IT company, Tata Elxsi Ltd (TEL), shares have rallied more than 43 per cent this year so far and has doubled investors’ money in the last one year. Should investors buy or book profit?
Tata Multibagger Stock: IT company Tata Elxsi Ltd (TEL) shares have rallied more than 43 per cent this year so far and has doubled investors’ money in the last one year. Tata Elxsi shares have risen from Rs 3809.60 to Rs 8,445, resulting in a multibagger return of 121.29 per cent in one year. The stock’s last traded price of Rs 8,445 is higher than the 5 days, 20-day, 50-day, 100-day, and 200-day moving averages. Its 52-week low is 3,555.05/share and its 52-week high is 9420/share.
Up to 15% Returns Expected
Tata Elxsi Limited’s annual report for FY2022 put the spotlight on its differentiated offerings and design-led approach across selected industries, rising focus on subscriber-based platform business, offshore delivery capabilities and favourable sector tailwinds. Sharekhan has assigned a buy call rating to Tata Elxsi shares, with a target price of Rs. 9,750, indicating a 15.5 per cent upside potential from the stock’s last traded price.
Rationale
Brokerage firm Sharekhan has said in a note that “Tata Elxsi Limited’s (TEL’s) annual report for FY2022 put the spotlight on its differentiated offerings and design-led approach across selected industries, rising focus on subscriber-based platform business, offshore delivery capabilities and favorable sector tailwinds. TEL focuses on design thinking and application of digital technologies in high-growth verticals that are expected to see strong growth driven by rising ERD spends. According to Zinnov, the share of Indian ERD service providers is expected to increase from $16 billion in 2021 to $58 billion in 2031, implying an over 13 per cent CAGR. Given its wide array of digital engineering-led services, robust platform portfolios, deep domain expertise and solid offshore delivery capability, we believe Tata Elxsi would be one of the key beneficiaries among the global peers from the current upcycle in ERD spends.”
“Management remains optimistic on the sustenance of higher offshore mix in FY2023E (90 per cent in Q4FY2022) given its strong delivery model and cost-savings to customers, although we believe the mix would taper off marginally in FY2023E due to opening of travel. Attrition is expected to slow down going ahead given rising layoffs in startups, hiring freeze, and strong industry-wide fresher hiring (during FY2022). Further, the company has brought forward wage hikes in January 2022 (which covered 65-70 per cent of the workforce) from July (rolled out 7-8 per cent wage hike in 2021), which would benefit TEL in FY2023E. We believe the company would continue to deliver industry-leading margin in FY2023E, led by pricing, higher offshore mix, pyramid balancing and currency tailwinds,” said the brokerage.
According to the Sharekhan report, Tata Elxsi is well poised to capture market opportunities across the selected industries given its unique capabilities in design-led engineering. Its USD revenue and earnings are likely to clock a CAGR of 23 per cent and 20 per cent, respectively, over FY22-FY24. “Under our coverage, Tata Elxsi is the only company whose stock performance (up 22 per cent) has significantly outperformed CNX IT (down 17 per cent) over last three months despite interest rate hikes by the US Federal Reserve, rising inflation in developed markets, the Russia-Ukraine conflict and potential recession in the US,” it said.
Tata Elxsi stock is trading at 78x/67x its FY2023E/FY2024E earnings, which is expensive. However, Sharekhan continues to prefer Tata Elxsi given its strong growth potential, market share gains, superior margin profile, differentiated capabilities in digital engineering, and strong balance sheet. Rupee appreciation and/or adverse cross-currency movements would adversely impact its earnings. Further, the reversal of the offshore effort mix could impact its margins, the report added.
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