Why is Tata Elxsi a multibagger in an iffy tech space? Siddhartha Khemka answers
I have seen stocks go through the roof. It is not that for the first time I have seen multibaggers in my life but when it comes to I am just surprised that why a stock like Tata Elxsi is trading at a PE multiple of 80 times even though the entire tech space is going through a grounding crunch. It is now the most expensive midcap IT stock.
The first disclaimer is we do not have Tata Elxsi under our coverage but let me still put my thoughts on the stock. First, it would be wrong to put Tata Elxsi as a generic tech company that we have in India. It is not a technology services company like or or the others. It is mostly a product development company and they are working closely with some of the global majors in the auto sector, in the EV space with some of the latest technology.
So it is more to do with the future growth opportunity that this company provides with the ERD segment — engineering, research, development – where there is a steady, consistent growth. The global majors’ innovation companies depend on companies like Tata Elxsi to do the hard backend work. It is difficult to say why it trades at such a high premium. but if you look at the business and the fundamentals, it shows strong growth and a strong business model.
What is the outlook in terms of M&M’s quarterly performance? The management has categorically said that they are yet to realise the benefits of the lower raw material prices and that will take place in Q1 and therefore they are expecting margin expansion in the upcoming quarters. No doubt that the semiconductor challenges, the raw material price inflation does remain a looming concern for most of these auto companies.
In the case of M&M, the overall broad numbers were in line with our expectations although the farm business was marginally disappointing, But the strong auto numbers offset the farm business weakness. So overall, realisations were better than expectations largely led by price hikes as the raw material cost had gone up and that kind of put in some pressure on margins.
![Smart Talk](https://img.etimg.com/photo/msid-91457710,quality-100/SmartTalk.jpg)
However, the company was able to pass the price hikes and even after that, the volume growth was significant at almost 46% growth on a YoY basis. Last year, there were the Covid related restrictions and impact on the entire corporate world. But margins on a quarter on quarter basis, have remained pretty steady. So, the operating performance was decent.
Lower taxes also boosted profits. So yes overall numbers are in line. The benefits of the current fall in commodity prices combined with an improvement in the rural farm outlook will help the company see strong growth in the tractor business and with newer launches which have seen strong demand and strong booking. The auto sector would continue to show robust performance.
What do you like in the defence space?
If you look at the overall global setup, we are definitely hearing a lot of hysteria around the war kind of situation. But what is happening in India is that gradually and steadily, the order book for some of these players have improved. There has been a marked improvement in the way the government has focused on defence preparedness as well as the Make in India policy has worked for the defence space.
The most important factor is on the delivery, the execution part. We have some of these stocks like Bharat Electronics with record order books for a while now. We are seeing consistent execution quarter after quarter. is something that we like within the overall defence space.
Q1 generally is a weak quarter for them but they have reported fairly strong numbers backed by a strong order book, visibility in terms of execution plus the size. We do not have such large pure defence plays in India. You have a little bit of defence in a Bharat Forge, in L&T and in
, but the pure plays are generally small in size. We would continue to prefer Bharat Electronics.
is a great company. It is a stock which has created a lot of wealth, but its numbers are very tepid?
Again, we do not cover sugar but it is a commodity and there are a lot of regulations around sugar with respect to the procurement price, with respect to where you can buy, how much you can export etc.
So one day we had the news of government increasing the fair price at which mills can buy from the farmers and today we had another news where the government allowed 1.2 million tons of additional exports. I think it would be largely driven by news flows but the ethanol story is definitely helping to bring some stability of structure to the overall business flows. But again, we do not track this space very closely and so am not able to give any views on the stock.
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