Table of Contents
BRIEF SUMMARY OF SHAREKHAN’S RESEARCH REPORT ON TATA ELXSI SHARE
Tata Elxsi share (TEL) reported another quarter of outstanding all-round revenue growth of 6.5% q-o-q and 32.7% y-o-y on constant currency (CC) basis, with further margin expansion, strong fresher intake, and robust deal intake across its verticals.
Revenue growth was driven by continued robust growth in embedded product design (EPD), up 9.6% q-o-q and 35.4% y-o-y on CC basis in Q3FY2022. USD revenue grew by 5.4% q-o-q and 30.9% y-o-y to $84.8 million, in-line with Sharekhan’s estimate of $85 million.
EBITDA margin expansion surprised positively, backed by faster growth in its high-margin medical devices vertical, higher offshore, increasing utilisation, quality of revenue mix (including multi-year contracts with focus on better margin deals), operational efficiencies, and delivery excellence.
Sharekhan believe margin headwinds such as supply-side concerns, investments in building capability in emerging areas, lateral hiring, and higher discretionary spends in the area of travel and facility would put pressure on margins in the subsequent quarters.
They expect strong growth momentum to continue in the medium term, backed by strong order intake, robust deal pipeline, solid execution, excellent capability across focused verticals, good client mining, a quality client base, and strong demand tailwinds.
KEY POSITIVES
EBIT margin improved by 240 bps q-o-q to 31.0%, exceeding Sharekhan’s estimates.
Offshore revenue mix further improved to 75.1%.
Strategic multi-year large deal wins across verticals, including a software development programme from a new-age electric vehicle (EV) original equipment manufacturer (OEM).
KEY NEGATIVES
Industrial design and visualisation (IDV) revenue declined by 15.4% q-o-q on CC basis Management Commentary.
Growth momentum likely to remain sustainable in the coming quarters, led by robust order book, healthy deal pipeline, and strong demand.
In Q3, Tata Elxsi share had included 150 freshers and is expecting to continue this rally of intake in upcoming few quarters as well.
Expect strong growth in the automotive sub-segment going ahead, led by rising spending across electric, autonomous, connected, and digital technologies.
There is an expectation from the management that the new projects in IDV business would be resumed by Q4FY2022 or Q1FY2023.
Tata Elxsi share is focusing on turning the project-based deals into long term deal contracts for which they aiming a tenure of 18-24 months.
Revision in estimates – Sharekhan has revised their earnings estimates upwards for FY2022E/FY2023E/FY2024E by 1-5%.
SHAREKHAN’S CALL VALUATION
Strong growth prospects going ahead: The company’s continued investments on these emerging technologies have helped it to align itself to fulfill the demand of global enterprises. Sharekhan believes in medium term Tata Elxsi share’s revenue growth is likely to remain strong, as it focuses on future and developing sectors (media and healthcare) and emerging technology which is highly asked by the customer.
The growth of the company would be due to the company’s good client mining strategy, pipeline of robust deals, solid execution and intake of strong orders.
Tata Elxsi shares USD revenue and earnings are likely to post a CAGR of 22% and 20%, respectively, over FY2022-FY2024E.
Sharekhan continues to prefer Tata Elxsi share, given its strong digital engineering capabilities, long-standing client relationships, superior margin profile, increased focus on long-term deal contracts, and presence in the fast-growing ERD space.
The stock is moving in a range of 68x/56x its FY2023E/FY2024E earnings at the current market price.
Though Tata Elxsi share PE multiples has significantly rerated over last one year, it is still trading discount to median forward PE multiple of Chinese tech companies whose long-term growth profile in the high 20% EPS growth range.
Sharekhan maintains a buy rating on Tata Elxsi share and has revised its target price to ₹ 8,160.
KEY RISKS
(1) Growth momentum could be hampered due to a slowdown in the global economy and specifically due to automotive industry;
(2) currency risks; and
(3) slower growth in the broadcast sectors.
QUARTERLY RESULTS
Figures in Rs. Crores
| Quarterly Results | Mar-19 | Jun-19 | Sep-19 | Dec-19 | Mar-20 | Jun-20 | Sep-20 | Dec-20 | Mar-21 | Jun-21 | Sep-21 | Dec-21 |
| Sales | 405 | 362 | 386 | 423 | 439 | 400 | 430 | 477 | 518 | 558 | 595 | 635 |
| Expenses | 307 | 292 | 315 | 329 | 330 | 308 | 312 | 333 | 350 | 408 | 412 | 425 |
| Operating Profit | 98 | 70 | 70 | 94 | 109 | 93 | 118 | 144 | 168 | 150 | 184 | 211 |
| OPM % | 24% | 19% | 18% | 22% | 25% | 23% | 27% | 30% | 32% | 27% | 31% | 33% |
| Other Income | 15 | 12 | 12 | 21 | 13 | 13 | 4 | 15 | 7 | 18 | 2 | 7 |
| Interest | 0 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 3 |
| Depreciation | 7 | 10 | 11 | 11 | 11 | 11 | 11 | 11 | 11 | 12 | 14 | 14 |
| Profit before tax | 107 | 70 | 70 | 102 | 110 | 94 | 110 | 146 | 162 | 154 | 171 | 200 |
| Tax % | 33% | 30% | 29% | 26% | 25% | 27% | 28% | 28% | 29% | 26% | 27% | 25% |
| Net Profit | 71 | 49 | 50 | 75 | 82 | 69 | 79 | 105 | 115 | 113 | 125 | 151 |
| EPS in Rs | 11.45 | 7.83 | 8 | 12.11 | 13.18 | 11.06 | 12.67 | 16.89 | 18.49 | 18.21 | 20.12 | 24.24 |
SHARE HOLDING PATTERN
| Share Holding | Jun-19 | Sep-19 | Dec-19 | Mar-20 | Jun-20 | Sep-20 | Dec-20 | Mar-21 | Jun-21 | Sep-21 | Dec-21 |
| Promoters | 44.53 | 44.53 | 44.53 | 44.53 | 44.53 | 44.53 | 44.53 | 44.53 | 44.53 | 44.53 | 44.32 |
| FIIs | 8.75 | 7.7 | 9.05 | 10.71 | 10.54 | 11.75 | 12.62 | 12.07 | 11.81 | 12.71 | 11.93 |
| DIIs | 5.3 | 5.27 | 2.52 | 3.68 | 4.05 | 4.62 | 4.82 | 5.32 | 5.77 | 4.96 | 5.55 |
| Public | 41.42 | 42.5 | 43.9 | 41.09 | 40.88 | 39.1 | 38.03 | 38.08 | 37.89 | 37.8 | 38.21 |
Disclaimer
This stock has been analyzed and recommended in the brokerage report of Sharekhan. Equity investing can cause a risk of financial losses. Due caution should be exercised by the Investors while dealing in equities. LearnTwoTrade as well as the author are not liable for any losses caused as a result of decisions based on the article.