This Tata group stock can give 20% returns, should you buy it?

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A pure-play engineering services and design services of Tata group catering to industries like transportation, broadcast & communication and healthcare & medical devices, Tata Elxsi is no small fish. The stock has risen 153% from Rs 1,071 August 2020 to Rs 2,739 as of 22^nd March 2021. It means Rs 1,00,000 invested six months back today has turned into Rs 2,55,742.

In the December quarter, Tata Elxsi reported nearly 40% profit growth with revenues rising nearly 13% year on year. The management sounded upbeat, “entering the fourth quarter and the New Year with the reinforced confidence of a strong deal pipeline across markets and industries.”

Owing to this and many other positives in Tata Elxsi, HDFC Securities has initiated coverage for the stock with a price target of Rs 3,300.

Investment rationale:

Tata Elxsi revenue trajectory has traversed from growth discount to a strong growth premium within the engineering R&D segments. Industry tailwinds include a large and growing R&D pool across automotive, broadcast & communications and medical devices, re-factoring of R&D spend into faster-growing sub-segments, said the brokerage in a report.

The brokerage firm believes that the transportation vertical to grow at a 16% CAGR over FY21-24E, supported by gaining share in the OEMs with the confluence of partnerships and trends in connected-autonomous-electrification.

Opportunities in OTT & new media, RDK expertise and monetisation of IPs are expected to keep growth rates strong. TELX’ partnership with semiconductor and Google refrenceability/partnership (SI in Widevine) provides access to a large network and is likely to accelerate growth in the broadcast & media vertical (20% CAGR over FY21-24E), added the note.

That apart, the low cost of delivery model, highest offshore, and lowest attrition translate into superior margin & efficiencies.

HDFC Securities is of the opinion that for FY22E, Tata Elxsi is set to grow at a 10pp premium to mid-tier peers both on growth and margin. The target price of Rs 3,330 is based on 36x (base case) at 1.6x the average multiple, supported by top quadrant growth/efficiencies, quality of franchise, industry tailwinds, and favourable risk-reward (upside risk to the base case).

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