Based on poor Q1FY20 financial performance, we have revised our estimates downwards and now expect the company to generate a topline growth of average 11.9% in FY20E/FY21E while we take a conservative stance on margin outlook (EBIT to stay below 23% in forecast period compared to >24% in the recent past). Tata Elxsi is currently trading at a P/E multiple of 18.4x/13.9x on FY20E/FY21E earnings. We apply a P/E multiple of 19.2x to the FY21 estimated EPS of INR 52.5 to arrive at a target price of INR 1,008 per share, an upside of 38% over the CMP. Accordingly, we reiterate our “BUY” rating to the stock.
We believe that current weakness in Automotive division is due to macro economic factors and ramp down of spending by JLR. Since these factors are macro- economic in nature and are beyond management’s control, it is hard to predictwhen the revenues will improve. Also, we see margins to get affected due to slow growth in revenues as large component of expenses are fixed in nature. Hence,we have revised our estimates downwards to factor in these uncertainties. We rate the stock SELL with a target price of Rs. 711,with a downside of 3%. We value the company at a 50% discount to 5-Yr average 1-Yr forward multiple of 14x.
Seasonality Impacts Growth Momentum. Valuation and Risks: We continue to remain positive on the stock given its presence in high growth markets and proven technical capabilities. We believe the subdued performance during the quarter is more due to seasonality. We retain our “BUY” rating on the stock with a target price of Rs. 1159, an upside potential of 20%. We value TELX at a 3-year historical average of FY20E PE of 20.9x. Key risks include slowdown in key client as evident from declining revenue contribution and technology risks.