Tata Elxsi falls 3% as analysts caution on high valuation, near term risks

According to analysts, Tata Elxsi's revenue growth was led by ramp-up of deals in the transportation vertical but was offset by softness in the media and communication

Tata Elxsi’s stock slumped 2.64 per cent at Rs 6930.45 per share on the BSE in Thursday’s intraday deals. This came after the design and technology services firm reported a 3 per cent year-on-year (Y-o-Y) decline in net profit to Rs 184.1 crore for the first quarter ending June 30, 2024. 

Sequentially, net profit fell 6.5 per cent from Rs 196.9 crore in the March 2024 quarter. On the other hand, revenue rose by 2.3 per cent to Rs 926.5 crore, marking a 9 per cent increase from the previous fiscal's corresponding quarter's revenue of Rs 850 crore.

According to analysts, the company’s revenue growth was led by ramp-up of deals in the transportation vertical but was offset by softness in the media and communication vertical and weakness in the healthcare vertical due to renewal delay from a large US customer.

Those at InCred Equities stated that the earning before interest and tax (Ebit) margin at 26.4 per cent was above their estimates and management’s commentary of FY25F revenue growth was better than FY24 led by the transportation vertical.

Analysts at Kotak Institutional Equities, too, believe that while there is visibility of green shoots in Tata Elxsi’s performance some key risks still remain. Media and communications’ performance was muted, but a few large deals in the pipeline might drive growth in the near term, the brokerage said. 

Apart from that Tata Elxsi's thin presence among healthcare and medical device clients has impacted overall performance, as one of its large clients has delayed contract renewals and it is unlikely to recover in the near term.

Going forward, wage hikes to employees are key headwinds in the second and third quarter of FY25, while growth leverage, utilisation improvement and operational efficiency are key tailwinds for the company. 

Analysts at InCred equities maintained their ‘Reduce’ rating for Tata Elxsi at a target price of Rs 6,064, a downside of 12.5 per cent from today’s low. 

“We retain our revenue and PAT CAGR of 12.1 per cent and 14.2 per cent, respectively, over FY24-27F and retain our discounted cash flow based target price of Rs 6,064, implying a target P/E of 37.4x FY26F EPS, a 10 per cent premium to the peer group (LTTS, Tata Technologies, KPIT Technologies and Cyient), considering the superior margin profile and return ratios,” Abhishek Shindadkar, Tushar Wavhal and Smit Gosrani of InCred Equities wrote in report. 

KIE expects revenues in the current fiscal would slightly improve driven by demand tailwinds in transportation. It expects 11.3 per cent Y-oY growth in constant currency terms with a 4.4 per cent CAGR over the second to fourth quarter of FY2025E, significantly better than its performance in the past 7 quarters. The brokerage further expects the Ebit margin to remain range bound over the medium term. 

"Our revised fair value of Rs 5,500 from Rs 5,400 implies 31X Sep 2026E P/E. We see risks from increasing the concentration of the top-5 accounts, moderated growth and stretched valuations,” Kawaljeet Saluja, Vamshi Krishna, Sathishkumar S of KIE wrote in a report.  

At 12:13 PM; the stock of the company was trading 1.94 per cent lower at 6968.80 per share on the BSE. In comparison, the BSE Sensex was down by 0.33 per cent at 79,660 levels.