Shares of Tata Elxsi Ltd fell 8% on Friday following a muted set of quarterly results. The transportation vertical showed modest growth in Q3, supported by large deal wins in Asia and Japan. However, significant challenges persisted in the automotive sector, particularly in Europe and the US, analysts noted. Margins were further impacted by adverse currency movements and salary hikes.
Key Highlights of Tata Elxsi’s Q3 Performance
The Q3 performance revealed weakness across multiple verticals:
- Automotive Sector: The automotive vertical, particularly in Europe and the US, faced significant headwinds, contributing to the weaker performance.
- Transportation Sector: Modest growth was observed in transportation, supported by deal wins in Asia and Japan.
- Healthcare Sector: The healthcare vertical saw a slight uptick, but it was not enough to offset challenges in other sectors.
- Media Sector: Growth in the media sector was muted, reflecting ongoing demand challenges.
- Margins: EBIT margins declined 160 basis points (bps) quarter-on-quarter (QoQ) to 23.5%, primarily due to currency headwinds and salary hikes.
Analysts’ Views on the Results
Kotak Institutional Equities highlighted the weaker-than-expected Q3 performance. “Tata Elxsi’s Q3 performance was weak, missing moderate expectations. Weakness was across verticals with a modest uptick in the healthcare vertical, while the transportation and media verticals were muted. EBIT margin declined 160 bps QoQ to 23.5%, impacted by a wage hike and currency headwinds,” the brokerage said.
Kotak also pointed out a bleak near-term outlook due to challenges in the automotive vertical. It revised its FY2025-27 EPS estimates downward by 7-11% and maintained a ‘Sell’ rating with a revised fair value target of Rs 5,400 from Rs 5,600.
Morgan Stanley echoed these concerns, stating, “With limited growth visibility, potential cuts to consensus estimates, and high valuations, the stock may continue to underperform.” The firm reduced its target price to Rs 6,000 from Rs 6,500.
JP Morgan maintained an ‘Underweight’ rating, lowering its target price to Rs 5,400 from Rs 5,700. “Q3 sales and margins were a big miss for the second successive quarter,” it noted.
Financial Snapshot
Tata Elxsi’s financial performance in Q3 showed a mixed picture:
- Net Profit: The company reported a 3.39% decline in net profit, which fell to Rs 199 crore compared to Rs 206 crore in the December 2023 quarter.
- Revenue: Revenue grew 2.72% year-on-year (YoY) to Rs 939.17 crore from Rs 914.23 crore.
- Operating EBITDA: Operating EBITDA stood at Rs 246.6 crore, with an EBITDA margin of 26.3%.
- Stock Performance: On Friday, the stock dropped 8.06% to Rs 5,924 on the BSE. Over the past six months, the stock has fallen 17%.
Strategic Focus Areas
Despite the challenges, Tata Elxsi remains committed to growth in key markets and sectors:
- Emerging Markets: The company aims to drive growth in India, Japan, and other emerging markets.
- Operational Efficiency: Focused on optimizing operations to navigate challenging conditions in Europe and anticipate recovery in the US.
- High-Growth Areas: Expanding in connected vehicles, digital engineering, and healthcare, which are considered high-potential sectors.
- Deal Momentum: Strengthening deal pipelines in media and healthcare to diversify revenue streams.
Arihant Capital Markets highlighted the company’s strategic direction: “Tata Elxsi aims to drive growth in India, Japan, and emerging markets while addressing challenges in Europe and anticipating recovery in the US. The company remains focused on operational efficiency, deal momentum in Media and Healthcare, and expanding in high-growth areas like connected vehicles and digital engineering.”
Challenges Ahead
The road ahead for Tata Elxsi is fraught with uncertainties:
- Automotive Sector Headwinds: Continued weak demand in the automotive vertical, particularly in Europe and the US, poses significant challenges.
- Currency Fluctuations: Adverse currency movements could further pressure margins.
- High Valuations: Current valuations leave little room for error, making underperformance more impactful on investor sentiment.
- Competitive Landscape: Increased competition in digital engineering and connected vehicles could affect growth prospects.
Market Reaction and Investor Sentiment
The sharp decline in Tata Elxsi’s stock reflects investor concerns over its performance and future outlook. Analysts believe that limited growth visibility and ongoing challenges in key verticals may lead to continued underperformance in the near term. The company’s ability to address these challenges and capitalize on growth opportunities in emerging markets and high-growth areas will be crucial.
Looking Ahead
While the near-term outlook remains cautious, Tata Elxsi’s focus on innovation, operational efficiency, and strategic market expansion offers hope for a turnaround. The company’s investments in connected vehicles, digital engineering, and healthcare could drive long-term growth, provided it successfully navigates current challenges.
Tata Elxsi’s management will need to demonstrate resilience and adaptability to overcome market pressures and rebuild investor confidence. For now, the stock remains under pressure, with analysts closely watching its performance in the upcoming quarters.
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