Tata Elxsi at Rs 5,400! Why Kotak see a 30% fall in this Tata Group stock?

Kotak Institutional Equities has maintained its 'sell' rating on Tata Elxsi and sees up to 30 per cent downside in the stock from its previous close. Thr brokerage believes that revenue growth of the Tata Group firm will be impacted due to constrained addressable market and business churn at Tier-1 suppliers. "We cut FY2025-26E revenue and EPS estimates by 7-8 per cent, as we bake in a slowdown across Tata Elxsi's key verticals. Our analysis of automotive client spends indicates continued focus on cost efficiency by Tier-1 suppliers. Tata Elxsi derives nearly half of revenues within the transportation vertical from Tier-1 suppliers," said Kotak Institutional Equities.(KIE). Shares of Tata Elxsi were trading almost flat, little change, at Rs 7644, on Tuesday, commanding a total market capitalization of more than Rs 47,600 crore. The scrip had settled at Rs 7,664 in the previous trading session on Friday. Tata Elxsi's growth has been impacted due to weakness across transportation and media & communications in the past quarter. The outlook in both verticals is expected to remain weak through CY2024E. The near-term outlook of the healthcare vertical remains uncertain and better comfort on growth is likely to emerge in FY2025E, said Kotak's report. Tata Elxsi is a design and technology service provider across industries, including automotive, broadcast, communications, healthcare, and transportation. It helps customers reimagine their products and services through design thinking and the application of digital technologies such as IoT (Internet of Things), cloud, mobility, virtual reality, and artificial intelligence (AI). Tata Elxsi has a few levers to flex such as pyramid and operating efficiencies, noted the brokerage. "This would be partly offset by investments in long-term talent management initiatives, while offshoring has limited scope for improvement. We expect EBIT margins to remain range-bound within 27-28 per cent over FY2024-26E," it said. "We lower our FY2025E constant currency revenue growth estimate, leading to a 7-8 per cent cut in FY25-26E EPS estimates. Our fair value reduces to Rs 5,400 on moderated earnings, offset partly by roll-over. Our DCF-based FV implies 32 times FY2026E P/E. Tata Elxsi has strong capabilities in embedded engineering and diversified presences in the medium term," Kotak added.

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