Tata Elxsi Share price: Sharekhan recommends Buy with a revised a price target of Rs 2850

Tata Elxsi Share price: This Tata group company has impressed once again with all-round growth, led by strong recovery in the automotive market, accelerated growth in other verticals, and ramp up of deals. The company reported constant currency (CC) revenue growth of 10% qoq and 7.5% yoy, ahead of estimates, led by strong 8.5% qoq/9.1% yoy and 25.3% qoq/2.5% yoy growth in embedded product design (EPD) and industrial design and visualisation (IDV) businesses. Strong Tata Elxsi balance sheet, improving cash generation, and consistent dividend payout provide comfort on the stock. Hence, Sharekhan recommends Buy on Tata Elxsi with a revised price target of Rs 2850.

Tata Elxsi USD revenue grew by 11.7% qoq to $64.7 mn vs Sharekhan estimate of $62 mn. EBITDA margin improved by 266 bps qoq to 30.1% despite wage revision, exceeding estimates, led by revenue growth, absence of one-time visa expenses, and higher offshore revenue. Tata Elxsi Net profit of Rs. 105.2 crore (up 33.4% q0q and 39.5% yoy) was ahead of Sharekhan’s estimate, aided by strong beat in revenue and margin and higher than expected other income (up 3.4x qoq). Tata Elxsi management indicated that some OEMs started reinitiating key R&D programmes, which would lead to resumption of projects as well as deals with tier-1 suppliers.

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Tata Elxsi has added new automotive customers and closed some large deals in vehicle electronics and software and the autonomous driving space during the quarter. Management remains optimistic that growth momentum would continue in Q4 FY21 because of strong deal pipeline across markets and verticals, ramp up of deals, strong deal wins, green shoots in the auto sub-segment, and strong traction in media and medical devices verticals. Further, management believes that its investments in sales and marketing, delivery, and capabilities would reap benefits in terms of large long-term deal wins in the coming years.

Tata Elxsi management believes it can be sustainable in the medium term, given:

1) continued reduced travel and administration expenses
2) WFH efficiencies
3) higher offshoring

Key positives:

Tata Elxsi Revenue grew by 10% qoq on CC terms, beating estimates
EBITDA margin improved to 30.1% despite wage revision, exceeding estimates
Offshore revenue mix improved by 250 bps qoq to 67.8%

Key negatives:

System integration and support reported revenue decline of 19% yoy on CC basis
Tata Elxsi Revenue growth in the top account remained at 0.5% qoq

Key Risks:

(1)    Slowdown in the global economy especially in the automotive industry might affect growth momentum
(2)    currency risks
(3)    slower growth in the automotive and broadcast sectors