build efficiencies. Apart from customers whom it provides services, the company targets those enterprises who don't have engineering/financial strength to develop platforms and/or potential customers who only look for outsourcing platforms for the offerings to their customers. The business model of these standalone platform deals is subscriber-based and linked to growth. 

Superior margin performance to continue in FY2023E

The brokerage said, "Management remains optimistic on sustenance of higher offshore mix in FY2023E (90% in Q4FY2022) given its strong delivery model and cost-savings to customers, although we believe the mix would taper off marginally in FY2023E due to opening of travel. Attrition is expected to slow down going ahead given rising layoff in startups, hiring freeze and strong industry-wide fresher hiring (during FY2022). Further, the company has brought forward wage hikes in January 2022 (which covered 65-70% of the workforce) from July (rolled out 7-8% wage hike in 2021), which would benefit TEL in FY2023E. We believe the company would continue to deliver industry-leading margin in FY2023E, led by pricing, higher offshore mix, pyramid balancing and currency tailwinds.'

Strong growth outlook intact, Suggests Buy For Target Price of Rs 9750/share

Tata Elxsi is well poised to capture market opportunities across the selected industries given its unique capabilities in design-led engineering. Tata Elxsi's USD revenue and earnings are likely to clock a CAGR of 23% and 20%, respectively, over FY2022-FY2024E. Under our coverage, Tata Elxsi is the only company whose stock performance (up 22%) has significantly outperformed CNX IT (down 17%) over last three months despite interest rate hikes by the US Federal Reserve, rising inflation in developed markets, the Russia-Ukraine conflict and potential recession in the US. "At CMP, stock is trading at 78x/67x its FY2023E/FY2024E earnings, which is expensive. However, we continue to prefer Tata Elxsi, given its strong growth potential, market share gains, superior margin profile, differentiated capabilities in digital engineering and strong balance sheet (cash and investments was 51% of total assets). We maintain a Buy rating on Tata Elxsi with a revised price target of Rs. 9,750," the brokerage has said.

The brokerage also highlighted key Risks, said, "Rupee appreciation and/or adverse cross-currency movements would adversely impact its earnings. Further, the reversal of offshore effort mix could impact its margins."

About - Tata Elxsi Ltd

Tata Elxsi was incorporated in 1989, in Bangalore, the Silicon Valley of India. The company provides system integration and software development. The company caters to various industries such as aerospace, consumer electronics, entertainment, FMCG, telecom etc. The Company is engaged in product research and development outsourcing business. It provides hard-core technology and strength in design. The company offers end-to end solutions across the product lifecycle. The Company develops 3D and 2D animation, visual effects and gaming services. This division offers services in Pre-production, Production, Animation, and post-production for advertising, films, TV and Gaming. Today, Tata Elxsi is recognized as a premium engineering service provider worldwide and amongst the leaders in the automotive, media, broadcast, communications, and healthcare industries.