Why has this Tata stock jumped 10x in 3 years and where is it heading?

It was one of the first companies started by Ratan Tata after taking over as the chairman of the Tata Group.

The stock has also given excellent returns in a short span of three years. a True Multibagger Stockit was trading at approx 700 in September 2019, and trades now 9,000.

So, if you had invested 100,000 three years ago, it would have been over 800,000 today.

Which company are we talking about?

The stock is none other than Tata Alexi, headquartered in Bengaluru with over 10,000 employees.

So, what does Tata Alexi do?

Tata Alexi is a mid-sized IT firm renowned for its design and engineering capabilities.

Most of the revenue (87%) comes from designing products for the broadcast and communications, transportation and medical sectors.

A large portion of the revenue comes from customers around the world. 42% of its revenue comes from the US, 30% from Europe, 16% from India and the rest of the world.

The products designed by the company have become an integral part of many of the equipment we use every day. These include home appliances, mobile phones, cars and vehicles, medical devices and more.

But the most promising segment of the business is one of its smaller segments, the Internet of Things, the IoT.

The Internet of Things (IoT) is a network of interconnected and Internet-connected objects. It can collect and transmit data over wireless networks without human intervention.

The Indian IoT market is to exhibit a CAGR of 13.9% in 2022-2027. Under this segment, Tata Alexi helps customers reimagine their products and services through design thinking and application of digital technologies such as cloud, mobility, virtual reality and artificial intelligence.

This feature makes Tata Alexi a strong contender, ready to ride the swelling wave in the Artificial Intelligence and Internet of Things (IoT) space.

And with digitization becoming the new norm in the post-pandemic era, this opportunity has only gotten bigger.

This has put Tata Alexi in a good position, which has helped it generate great returns in a short span of time.

The company’s excellent financial performance has exceeded all growth expectations. This growth is reflected in the exceptional returns that the stock has generated in a short period of time.

The business has done well…

Revenue and profit have more than doubled in the last five years. They have grown at a 5-year CAGR of 17% and 25% respectively.

The return ratio has also been strong at an average of 30% over the past five years.

In addition, the company has no debt on its books, so that it can reward its shareholders generously. The five-year average dividend yield is 1.4%.

A large part of this growth stemmed from the transport sector of communications and broadcasting, and trade. Currently, communications and broadcasting contribute 44% to revenue, with transportation and healthcare contributing 41% and 14%, respectively.

However, going forward, the company is making inroads into the transportation vertical, tapping into the growing Electric vehicle (EV) market.

In addition, they are expanding their healthcare segment, which has grown 3x in the last two years. The company expects the revenue mix to be more skewed towards healthcare, 40% communications and broadcasting, 40% transportation and 20% healthcare.

But how sustainable is this strong growth?

Currently, the stock is trading at a price-to-earnings ratio of 89.4x. This ratio is much higher than its 5-year average of 30x and the industry average of 24x.

While this stock has helped investors create huge wealth in the short term, it may be difficult for any company to reflect such growth in future.

However, the company’s larger counterparts in this space, Infosys and TCS, have achieved this. Over the past two decades, stocks have risen almost tenfold, twice!

Infosys went out of business since 19 February 1999 170 in 2000. After that, after many ups and downs, the stocks touched all the time 1900 in April 2022.

Similarly, TCS trading went 37 in 2002 300 in 2009. Subsequently, it touched its all-time 4,000 in January 2022.

Apart from the tech giants, HDFC Twins has also done such a feat.

HDFC Bank Gaya from 3 in 1996 30 in 2003. Later, the stock touched its all-time high in April 2022 1,656. Similarly, trading on HDFC went from 21 in 1999 230 in 2006. Subsequently, the stock touched 3,000 in 2021.

in conclusion

In the end, what matters is the business.

While there are many such success stories, there are also some stocks that ended early. Services gone from trading from 9 in 2005 100 in 2008. And now, after many ups and downs is trading on 50.

ONGC also went out of business from 13 in 1999 130 in 2006, seeing a return of 10x, but trades now 130.

Fluctuations in stock prices are a function of the company’s business. As Buffett also says, ‘If a business does well, the stock eventually follows.’

Over the years, management guidance has been consistent with its performance. Even now, the management is confident of growing its business at a robust rate without any fatigue.

However, the current high valuation of the stock poses a huge risk to strong returns in the future.

Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.

This article is syndicated from equitymaster.com

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