Tata Elxsi dips 14% in 2 days, hits 3-month low post weak Q2 revenue growth

Shares of Tata Elxsi hit a three-month low of Rs 7,280, falling 6 per cent on the BSE in Tuesday's intra-day trade, in an otherwise weak market. The stock has slipped 14 per cent in the past two trading days after the Tata Group company reported weak revenue growth in the July-September quarter (Q2FY23).

With the past two days' decline, Tata Elxsi's market price has corrected 32 per cent from its record high level of Rs 10,760, which it had touched on August 17, 2022. It was trading at its lowest level since June 21, 2022. In comparison, the S&P BSE Senses was up 1.1 per cent at 12:15 PM. The index has surged 2 per cent in two days.

For Q2FY23, Tata Elxsi reported Rs 763 crore of revenue from operations, a growth of 5.1 per cent quarter-on-quarter (QoQ), and 28.2 per cent year-on-year (YoY). EBITDA margin declined by 312 basis points QoQ to 29.7 per cent, while net profit stood at Rs 174.3 crore, down 5.7 per cent QoQ but up 39.1 per cent YoY.

The management said the company is gaining market share in both automotive and media & communications, especially in Europe. The numbers are muted in the region due to unfavorable currency movement. However, management highlighted that Media and Communication has seen some deferment and slowdown. It expects this to continue for one or more quarters as customers are cautious, majorly in US and Europe, owing to the inflationary environment. Management also indicated that deal closures are taking longer in the tUS and Europe due to the macro environment.

According to analysts at Sharekhan, Tata Elxsi reported weak revenue growth during Q2FY2023, with sharp drop in margin due to strong headcount addition, back-to-office costs, opening of new facilities, and increased discretionary spends related to travel, and training. The company registered constant currency (CC) revenue growth of 4.7 per cent QoQ during the quarter, below the Street's consensus estimates, and notably missed the six consecutive quarters of 6 per cent CC growth.

The brokerage has downgraded the stock to 'Reduce' as earnings growth trajectory appers to be tapering off amid macro uncertainties at the current juncture. 

"The macro overhang, especially in the key markets of Europe and US, and extension of slowness in deal closures spreading to other verticals other than Media and Communication could impact deal wins and revenues. The supply-side pressure, back-to-office costs, and facilities-related costs are expected to increase in the near term and are likely to keep margins under pressure," the brokerage firm said.

Those at HDFC Securities, too, have a 'sell' rating on the stock. "We expect 26 per cent EPS CAGR over FY22-25E, and doubling of EPS in three years (revenue-led) with margins for FY23/24/25E at 30.8 per cent, 30.5 per cent, and 31.7 per cent, and RoE at ~40 per cent. Yet, these base case assumptions seem adequately priced-in and there's a low margin of safety at 61x FY24E; implied US dollar revenue growth rate over FY22-32E is ~24 per cent CAGR at current valuation. We maintain SELL, with a target price of Rs 6,540," they said.