Tata Elxsi shares sink 5% after Q1 results; Should you buy, sell or hold- Brokerages offer mixed views

Tata Elxsi shares sink 5% after Q1 results; Should you buy, sell or hold? Brokerages offer mixed views

Tata Elxsi’s share price fell 4.85% today to Rs 7,345.05 since the company’s Q1FY24 results failed to impress. The company faced pressure on the operating margins, which declined to 27.1% – down 340 bps on-year and 23 bps on-quarter. Tech services player Tata Elxsi reported increased revenue for Q1FY24 at Rs 8,503 million, up 1.2% sequentially and 11.9% on-year in constant currency. Despite macroeconomic uncertainties and challenges, Tata Elxsi posted a marginal 2% on-year increase in net profit at Rs 189 crore in the first quarter ended June 2023.Stock Call: Tata Elxsi

Choice Broking: Add

Tata Elxsi’s collaboration with ISRO to contribute for the Gaganyaan project is expected to push the company’s technical boundaries and ultimately provide them with a growth opportunity. However, the reported PAT of Tata Elxsi stood at Rs 1,889 million, which declined 6.3% on-quarter for Q1FY24 due to a surge in the effective tax rate. The operating margins for the company also declined by 340 bps on-year and 23 bps on-quarter by 27.1% in Q1FY24, the prime cause being the wage hikes during the quarter.

Nonetheless, Tata Elxsi plans to continue adding around 1,800-2,000 fresh engineers in key lead positions across delivery in FY24, which is expected to improve operating margins. “With a strong demand outlook and reasonable medium-term revenue visibility, we expect TELX to deliver a revenue CAGR of c.25% over FY23-FY25E. We ascribe a target price of Rs.8,100 based on DCF valuation methodology (implied P/E of 48x on Sept24E EPS) and maintain our ADD rating on the stock”, said the report.

HDFC Securities: Sell

HDFC Securities gave a ‘Sell’ rating to Tata Elxsi and set the target price at Rs 6,420 implying a downside of 14.8% from its current market price of Rs 7,538. “Tata Elxsi’s Q1 performance was lower in revenue, impacted by moderate growth in the Transportation vertical and muted performance in the Media & Communications vertical. The Transportation vertical was impacted by delayed decision-making; acceleration is expected in Q2 & Q3.”

“We expect TELX’s growth trajectory in the low teens as compared to 34/18% delivered in FY22/23. Growth visibility for TELX is based on (1) a healthy deal pipeline and acceleration in the Transportation vertical in Q2 & Q3 supported by OEM platform deals; (2) sustainability of the Healthcare vertical recovery; (3) traction in large accounts (T5/10 grew 7.1/6.6% QoQ); and (4) fresher addition plans of ~2,000 for FY24E.”

“Margin recovery will be supported by lower dependence on sub-contractor and utilization improvement. We expect a 17% EPS CAGR over FY23-26E as compared to a prolific 40% CAGR over FY20-23; maintain SELL with a TP of INR 6,420, based on 38x Jun-25E EPS”, said the report.