Tata Elxsi - Premium performance < Super premium valuations - ICICI Securities

Tata Elxsi (TELX) reported strong revenue growth of 7.3% QoQ US$ (7.4% QoQ CC) in 4QFY22, representing a beat to our estimate of +6.0% US$ QoQ. Growth was broad-based across verticals: transportation (+8.3% QoQ CC) led the pack, followed by media (+7.2% QoQ CC) and healthcare (+6.8% QoQ CC).

Margin performance was resilient at 32.5% (-70bps QoQ) vs Isec estimate of 31.9%; the slight beat was largely on account of lower employee expenses at 51% of revenue - lowest-ever - which led to gross margin of 44.5% in Q4FY22. Margin is unlikely to expand further given the supply-side challenges due to high attrition, reversal of elevated offshore mix (75.2% in Q4FY22 vs 55-57% pre-covid), peaked-out utilisation and return of travel and facility costs post the normalisation of global economy. However, we expect margin to stabilise above pre-covid levels (~24%) due to greater acceptability of clients toward offshoring and supported by levers of revenue growth leverage and pyramid optimisation. We build in EBITDA margin of 28.3%/27.5% for FY23E/FY24E.

TELX has emerged the fastest-growing company among Indian ER&D peers, growing at 9% YoY in FY21 and 34% YoY in FY22. We expect revenue growth leadership of TELX to continue over FY23E-24E driven by 1) higher offshore R&D spends on digital, 2) strong client mining capabilities (top 1 / top 5 clients grew 57%/40% YoY in FY22), 3) focus on winning longer-duration larger sized deals by becoming strategic partners for clients (e.g. Aesculap and Schaeffler deal wins), and 4) expansion in fast-growing healthcare sector and diversification in auto to de-risk growth. We expect TELX to continue its growth momentum and forecast revenue growth of 26%/23% in FY23/FY24.

TELX has superior operating metrics compared to its peers: 1) lowest cost of delivery; 2) highest offshore mix; 3) reducing client concentration and, at the same time, superior client mining capabilities. We like the company for its robust growth profile and maintenance of margin way above pre-covid levels. We are above consensus earnings estimates by 10% for FY24. However, its super premium valuations of 74.5x/61.3x on EPS of Rs106/129 drive our SELL rating. We value TELX on 38x target multiple of FY24E earnings to arrive at a fair value of Rs4,902 (prior: Rs4,875). Key upside risk to our rating includes better than expected margin performance.

Shares of Tata Elxsi Limited was last trading in BSE at Rs. 7904.30 as compared to the previous close of Rs. 7808.05. The total number of shares traded during the day was 84235 in over 18918 trades.

The stock hit an intraday high of Rs. 8190.95 and intraday low of 7832.00. The net turnover during the day was Rs. 671795394.00.

Source : Equity Bulls

Keywords

TataElxsi INE670A01012 Q4FY22 FY2022 ResultUpdate ICICISecurities