Why this Tata stock multiplied 10x in 3 years and where is it headed?

the stock's current lofty valuations pose a big risk to robust returns in the future..Istock
the stock's current lofty valuations pose a big risk to robust returns in the future..Istock


  • This Tata group stock has delivered a 1,000% return to its shareholders in last 3 years.

This company is a global design and technology services leader from one of the most trusted business houses in the country, the Tata Group.

It was one of the first companies to be launched by Ratan Tata after he took over as chairman of the Tata group.

The stock has also delivered stellar returns in a short span of three years. A true multibagger stock, it was trading at around 700 in September 2019, and now trades at 9,000.


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So, if you had invested 100,000 three years ago, it would have grown to more than 800,000 today.

Which company are we talking about?

The stock is none other than Tata Elxsi, a company head-quartered in Bengaluru with a little over 10,000 employees.

So, what does Tata Elxsi do?

Tata Elxsi is a medium-sized IT firm well-known for its design and engineering capabilities.

Most of the revenues (87%) come from designing products for the broadcast and communication, transportation, and medical sectors.

A large chunk of the revenues comes from clients across the world. 42% of its revenues are from the US, 30% from Europe, 16% from India, and the remaining from the rest of the world.

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

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

The internet of things (IoT) is a network of interrelated and internet-connected objects. It can collect and transmit data over a wireless network without human intervention.

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

This trait makes Tata Elxsi a strong contender, well-poised to ride the swelling wave in the artificial intelligence and the Internet of Things (IoT) space.

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

This has put Tata Elxsi in a sweet spot, helping it deliver stellar returns in a short period of time.

The company's stellar financial performance has surpassed all growth expectations. This growth is mirrored in the phenomenal returns the stock has generated in a short period of time.

The business has done phenomenally well...

The revenues and profits have more than doubled in the past five years. They have grown at a 5-year CAGR of 17% and 25%, respectively.

The return ratios have also been strong, averaging 30% in the past five years.

Apart from this, the company has no debt on its books, allowing it to reward its shareholders generously. The five-year average dividend yield stands at 1.4%.

A large part of this growth stems from communication and broadcasting, and transportation verticals of the business. At present, communication and broadcasting contribute 44% to the revenues, 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.

Apart from this, they are expanding their healthcare segment, which has risen 3x in the past two years. The company expects the revenue mix to skew more towards healthcare, 40% communication, and broadcasting, 40% transportation, and 20% healthcare.

But how sustainable is this robust growth?

At present, the stock is trading at aprice-to-earnings ratioof 89.4x. This ratio is much higher than its 5-year average of 30x and the industry average of 24x.

While the stock has helped investors create massive wealth over a short span, mirroring such growth in the future may be difficult for any company.

However, the company's larger counterparts in the sector, Infosys and TCS, have achieved that. In the last two decades, the stocks have grown nearly ten-fold, twice!

Infosys went from trading at 19 in February 1999 to 170 in 2000. Thereon, after several swings, the stocks went on to touch all-time at 1,900 in April 2022.

Similarly, TCS went from trading at 37 in 2002 to 300 in 2009. Thereafter, it touched its all-time of 4,000 in January 2022.

Apart from the tech giants, HDFC twins have also managed such a feat.

HDFC bank went from 3 in 1996 to 30 in 2003. Later, the stock touched its all-time high in April 2022 at 1,656. Similarly, HDFC went from trading at 21 in 1999 to 230 in 2006. Thereafter, 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 stocks that burnt out early. Services went from trading at 9 in 2005 to 100 in 2008. And now, after many swings is trading at 50.

ONGC also went from trading at 13 in 1999 to 130 in 2006, clocking a return of 10x, but now trades at 130.

Stock price movements are a function of the company's business. AsBuffettalso says, 'If a business does well, the stock eventually follows.'

Over the past few years, the management guidance has been consistent with its performance. Even now, the management is confident of growing its business at a strong rate with no signs of fatigue.

However, the stock's current lofty valuations pose a big risk to robust returns in the future.

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

This article is syndicated from Equitymaster.com

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