Next-gen Mobility Innovations And Qualcomm RDK Broadband Launch Fuel Global Growth

Key Takeaways

• Tata Elxsi's focus on transportation and innovation centers strengthens growth prospects in ADAS, electric vehicles, and robotics.
  
• Expansion into Japan and emerging markets reduces dependency on traditional sectors, boosting revenue streams with innovative tech solutions.
  
• The slowdown in key sectors, high dependence on large deals, and attrition risks could negatively impact Tata Elxsi's revenue growth and profitability.

Catalysts

Engages in the provision of product design and engineering, and systems integration and support services in India, the United States, Europe, and internationally.

• Tata Elxsi's transportation business is a significant growth driver, with strong capabilities in ADAS, connected, electric, and software-defined vehicles. The recent $50 million multiyear deal from a European OEM is expected to impact future revenue positively as it ramps up.
  
• The strategic focus on expanding into Japan and emerging markets is contributing significantly to growth, with revenues from Japan growing by 81.9% year-on-year. This is expected to boost future revenue streams and reduce dependency on traditional markets.
  
• The establishment of a global Next-gen Mobility Innovation center and a state-of-the-art robotics innovation lab highlights the company's investment in new technological capabilities. These investments are likely to enhance future earnings and operational efficiencies.
  
• Recovery signs in the Media and Communication business, particularly with new contracts like the AI Center of Excellence deal in the Middle East, are expected to improve revenue performance in upcoming quarters.
  
• The launch of innovative products like the world's first RDK Broadband implementation for Qualcomm positions Tata Elxsi well in key technological advancements, potentially enhancing future revenue and margins due to the higher efficiency and cost-effectiveness these solutions offer.

Tata Elxsi Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tata Elxsi's revenue will grow by 12.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.0% today to 22.4% in 3 years time.
• Analysts expect earnings to reach ₹11.8 billion (and earnings per share of ₹190.03) by about December 2027, up from ₹8.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 53.7x on those 2027 earnings, down from 55.1x today. This future PE is greater than the current PE for the IN Software industry at 42.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.86%, as per the Simply Wall St company report.

Tata Elxsi Future Earnings Per Share Growth

Risks

• The Media and Communication business has been declining due to pending customer decisions and project completions. This may impact revenue growth if these issues persist.
  
• There is a slowdown in the Healthcare and Life Sciences business due to delays in renewal and start of new programs, which could affect revenue and earnings negatively if not resolved soon.
  
• The automotive industry is experiencing a general slowdown, specifically in the EV segment, which could reduce the pipeline of new deals and affect future revenue growth.
  
• The company's dependence on a few large deals in Transportation and other sectors to drive growth poses a risk; if these deals do not materialize or ramp up as expected, it could impact overall revenue.
  
• Attrition remains a concern despite being under control at 12.5%, as it could potentially affect operational efficiency and profitability if not managed properly.

Valuation

• The analysts have a consensus price target of ₹6944.92 for Tata Elxsi based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹8963.0, and the most bearish reporting a price target of just ₹5510.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹52.7 billion, earnings will come to ₹11.8 billion, and it would be trading on a PE ratio of 53.7x, assuming you use a discount rate of 13.9%.
• Given the current share price of ₹7232.15, the analyst's price target of ₹6944.92 is 4.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.