Investors have little to complain about in the shares of Tata Alexi Ltd. After all, the stock has outperformed the sectoral Nifty IT index, appreciating around 42% so far this calendar year. The Nifty IT index has lost 16% during the same period.
It also means that the valuation of the stock is expensive. According to data from Bloomberg, Tata Alexi stock trades at 60 times estimated earnings for FY2424. In fact, the stock’s undervalued valuation is posing a hindrance. ICICI Securities and HDFC Securities have given ‘Sell’ ratings on the stock. Both have described the high valuation as a matter of concern.
“Tata Elxi’s valuation builds on premium growth premium (both absolute and relative), strength of delivery, a strong balance sheet and efficiency metrics,” analysts at HDFC Securities said in reviewing their March quarter results (Q4FY22).
The company announced its Q4 results after market hours on Wednesday, and the stock has risen nearly 7% since then.
Q4 Ebitda (earnings before interest, taxes, depreciation and amortization) margin declined 73 basis points (bps) sequentially to 32.5%. One basis point is 0.01%. However, it was slightly higher than ICICI Securities’ estimate of 31.9%. “Margins likely to expand further in view of supply-side challenges due to high attrition, reversal of elevated offshore mix (75.2% vs 55-57% pre-Covid in Q4FY22), peak out usage and return of travel and facility costs. Not there. Normalization of global economy,” said analysts at ICICI Securities in a report on April 22.
Further, Tata Alexi’s Q4 revenue in constant currency terms grew 7.4% sequentially to Rs 682 crore. This was driven by growth across all verticals in the Embedded Product Design segment, which accounted for 89% of Q4 revenue. In constant currency terms, transportation registered 8.3% sequential growth, while media & communications and healthcare and medical devices registered 7.2% and 6.8% sequential growth, respectively.
Note that attrition sequentially increased by 260bps in Q4 to 20.8%. The management expects a demand-supply mismatch through hiring in the next 2-3 quarters. The company added 2,014 employees in FY2012 and targeted a gross recruitment in the range of 3,000-3,500 in FY2013.
Nevertheless, the ICICI Securities report said margins are expected to remain above pre-Covid levels. Analysts expect EBITDA margin to be 28.3% in FY23. For perspective, in FY12, the company reported EBITDA of 31% which is 238bps higher year-on-year (YoY). FY22 revenue up 35% 2,471 crore.
The company has a strong pipeline of deals across various verticals which means the outlook is bright. Compared to its competitors, Tata Alexi has better operating metrics – lowest cost of delivery; highest offshore mix; Lower customer concentration and better customer mining capabilities, said an ICICI Securities report.
From here, HDFC Securities expects EPS to double in three years (revenue-based) with stable margins and ~40% ROCE. Nevertheless, these base case assumptions seem to be substantially priced and have a low margin of safety, the broking firm said.
The above concerns may lead to meaningful growth in the near future.