Tata Elxsi share price formed a God candle: is it a good buy?

The Tata Elxsi share price has done well in the past few decades, making it one of the top-performers in India. It has jumped from just ₹30 in 1999 to almost ₹8,000 today, or a 305,800% increase. This surge has brought its market cap to over ₹585 billion, equivalent to over $7 billion.

Favorable tailwinds

Tata Elxsi is one of the many companies in the Tata Group’s ecosystem. It is a technology company that focuses on providing Engineering, Research, and Development (ERD) solutions to companies from around the world.

It serves some of the biggest companies globally. In addition to firms within Tata Group, Elxsi offers solutions to companies like Ford, Toyota, Daimler, Volvo, Comcast, Vodafone, and Medtronic.

These companies leverage its experience in the design industry and its relatively lower operational costs since most of its services are handled in India. 

For example, in the automotive industry, Tata Elxsi helps companies in their engineering, systems testing, and software development. It offers similar solutions in industries like aviation, media, and appliance manufacturing.

Tata Elxsi faces numerous tailwinds. First, as an Indian company, it is, to a small part, benefiting from the tensions between the US and China, which have pushed many manufacturers to move part of their businesses to India. 

Second, it is a leading player in some of the top-growing sectors globally. For example, it does a lot of work in growing industries like big data, internet of things, cloud computing, cybersecurity, and robotics. 

Each of these industries has a total addressable market (TAM) in their trillions. For example, when it comes to AI, Nvidia’s revenue came in at $30 billion on Wednesday, higher than what it made in the four quarters of 2021. 

The cybersecurity sector is also growing, as evidenced by the strong revenue growth and premium valuation of companies like Palo Alto Networks and CrowdStrike. 

Third, Tata Elxsi belongs to the Tata Group conglomerate, which boosts its credibility when negotiating deals with other companies. It also does a lot of work for companies within the Tata Group as well.

Tata Elxsi revenue growth

Therefore, Tata Elxsi’s revenue figures have been growing in the past few years. Its annual revenue moved from ₹12.3 billion in FY 2017 to over ₹31.45 billion in the last financial year and the management believes that it has more room to grow.

The most recent earnings showed that the company’s revenue rose by 9% YoY in the last quarter to ₹926.5 crores while its EBITDA and net margin came in at 27.2% and 26.3%, respectively. These numbers brought its profit-before-tax (PBT) to over ₹252 crores.

This revenue growth ewas mostly because of its transportation and its system integration solutions, which rose by 5.3% and 8.7%, respectively. 

The media division grew by 0.5% as the industry continues going through major headwinds as advertising spending slows. It also saw a difficult performance in the healthcare and lifesciences division, where revenue dropped by 4.3%

Concerns about its valuation

A key concern about Tata Elxsi and many other Indian companies is that they have become severely overvalued. 

A good example of this is Tata Elxsi, which has a market cap of over $7 billion and annual revenues of $427 million, giving it a price to sales multiple of 16. This is a highly expensive valuation considering that a firm like Microsoft trades at a 11.5 P/S ratio.

The company also trades at a whopping 61x forward price-to-earnings ratio, higher than some of the most popular names like Nvidia and Broadcom. 

In a recent note, an analyst at Kotak Mahindra, noted that the stock could drop sharply to ₹5,500, much lower than the current ₹7,700. Many other analysts believe this as only two of the 12 of them have a buy rating on the stock.

To be clear: thematic companies can remain at an expensive level for a long time. This explains why firms like Apple, Nvidia, and Microsoft have constantly been highly overvalued. As long as the Tata Exlsi maintains its growth, there is a likelihood that the stock will remain at an elevated level.

Tata Exlsi share price analysis

The weekly chart shows that the Tata Elxsi stock price topped at ₹10,577 in August 2022 and then pulled back to ₹5,591 in December of that year. Since then, the stock has been in a slow rebound. This week, however, it formed a God candle, which pushed it to a high of ₹9,044 before pulling back.

The stock remains slightly above the 50-week and 100-week Exponential Moving Averages (EMA) and is slightly below the 23.6% Fibonacci Retracement point. 

Therefore, my view is that the stock will remain in this range for a while and then continue rising since it has formed an ascending double-bottom chart pattern. More gains will be confirmed if it jumps above the resistance point at ₹9,044.