Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities and Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities
We downgrade Tata Elxsi (TELX) to REDUCE (ADD earlier), based on diminishing margin of safety at 43x FY23E and following an in-line Q1 (both revenue and margin). While we remain positive on the company's prospects and growth leadership in ER&D (24/26% revenue/EPS CAGR over FY21-24E), the unfavourable risk-reward can be construed from (1) concentrated growth pockets with ~25% of business driving ~50% of growth (IDV and medical devices-EPD), (2) reducing growth premium vs. ER&D peer, and (3) the fact that its margin is currently at a peak (32.8% EBITDA margin adj. for Q1 one-time) and increase in discretionary spend is on the anvil. The near-term prospects remain strong with FY22 revenue growth expected at 33%, which would subsequently normalise to 20%. Our TP of INR 4,200 is based on 40x Jun-23E EPS (similar to our bull case scenario at the time of initiation), supported by an EPS CAGR of 26% over FY21-24E.
Q1FY22 highlights: (1) Revenue: TELX' revenue growth was 6.4% QoQ CC and 37.4% YoY CC at a strong (but reducing) growth premium to ER&D peer (LTTS). (2) Segmental growth: EPD (84% of revenue) grew 6.4% QoQ CC, which included transportation growth at 2.2% QoQ CC, broadcast & comms at 6.7% QoQ CC, and healthcare & medical at 18.5% QoQ CC. (3) Margin: EBITDA margin declined 555bps QoQ to 26.9%, impacted by a one-time bonus salary payout of INR 0.33bn in Q1 (similar quantum expected in Q3), excluding which, the margin improved 36bps QoQ to 32.8%, led by higher utilisation and better offshore mix. TELX will roll out a wage hike in Q2FY22 at ~7-8% (similar to FY21). (4) TELX had a strong net headcount addition of 552 in Q1 and attrition increased 280bps QoQ to 10.2%. (5) Management commentary included a strong order book and healthy deal wins (multiple strategic partnerships).
Outlook: We have factored in the USD revenue growth of 33/21/20% for FY22/23/24E, factoring in EPD growth of 27/20/19% and IDV growth of 96/25/22%. EBITDAM has been taken at 28.2/28.8/27.8% for FY22/23/24E, translating into a 26% EPS CAGR over FY21-24E. Following the recent stock performance (45/82% in 3M/6M), TELX trades at 43x FY23E.
Shares of TATA ELXSI LTD. was last trading in BSE at Rs.4302.55 as compared to the previous close of Rs. 4487.2. The total number of shares traded during the day was 62162 in over 12285 trades.
The stock hit an intraday high of Rs. 4469.8 and intraday low of 4200. The net turnover during the day was Rs. 270596338.