Summary
of Contents
STOCK IDEA
Tata Elxsi Cluster:
Emerging Star Recommendation: Buy Price target:
Rs320 Current market price: Rs232
Designed to
grow
Key
points
-
Niche
player with distinct competitive strengths: Tata Elxsi Ltd (TEL) has built the
required scale of operations and established strong client
relationships with leading global companies to effectively tap the
huge opportunity emerging in the niche segment of product design
and engineering space. In this space, the size of the opportunity
for the domestic companies is estimated to more than double to
$6.6 billion by 2010. TEL also has the advantage of having
developed reusable components (intellectual property to provide
faster and more valuable proposition to the customers) and is
investing to boost its delivery capabilities in the high-end
services like VLSI and chip design.
-
Aggressive
expansion plans: TEL
has aggressive expansion plans in terms of the capital expenditure
on physical infrastructure and employee addition. This clearly
reflects the management's growing confidence in the revenue growth
visibility over the next few years.
-
Improving
margins: The shift in
the revenue mix in favour of the high-margin software development
service business has significantly improved the company's
operating margins in the past two years (up by 490 basis points to
19.8% in FY2006). The trend is expected to continue and further
boost margins by 250 basis points during FY2006-08, in spite of
the aggressive expansion plans and rising wage inflation.
-
Attractive
valuations and decent dividend yield: Revenues and earnings are estimated to
grow at a robust rate of 26.8% and 34.5% respectively, during the
period FY2006-08. Moreover, the company offers a decent dividend
yield of 2.8% (based on the 65% dividend given in FY2006), which
is likely to limit the downside risk. We recommend Buy call on TEL
with a one-year target price of Rs320.
INDUSTRY
UPDATE
Positive sentiment bolsters equity
AUMs
The assets under management (AUM) for
equity funds increased by 6.2% to Rs135,851 crore in November 2006.
The rise in the equity AUM was higher than the market movement of
5.2% .
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