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Growth & quality

Tata Elxsi (TELX) is a niche ER&D services company with strong scalability (20% CAGR over FY21-24E) based on integrated design & engineering practice and a superior execution framework. TELX is a good proxy to play the disruption and confluence in automotive (Connected, Autonomous, and Electric), broadcasting & communication (OTT) and healthcare (Telemed) industries.

The company has recently pivoted its model to focus on large and multi-year deals (Schaeffler, Aesculap) as well as invested in creating vertical adjacencies that address diversification and supply-side fungibility. For FY22E, TELX is set to grow at a 10pp premium to mid-tier peers both on growth and margin. We initiate coverage on TELX with a BUY and target price of INR 3,330, based on 36x (base case) at 1.6x the average multiple, supported by top quadrant growth/efficiencies, quality of franchise, industry tailwinds, and favourable risk-reward (upside risk to base case).

* Industry tailwinds and TELX’ growth premium: TELX’ revenue trajectory has traversed from growth discount to a strong growth premium within the ER&D segment. Industry tailwinds include large and growing R&D pool across automotive (stable R&D in tier-1s), broadcast & comms and medical devices, re-factoring of R&D spend into faster growing sub-segments (‘CASE’ & OTT).

* Recovery in transportation vertical: Transportation vertical has outpaced peers recently, supported by growth in adjacencies, new logo addition, and mining of large accounts. Gaining share in the OEMs (traditionally underpenetrated) with confluence of partnerships and trends in connectedautonomous-electrification, can propel the transportation vertical to 16% CAGR over FY21-24E.

* Growth momentum in broadcast & communication: Opportunities in OTT & new media, RDK expertise and monetisation of IPs are expected to keep growth rates strong. TELX’ partnership with semiconductor and Google refrenceability/partnership (SI in Widevine) provides access to a large network and is likely to accelerate growth in the broadcast & media vertical (20% CAGR over FY21-24E).

* High-growth in medical device & healthcare vertical: Vendor consolidation from onsite European/US vendors to TELX and setup of GECs and the company’s strong credentials in video delivery (complimentary to Telemed) are expected to drive growth (growing ahead of LTTS, Cyient, Alten) in the higher-margin medical device & healthcare vertical (32% CAGR over FY21- 24E).

* Strong execution framework: Lowest cost of delivery (including sub-con), highest offshore, and lowest attrition translate into superior margin & efficiencies. Client mining prowess (including its T2-10 accounts), reducing client concentration risk and geo mix getting balanced are positives

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