With 4x return in a year, 25x in a decade, this stock is driving investors crazy

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When Rs 1 lakh turns into Rs 4 lakh within a year, or Rs 1 lakh gallops to Rs 25 lakh in a decade,  the ride for has to be crazy. This crazy ride has been enjoyed by investors in Tata Elxsi as the stock has skyrocketed from Rs 130 in April 2011 to Rs 3307.50 now, garnering a return of 2442% in a decade. Apart from creating wealth in the long run, the stock not only recovered from COVID induced selloff but is on a record-breaking spree. It has quadrupled in a year’s time from Rs 814 in April 2020 to Rs 3,307.50 as of Wednesday’s closing.

Journey so far

A decade ago, Tata Elxsi was a pure-play technology company. In 2011-2012 the management took a call to start focusing on industry verticals and this helped the company transition to a premium engineering service provider. Think of a feature-loaded infotainment system, or parking sensors, or voice assistants, or safety systems. Tata Elxsi helps auto component manufacturers design and engineer these products to perfection. The company is innovating new-age tech solutions for industries like media, communication, healthcare, home appliances, rail, constructions and semiconductors.

Venturing into specialised delivery has paid rich dividends as the operating income of the company grew at a CAGR (compounded annual growth rate) of 18% from Rs 411 crore in FY11 to Rs 1,826 crore in FY21. Likewise, its profit after tax jumped from a mere Rs 31 crore to Rs 368 crore during the same period registering a CAGR of 31%.

Exciting future

Tata Elxsi’s management remains confident on delivering strong revenue growth with a stable operating margin going ahead due to strong demand tailwinds across its verticals, robust deal wins, healthy deal pipeline, ramp-up of deals won earlier, and its differentiated capabilities.

Also, continued investments is helping the company align itself to fulfil the demand in newer areas such as connected, autonomous, shared and electric vehicles, and infotainment. TEL’s Internet of Things (IoT) platform is preferred by most original equipment manufacturer (OEM) across the globe.

Furthermore, the company is focusing on building adjacencies areas in sectors like rail, off-road, digital health, and others to de-risk its business from any slowdown on any specific business and add more logos for growth going ahead. Further, the company’s sharp focus on design kind of projects would help the company to drive Industrial Design & Visualisation business growth at 30%-40% going forward.

With the management connecting all the dots analysts are bullish on the counter. Sharekhan has revised its earnings estimates upward for FY2022E/FY2023E, factoring in all-round beat in Q4FY2021, order booking across verticals, and continued growth in the non-automotive segment. With demand tailwinds, strong traction for its offerings, and recent deal wins.

“Tata Elxsi’s USD revenue and earnings to post a CAGR of 26% and 29%, respectively, over FY2021-FY2023E. Prefer the stock, given its differentiated technological capabilities, solid execution, long-term relationships with clients, and a strong parentage,” said the brokerage firm in the report and has set a price target of Rs 3,600.

Similarly, HDFC Securities has a buy rating on the counter based on industry-leading metrics (growth, margin, and efficiencies) and a stellar Q4 performance. “Our positive view is predicated on (1) strong scalability in the business (>20% CAGR over FY21-24E), (2) superior execution framework, led by the low cost of delivery (high offshoring, low attrition, low sub-con dependence), (3) potent industry drivers (CASE, OTT & new media), IP deals and strong partnerships (Google Widevine) augmenting growth, (4) improving growth visibility with a pick-up in deal wins (including strong pipeline within large accounts) and investments to drive higher duration annuity deals, and (5) stronger cash generation (70% growth in OCF/FCF),” said the note.

(Disclaimer: The recommendations in this report are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing)