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HDFC Securities have set a price target of Rs 3,300 for Tata Elxsi, supported by top quadrant growth/efficiencies, quality of franchise, industry tailwinds, and favourable risk-reward ratio.
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 22nd 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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