Following its quarterly earnings reported earlier this week, the stock rose a further 18 per cent in just three days. That has made it a five-fold jump for the stock from its March lows.
We are talking about Tata Elxsi.
The question is: how much more can it rally going forward? Dalal Street analysts seem to agree that the stock is overvalued now and it can, in fact, start falling. And, it can be an opportunity for investors to add the stock in their portfolios as the fundamentals remain strong.
“While we take note that the stock has already reported a massive rally in last six months, Tata Elxsi is a ‘must-have in the portfolio’ and should therefore be added on all major dips, as the company has consistently proven its mettle,” said Dalal & Broacha in a note.
The stock trades at 52 times its earnings, higher than its peers L&T Tech Services and OFSS, which trade at 41 and 17 times, respectively.
In December quarter, the company reported nearly 40 per cent profit growth with revenues rising nearly 13 per cent year on year. Growth was led by embedded product design (EPD), the company’s largest division, and industrial design and visualization (IDV), which contributed 9 per cent to total revenue.
The management sounded upbeat, saying the company is “entering the fourth quarter and the New Year with the reinforced confidence of a strong deal pipeline across markets and industries.”
Ayush Rathi, analyst at Narnolia Financial Advisors, is positive on the stock, as improvement in the transportation vertical with some strong deal closures amid the recovery in the automotive market.
“The management expects margins to be in line for FY21 in the 22-24 per cent range. A strong deal pipeline across geographies and vehicles, and a significant number of large deals indicate a positive growth momentum,” Rathi said.
Tata Elxsi’s fortunes used to be tied to JLR’s performance. But in the past few years, it has added more clients, leading to double-digit growth in revenue, subsequently a rally in its shares. The company is confident of future growth.
However, not everyone is convinced.
“Over the medium to long term, auto OEMs would partner and pool R&D budgets with a few OEMs even taking the ownership of the software. This is likely to impact Tata Elxsi, as the business would shift from Tier I suppliers to OEMs, since Tata Elxsi gets 65 per cent of auto vertical revenues from Tier I vendors,” said Soumitra Chaterjee of Spark Capital.
He has a ‘sell’ rating on the stock with target price of Rs 1,650.