ICICI Securities Recommends Holding Tata Elxsi with ₹7,590 Target

ICICI Securities has recommended a “Hold” rating for Tata Elxsi, with a target price of ₹7,590, according to their research report dated October 11, 2024.

Revenue Growth Slows in Q2, H2 Expected to Be Better

Tata Elxsi saw slow revenue growth of just 0.2% quarter-on-quarter in constant currency (CC) for Q2 FY25. The growth was mainly driven by the Transportation sector, which increased by 4.4% in CC. However, the company faced challenges in the Media & Communication and Healthcare & Life Sciences sectors.

The Media & Communication sector saw a 1.9% drop in revenue due to the completion of some projects and delays in closing new deals. Healthcare & Life Sciences experienced a sharp decline because of delays in scaling up new programs with a major US-based client.

Given the slower growth of 6.5% year-on-year in constant currency during the first half of FY25, the management’s earlier goal of achieving double-digit growth for the full fiscal year now seems challenging. For this to happen, Tata Elxsi would need to grow by about 7% each quarter in the second half, which looks tough considering the struggles in two out of their three main business sectors, which make up about 43% of the company’s portfolio.

Strong Growth in Transportation Despite Industry Slowdown

The Transportation sector continued to perform well, driven by the ramp-up of large deals with auto manufacturers (OEMs) won in previous quarters. Revenue from auto manufacturers now accounts for 68% of the total transportation revenue, even though demand from tier-1 suppliers remains weak.

Despite the overall slowdown in the auto industry, Tata Elxsi’s auto business is performing strongly. The company secured a $50 million, five-year deal with a global auto manufacturer based in Europe. Its pipeline of potential deals is also strong in Asia and Japan, where automakers are catching up with trends like electric vehicles (EVs) and autonomous driving.

Summary of Key Points:

• Tata Elxsi saw weak revenue growth of 0.2% in Q2 FY25.
• Transportation sector grew by 4.4%, but Media & Communication and Healthcare & Life Sciences faced challenges.
• The company will need to grow by 7% each quarter in the second half to meet its full-year growth target, which may be difficult.
• Tata Elxsi’s auto business remains strong, and it won a $50 million deal from a European auto manufacturer.
• ICICI Securities recommends holding the stock, with a target price of ₹7,590.