Tata Elxsi: Sentiments defy weak Q4 and bearish calls by brokerages

Tata Elxsi reported weak results for the fourth quarter of the financial year 2024-25 (FY25) and many analysts were also negative on the stock.

 

But the share surged by over 9 per cent post the results (announced on Thursday post market hours) to close at ₹5,344.55 on the BSE on Monday. This might be due to low expectations and potentially attractive valuations after a 30 per cent correction over the last 12 months.

 

There was a sequential revenue decline in large verticals, across regions and clients. However, the company announced a $100 million deal and a EUR50 million deal in media and communications and transportation verticals, respectively. This may offset some macro uncertainty.

 

There was a revenue decline of 5.3 per cent quarter-on-quarter (Q-o-Q) at $105 million. Year-on-year (Y-o-Y) basis, it was down 2.9 per cent. Transport (down 9.7 per cent Q-o-Q) was hard hit, while media and communications too was down 6.3 per cent Q-o-Q. The healthcare and medical devices vertical grew 3.5 per cent.

 

In Y-o-Y terms, revenue growth was 3.1 per cent in constant currency, led by transportation, up 11.8 per cent Y-o-Y, while media and communications was down 5.5 per cent Y-o-Y and healthcare and life sciences vertical down 9.4 per cent Y-o-Y.

 

Regionally, on a Q-o-Q and US$ basis, US saw a revenue decline of 6.1 per cent, while Europe too was down 12.1 per cent and rest of world was down 7.2 per cent. India revenues though grew 9.5 per cent Q-o-Q.

 

The EBIT (earnings before interest and tax) margin declined 340 bps to 20.1 per cent due to higher cost of materials consumed. The net profit was at ₹172 crore, down 12.4 per cent Y-o-Y. One bright spot for FY25 was better cash flow with CFO (cash flow from operations) of ₹812 crore, up 15.6 per cent Y-o-Y, and free cash flow (FCF) of ₹796 crore, up 28.7 per cent Y-o-Y. CFO/PAT and FCF/PAT ratios were both over 100 per cent. Dividend was at ₹75 per share. 

 

The outlook in Transport is clouded by tariff uncertainty. Tata Elxsi has very high exposure to JLR (subsidiary of Tata Motors), but this is now easing down. R&D spending by media and communications clients is weak.

 

Automotive original equipment manufacturers (OEMs) and Tier-I suppliers have been badly impacted due to US tariffs amidst already weaker demand. However, Tata Elxsi has a EUR50 million TCV (Total Contract Value) multi-year engagement with a European OEM to establish a dedicated GEC (Global Engineering Centre).

 

Media and communications performance is weak due to caution from telecom operators. However, the company has a $100 million, 3-year deal to offer engineering across video and broadband products as well as a $10 million deal with a global broadcaster for streaming video platform engineering.

 

Management was cautious about growth in the segment in FY26 despite these deal wins due to a general cautious approach by clients.

 

In healthcare and medical devices, there was some momentum. The vertical was hit by insourcing and volume declines at large clients in the first six months (H1) of FY25 but Tata Elxsi has diversified in the vertical targeting new areas in diagnostics and therapies. But, on Y-o-Y terms, the revenue declined 11 per cent in constant currency.

 

Tata Elxsi has tightly controlled discretionary expenses to improve margins. 

 

But demand deterioration led to weaker revenue and a drop in margins.

 

The company can look to improve utilisation, which remains at 70 per cent levels, even though headcount reduced by 464 employees, down 3.6 per cent Q-o-Q to 12,400 employees-- Y-o-Y the company has downsized by 985 employees.

 

Management indicated lateral hiring would be measured over H1FY26 but on boarding of freshers would occur.

 

Growth acceleration will be very gradual.

 

Management pointed to auto vertical challenges such as delayed ramp-up of new deals and pause of existing deals. Tata Elxsi expects growth to return from Q1FY26, which may have influenced the bullish trend. The deal wins will contribute fully only from H2FY26. This is a rare case of a share price surging despite negative results and lack of enthusiasm from analysts.

 

According to Bloomberg, 9 out of 12 analysts polled post Q4 results are bearish on the stock, one is bullish, one is neutral and one has no rating. Their average one-year target price is ₹4,675.