KR Choksey Downgrades Tata Elxsi to “Reduce” with Target Price of ₹7359

KR Choksey has downgraded Tata Elxsi to a “Reduce” rating, setting a target price of ₹7359 in their report dated October 14, 2024.

Earnings Overview

Tata Elxsi’s earnings exceeded expectations, with revenue closely matching estimates. In the second quarter of FY25 (Q2FY25), Tata Elxsi reported revenue of ₹9,551 million, which is an 8.3% increase year-on-year (YoY) and a 3.1% increase quarter-on-quarter (QoQ). The main growth driver was the Transportation vertical, but the Media and Healthcare sectors showed signs of weakness, particularly with Healthcare experiencing the largest revenue decline.

Profitability Insights

The company’s EBIT (Earnings Before Interest and Taxes) was ₹2,393 million, reflecting a slight increase of 0.3% YoY and a 6.2% increase QoQ. However, this fell short of expectations by 2.2%. EBIT margins decreased by 200 basis points YoY, primarily due to wage hikes and higher expenses.

Looking ahead, KR Choksey has increased the estimated earnings per share (EPS) for FY26 to ₹167.2, thanks to recent deal wins expected to enhance growth in FY26. They maintain a price-to-earnings (P/E) ratio of 44.0x and have adjusted the target price to ₹7,359 based on these revised FY26 estimates. However, they express concern that Tata Elxsi’s target of double-digit revenue growth for FY25 is ambitious and believe the current valuations are too high, prompting the downgrade from “Hold” to “Reduce.”

Sector Performance

• The Media and Communications sectors continue to struggle, with Healthcare suffering the most significant decline.
• The Healthcare & Life Sciences segment faced an 11.8% YoY revenue decline due to delays in renewing and starting new programs with major U.S. clients.
• Media and Communications revenue dropped by 5.1% YoY, also impacted by delays in deal closures and project completions.
• In contrast, the Transportation segment saw a robust growth of 16.0% YoY, thanks to significant deals and advancements in the Software Defined Vehicle (SDV) and OEM sectors.
• Regionally, India and Europe showed solid growth, while the Americas experienced a decline of 4.3% QoQ.

Profit After Tax (PAT) Update

PAT increased to ₹2,294 million, up 14.7% YoY and 24.6% QoQ, exceeding expectations. This increase was supported by R&D incentives and tax credits, resulting in a PAT margin of 24.0%, with a notable margin expansion of 134 basis points YoY and 415 basis points QoQ.

Overall, while Tata Elxsi shows some positive signs in certain areas, the downgrade reflects concerns about the sustainability of its growth amid challenges in specific sectors.