Tata Elxsi rating ‘Sell’- Stock faces valuation challenges despite positive outlook on revenue, transport biz

Tata Elxsi rating ‘Sell’: Stock faces valuation challenges despite positive outlook on revenue, transport biz

Indian digital technology and design company Tata Elxsi is confronted with challenges as it strives to maintain its valuation premium over peers, despite a positive outlook in the transportation vertical. HDFC Institutional Equities research has maintained a ‘Sell’ rating on Tata Elxsi stock with a target price of INR 6,480, based on 38x Jun-25E EPS, saying that valuation remains expensive. HDFC research note highlights the company’s diminishing growth premium relative to peers and an unfavorable risk-reward ratio.

The transportation vertical, which accounts for 44% of Tata Elxsi’s EPD (embedded product design) revenue, continues to exhibit a strong outlook. With a 30% compound annual growth rate (CAGR) over the past two years, this segment is poised to lead Tata Elxsi’s growth. Recent deals, such as the collaboration with Alps Alpine, have further bolstered Tata Elxsi’s position in the transportation industry. Additionally, the company’s increased presence in European original equipment manufacturers (OEMs) has contributed to its expansion in this vertical. Tata Elxsi’s T25, which includes key accounts with revenues of $50 million or more, is expected to drive growth at a faster pace than the company average, providing further visibility for future growth.

The HDFC research report maintains a ‘Sell’ rating for Tata Elxsi, highlighting a target price of Rs 6,480, implying a downside of 14% from Rs 7,546 CMP. The analysis suggests that Tata Elxsi’s earnings estimates have been revised upward by approximately 3% for FY25E, considering a recovery in revenue growth. However, the valuation remains expensive, and the projected 17% EPS CAGR over FY23-26 falls significantly short of the prolific 40% CAGR witnessed during FY20-23.

While Tata Elxsi continues to demonstrate strength in the transportation vertical and secure large contracts, the research note underscores the challenges it faces in maintaining its valuation premium over peers. The company’s ability to navigate these challenges and drive sustainable growth will be crucial in the coming months.