Maintain SELL on Tata Elxsi - Consistent execution, but priced-in - HDFC Securities

Apurva Prasad, Institutional Research Analyst, HDFC Securities and Amit Chandra, Institutional Research Analyst, HDFC Securities.

Tata Elxsi (TELX IN) posted in-line revenue and slightly better margin performance in Q1. Its revenue growth of 6.5% QoQ CC remains at the top-end within peers and was its eighth consecutive quarter of >6% CC growth, lifting the quarterly revenue rate by 75% and doubling its earnings in two years. Growth in Q1 was broad-based (across EPD & IDV segments) for TELX and within the EPD segment, it was led by transportation and medical & healthcare verticals. Commentary on demand, acceleration in vertical adjacencies and FY23E hiring outlook points to near-term momentum. We expect a 28% EPS CAGR over FY22-24E and a doubling of EPS in three years (revenue-led), with margins at 32.3% and 31.1% for FY23/24E and RoCE at ~40%. Yet, these base case assumptions seem adequately priced in and there's a low margin of safety at 55x FY24E; the implied USD revenue growth rate over FY22-32E is ~22% CAGR at the current valuation. Maintain SELL, with a TP of INR 6,530, valuing TELX at 45x FY24E EPS. TELX's valuation premium builds in growth premium (both absolute and relative), delivery strengths, as well a strong balance sheet and efficiency metrics.

Q1FY23 highlights: (1) Revenue came in at USD 93mn, +6.5% QoQ CC and 30% YoY CC supported by EPD segment (88.8% of revenue) growth at 6% QoQ CC and IDV segment (9% of revenue) growth at 9.3% QoQ CC. (2) Within the EPD segment, growth was led by the transportation vertical (41.5% of EPD revenue and 7.8% QoQ CC) and healthcare & medical devices (15.4% of EPD rev and 7.4% QoQ CC). (3) EBITDAM came at 32.8%, +35bps QoQ, led by better utilisation and price increase; PAT, at INR 1.85bn, +15% QoQ, was supported by lower ETR and sequential margin improvement. (4) Hiring outlook is 3,000 to 3,500 freshers and 1,000 to 1,500 laterals for FY23E.

Outlook: We have factored in the USD revenue growth of 21.6/24.4% for FY23/24E, factoring in EPD growth of 24.0/24.6% and IDV growth of 1.6/23.3%. EBITDAM has been factored in at 32.3/31.1% for FY23/24E, translating into a 28% EPS CAGR over FY22-24E.

Shares of Tata Elxsi Limited was last trading in BSE at Rs. 8055.85 as compared to the previous close of Rs. 7798.00. The total number of shares traded during the day was 40368 in over 10435 trades.

The stock hit an intraday high of Rs. 8119.00 and intraday low of 7870.00. The net turnover during the day was Rs. 323818507.00.

Source : Equity Bulls

Keywords

TataElxsi INE670A01012 HDFCSecurities Q1FY23 ResultUpdate