On Saturday, Ambit Capital initiated coverage on Tata Elxsi Ltd (TELX:IN), a leading provider of design and technology services, with a Sell rating and set a price target of INR 5,670.00. The firm cited concerns over the company's valuation and slowing revenue growth as the primary reasons for the downgrade.
Tata Elxsi has been recognized for its unique capabilities in design and digital services, which have contributed to its best-in-class margins and metrics. However, Ambit Capital pointed out that the current valuation of the company at 49 times FY26E P/E represents an 18% premium to the average of its peers and is considered no longer justifiable given the company's decelerating revenue growth.
The company's revenue growth slowed to 10.1% in FY24, with 74% of incremental revenues coming from Jaguar Land Rover (JLR). Ambit Capital projects a further slowdown in revenue growth to 11.2% over FY24-27, down from 17.4% during FY20-24. The firm also highlighted challenges that could impact Tata Elxsi, including declining 5G capital expenditures, a slowdown in media growth, and issues faced by Tier-1 suppliers, which account for 44% of the company's transportation revenues.
Despite these challenges, Ambit Capital anticipates a gradual recovery in margins, forecasting an average EBIT margin of 27.1% over FY24-27E, with FY24 margins expected at 26.7%. The current market price implies a 13.5% USD revenue compound annual growth rate (CAGR) over FY24-41E, in contrast to the 12.5% seen from FY10-24.
The price target set by Ambit Capital reflects a more conservative revenue CAGR of 10.4%, implying a 37 times FY26E EPS.
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