Tata Elxsi, a niche engineering, research, and development (ERD) services company, is confident of strong growth and is well placed to capture increasing R&D spends in automotive (one of the largest spenders on R&D), broadcasting and communication (smart, connected homes, and OTT), and medical devices (remote healthcare and leverage of patient data). Tata Elxsi’s unique capability of integrated design and technology teams across verticals help the company to enhance its service portfolio and innovate new products and services for its customers. Sharekhan recommends buying with a revised price target of Rs 3100. Tata Elxsi share price today is Rs 2706, down Rs 27 or 1%.

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Tata Elxsi is continuing to invest in strengthening capabilities, which include:

(1)   Electric vehicles as autonomous, connected, Electric, and Shared Mobility (ACES), which remain the dominant trend in the automotive market. This is a huge opportunity in the next few years as global auto R&D spends on software development are expected to post a 9%-10% CAGR

(2)   new media segment such as smart, connected homes and OTT for operators and broadcasters

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Tata Elxsi’s partnership with Google Widevine, Syntiant, and INVIDI Technologies would help in large deal wins and is likely to propel growth; (3) medical technology driven by market human factor engineering, regulatory standards, and telemed. Management indicated that it is confident of growth momentum in Q4 and expects to end FY2021 with a higher exit rate on account of gradual recovery in the automotive sub-segment and continued growth momentum in media and medical devices verticals.

Sharekhan expects EBIT margin to remain stable in Q4FY2021, led by:

(1)   continued lower travel and admin expenses

(2)   scope of improvement in utilisation

(3)   higher revenue growth

(4)   higher offshoring

(5)   operational efficiencies

Tata Elxsi’s management believes that its investments in sales and marketing, delivery, and capabilities would reap benefits in terms of large multi-year deal wins in the coming years. The company has changed its strategies to large multi-year deals compared to project-based engagements earlier. Given improving demand environment, ramp-up of recent deal wins, and a healthy deal pipeline, Tata Elxsi is expected to deliver revenue growth in the top quartile of industry-level growth rates in FY2022.

Tata Elxsi Key Risks:

(1)   Slowdown in the global economy especially in the automotive industry might affect growth momentum

(2)   currency risks

(3)   slower growth in automotive and broadcast sectors