Tata Elxsi – Q1FY22 results update – Decreasing safety margin – HDFC Securities

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

We are downgrading Tata Elxsi (TELX) to REDUCE (ADD earlier), based on a decreasing margin of safety to 43x FY23E and following a first quarter online (both revenue and margin). While we remain positive on the company’s outlook and its leadership in ER & D growth (24/26% CAGR / EPS CAGR on FY21-24E), the unfavorable risk-return can be interpreted from (1) concentrated growth pockets with ~ 25% business driver ~ 50% growth (IDV and medical devices-EPD), (2) reduction of the growth premium compared to its ER&D peers, and ( 3) The fact that its margin is currently at a peak (32.8% adjusted EBITDA margin for the first quarter – time) and the increase in discretionary spending is on the anvil. The near-term outlook remains strong with FY22 revenue growth expected at 33%, which would then normalize to 20%. Our TP of INR 4,200 is based on a 40x EPS of June-23E (similar to our bullish scenario at the time of initiation), supported by a 26% BPA CAGR on FY21-24E.

Highlights of the first quarter of fiscal 22: (1) Revenue: TELX revenue growth was 6.4% QoQ CC and 37.4% YoY CC with a strong growth premium (but reduced) compared to its ER&D (LTTS) counterpart. (2) Sectoral growth: EPD (84% of revenue) grew 6.4% QoQ CC, which included transportation growth to 2.2% QoQ CC, broadcast and communications to 6.7% QoQ CC and healthcare and medical at 18.5% QoQ CC. (3) Margin: EBITDA margin decreased by 555 basis points in QoT to 26.9%, impacted by a one-time premium payment of INR 0.33 billion in the first quarter (similar quantum expected in the third quarter ), excluding which, the margin improved by 36 basis points in QoQ to 32.8%, led by higher utilization and better offshore mix. TELX will launch a wage hike in T2FY22 to ~ 7-8% (similar to FY21). (4) TELX saw a strong increase in net headcount of 552 in the first quarter and attrition increased 280 basis points in the quarter to 10.2%. (5) Management comments included a strong order book and good business (multiple strategic partnerships).

Outlook: We have factored in USD revenue growth of 33/21/20% for fiscal year 22/23 / 24E, taking into account EPD growth of 27/20/19% and ‘IDV growth of 96/25/22%. EBITDAM was established at 28.2 / 28.8 / 27.8% for the FY22 / 23 / 24E, resulting in a CAGR of 26% against the FY21-24E. Following the recent market performance (45/82% on 3M / 6M), TELX is trading at 43x FY23E.

Shares of TATA ELXSI LTD. was last trading on BSE at Rs. 4302.55 from the previous close of Rs. 4487.2. The total number of shares traded during the day was 62,162 in more than 12,285 transactions.

The stock hit an intraday high of Rs. 4469.8 and intraday low of 4200. Net turnover during the day was Rs. 270596338.

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