Ambit Capital Initiates Coverage on Tata Elxsi Ltd with Sell Rating and INR 5,670.00 Price Target
Ambit Capital, a renowned investment firm, has recently initiated coverage on Tata Elxsi Ltd (TELX:IN), a prominent provider of design and technology services. The firm has assigned a Sell rating to the company and set a price target of INR 5,670.00. The decision to downgrade Tata Elxsi was based on concerns regarding its valuation and slowing revenue growth.
Tata Elxsi is well-known for its exceptional capabilities in design and digital services, leading to impressive margins and metrics. However, Ambit Capital highlighted that the current valuation of the company, at 49 times FY26E P/E, is at an 18% premium compared to its peers. This premium is no longer justified due to Tata Elxsi's decelerating revenue growth.
The company's revenue growth rate decreased to 10.1% in FY24, with a significant portion of incremental revenues coming from Jaguar Land Rover (JLR). Ambit Capital forecasts a further slowdown in revenue growth to 11.2% over FY24-27, compared to 17.4% in FY20-24. The firm also raised concerns about potential challenges, such as declining 5G capital expenditures, media growth slowdown, and issues affecting Tier-1 suppliers, which contribute to 44% of the company's transportation revenues.
Despite these challenges, Ambit Capital expects a gradual recovery in margins, projecting an average EBIT margin of 27.1% over FY24-27E. The current market price suggests a 13.5% USD revenue compound annual growth rate (CAGR) over FY24-41E, higher than the 12.5% CAGR observed from FY10-24.
In conclusion, Ambit Capital's price target reflects a conservative revenue CAGR of 10.4%, indicating a 37 times FY26E EPS. Investors should consider these factors before making any investment decisions regarding Tata Elxsi.
Analysis:
Ambit Capital's Sell rating and price target for Tata Elxsi indicate concerns over the company's valuation and slowing revenue growth. Investors should be cautious due to the premium valuation compared to peers and the projected slowdown in revenue growth. Despite challenges, there is optimism regarding margin recovery and revenue growth, albeit at a more conservative rate. It is essential for investors to assess these factors and the potential impact on their investment portfolios.