Tata Elxsi shares more than double investors’ money in last 1 year, analysts see 12% further jump, say buy

Tata Elxsi shares have rallied 46 per cent so far this year, outperforming benchmark Nifty 50 (down 7 per cent YTD) by a margin. The stock has more than doubled investors’ money in the last one year, and analysts see up to 12 per cent further upside going forward. Analysts at Sharekhan are bullish on Tata Elxsi stock, and have assigned ‘buy’ rating to the stock with a target price of Rs 9,750.

“Given its strong digital engineering capabilities, Tata Elxsi would benefit from the current upcycle in Engineering R&D (ERD) spends. It is expected to deliver industry-leading margin in FY2023, led by a higher offshore mix, and currency tailwinds,” they said. The stock was quoting at Rs 8,601 per share, down 1 per cent on BSE intraday.

Investment rationale Large addressable market provides sustainable growth opportunities: According to the Sharekhan report, total global ERD spends stood at $1. 3 trillion in 2021 and are expected to touch $1. 6 trillion by 2024.

With a 10-15% market share, India is gradually establishing itself as an engineering and design centre for automobiles, aerospace, consumer electronics, machinery, and semiconductors. According to NASSCOM, India’s contribution to the global ERD market is likely to increase to $63 billion by CY2025 from $31 billion in CY2019, translating at a CAGR of 12-13%. Indian ESPs will grow at a faster rate as compared to global peers owing to their ability to leverage robust digital engineering talent chains.

Growth prospects promising: Tata Elxsi’s key verticals have a huge growth opportunity, considering an increase in R&D spends in automotive, consumer electronics, and medical devices. The Tata group company is a specialist vendor for top OEMs and tier-I suppliers. This along with recent re-allocation of R&D budgets towards electronics and software, a large addressable market, and differentiated product offerings is expected to drive the company’s revenue growth going ahead, analysts noted.

The company’s strong capabilities in digital engineering, domain expertise and robust platform portfolio have helped it to strengthen its market position and win wallet share from existing customers. Superior margin performance to continue in FY23: Tata Elxsi management is optimistic on sustenance of higher offshore mix in FY23 given the company’s strong delivery model and cost-savings to customers, although the analysts believe that the mix would taper off marginally in FY23E 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 FY22).

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 Tata Elxsi in FY23E,” they said. The brokerage believes that the company would continue to deliver industry-leading margin in FY23, led by pricing, higher offshore mix, pyramid balancing and currency tailwinds. Tata Elxsi well poised to capture market opportunities across selected industries: According to the Sharekhan report, Tata Elxsi is well poised to capture market opportunities across the selected industries given its unique capabilities in design-led engineering.

Its USD revenue and earnings are likely to clock a CAGR of 23% and 20%, respectively, over FY22-FY24. “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,” it said. Tata Elxsi stock is trading at 78x/67x its FY2023E/FY2024E earnings, which is expensive.

However, Sharekhan continues to prefer Tata Elxsi given its strong growth potential, market share gains, superior margin profile, differentiated capabilities in digital engineering and strong balance sheet. The brokerage maintained a ‘Buy’ rating on the stock with a revised price target of Rs. 9,750.

Rupee appreciation and/or adverse cross-currency movements would adversely impact its earnings. Further, the reversal of offshore effort mix could impact its margins, the report added. (The stock recommendations in this story are by the respective research analysts and brokerage firms.

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