Tata Elxsi Shares: Tata Elexi, a mid-cap IT stock from Tata Group, surged sharply in trade after an initial dip of about 4 per cent in the morning session. Tata Elxsi shares have rallied 28 per cent so far this year, outperforming the benchmark Nifty 50 (down 12 per cent YTD) by a margin. The stock has more than doubled investors’ money in the last one year, and analysts see 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 7,565.95 per share, up 4.16 per cent on NSE intraday.
Tata Elxsi as per the company’s website is amongst the world’s leading providers of design and technology services across industries including Automotive, Broadcast, Communications, Healthcare, and Transportation. Tata Elxsi is helping customers reimagine their products and services through design thinking and the application of digital technologies such as IoT (Internet of Things), Cloud, Mobility, Virtual Reality, and Artificial Intelligence.
The 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 per cent 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 per cent. Indian ESPs will grow at a faster rate as compared to global peers owing to their ability to leverage robust digital engineering talent chains.
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.
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 per cent 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 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.
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