Tata Elxsi, the Tata Group-promoted design and technology services provider, has turned out to be a wealth creator in the past one year, beating all key sectoral indices and the benchmark and broader indices.
The stock rallied 353 percent or four-and-half-fold in the past year, while the BSE Midcap index shot up 76 percent and the BSE Sensex gained 56 percent.
From a March 2020 low, the stock has created enormous wealth for investors as it surged 10-fold or 925 percent. Tata Elxsi shares closed at Rs 5,581.45 on the BSE on September 22.
Consistent revenue growth, large and strategic deals, robust demand from overseas, strategic diversification and de-risking initiatives, and the improving outlook for the IT sector are some of the key factors that boosted investor confidence in the Tata Elxsi stock.
The company is helping customers in the automotive, broadcast, communications, healthcare and transportation segments reimagine their products and services through design thinking and the application of digital technologies such as Internet of Things, cloud, mobility, virtual reality and artificial intelligence.
“The reasons for the stellar rally in this stock are attributed to strategic diversification, seamless continuity of delivery and operations and investments in improving offerings, sales and marketing, along with faster digital technology adoption resulting in rapid revenue growth for technology service providers in FY21,” said Ankur Saraswat, a research analyst at Trustline Securities.
He said additionally, an improved revenue mix, a reduction in client concentration, broad-based, volume-led acceleration and robust demand from export markets augur well for the company.
“Strategic change in the leadership position is also a positive development,” he said.
According to Pushkaraj Kanitkar, VP equities at GEPL Capital, strong financial performance aided by a strong deal pipeline across newer high-growth industries and newer capabilities are reflected in superior margins.
The company’s diversification and de-risking initiatives are paying off and the automotive vertical now contributes less than half of the revenue,” he added.
Tata Elxsi reported revenue of Rs 1,826 crore in the year ended March 2021, increasing steadily every year from Rs 1,233 crore in FY17. Profit grew every year to Rs 368 crore in FY21 from Rs 173 crore in FY17, except in FY 20, when it fell to Rs 256 crore from Rs 290 crore in FY19.
On a quarterly basis, the company reported revenue of Rs 558 crore in the three months ended June 2021 compared with Rs 400 crore a year earlier. Profit was Rs 113 crore in the June quarter compared with Rs 69 crore a year earlier and Rs 115 crore in the March 2021 quarter.
“The rise in price can definitely be attributed to the overall outlook of the IT sector. In the past year, the company has kept up a steady rise in its quarterly revenue and it showed a consistent growth QoQ,” said Gaurav Garg, head of research at CapitalVia Global Research.
According to Garg, the company said that it has acquired new customers including a tier-I operator and a leading medical device manufacturer in North America. It also seems to have finalised certain large deals including a multi-million dollar deal with a global original equipment manufacturer for an integrated connected vehicle programme.
“The stock is generating a decent return on capital employed YoY and the net profit margin also seems to be rising from FY17. The stock has a high price-to-earnings (P/E) ratio of 84 and therefore it seems overvalued now,” Garg added.
The company had a strong start to FY22 with all-round growth across industries and key geographies in the quarter ended June.
“Healthcare business continues to grow strongly, while both transportation and media & communications reported another quarter of sustained growth,” Manoj Raghavan, CEO of Tata Elxsi, said on July 15. He said the company was seeing sustained recovery in the automotive market for the third consecutive quarter.
“We have also won large and strategic deals with both OEMs and suppliers in electric vehicle and autonomous technologies, underscoring our technology and engineering leadership. This is reflected in both the industry and geography growth we have reported in the quarter,” Raghavan said.
Tata Elxsi also won strategic deals in digital health, over-the-top and video platform development, Raghavan said.
Kanitkar of GEPL Capital said Tata Elxsi is the right bet on future technologies, with enhanced capabilities in EVs, autonomous cars and internet TV.
“Investments are expected to increase in OTT, 5G, software defined networking/network function virtualisation and artificial intelligence. Healthcare payers are accelerating digital investments to automate the trifecta of sales, operations and services. Medical device firms are unlikely to witness a significant change in their R&D roadmaps; their focus on connected devices will receive an impetus,” he said.
Can the stock gain 20-30% in 3-6 months?
All analysts expect the Tata Elxsi share price to advance 20-30 percent in the next three to six months, considering the expected growth in earnings and the IT segment. Technically, Tata Elxsi has maintained a rational uptrend, said Kanitkar.
“It has taken support at the 50-day moving average all through and that is the added advantage. The uptrend has also seen steady corrections in between, wherein Fibonacci retracements have acted as support,” he said, adding that this trend will continue.
Any corrections to Rs 5,100-5,200 would provide a great opportunity to buy, Kanitkar said.
Garg said the stock has consistently traded in an uptrend in the rising channel and as of now, faces resistance at the upper edge of the channel. A breakout above Rs 6,000 is expected to add 20-30 percent to the stock price by the end of CY21 or in the last quarter of FY22.
An upside potential of 20-25 percent would easily be achievable in the short- to mid-term time frame, Saraswat said.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before making any investment decisions.