Sell Tata Elxsi; target of Rs 4965: Deven Choksey

Tata Elxsi Under the Scanner: Valuation Premium Raises Red Flags

In a strategic market move, renowned market expert and MD of DRChoksey FinServ, Deven Choksey, has issued a ‘Sell’ recommendation on Tata Elxsi, setting a price target of ₹4,965 per share. The recommendation stems from the company's currently stretched valuations and concerns over sustainability of margins in the near-to-mid-term.

Tata Elxsi, a subsidiary of the Tata Group, is one of India’s most innovative design and technology services firms. It operates primarily in the automotive, broadcast, communications, and healthcare sectors and is known for its expertise in product engineering and digital solutions.

Analyst Perspective: Growth Doesn’t Justify Current Price Levels

Speaking on a business news segment, Choksey said:

“Tata Elxsi has been trading at a significant premium to its peers. While the company’s growth trajectory and focus on emerging technologies are commendable, the valuation multiple is not justified by the recent earnings performance. We believe there is limited upside in the short term.”

According to Choksey, the current trading price already factors in several future growth scenarios, making the stock vulnerable to any revenue or margin disappointment. The recommendation is based on a thorough review of recent earnings, sector dynamics, and broader market valuation trends.

Stock Performance Snapshot

As of the latest trading session, Tata Elxsi shares closed at approximately ₹5,450 on the NSE, marking a year-to-date decline of nearly 8%. The stock has seen volatile movements over the past six months, largely attributed to mixed quarterly results and subdued guidance in some segments.

Notably, the stock had peaked at over ₹10,000 in 2022 during the IT boom, before undergoing a significant correction amid sector-wide headwinds.

Sectoral Headwinds Weighing Down Sentiment

Tata Elxsi is part of the broader IT services space, which has been facing increased pressure from global macroeconomic uncertainties, delayed client decision-making, and reduced discretionary IT spending. Companies across the sector are being re-rated based on margin compression and lower revenue growth forecasts.

“Clients in the US and Europe are being more cautious. Spending patterns have shifted from transformation deals to cost optimization. This change is impacting companies like Tata Elxsi that depend on premium design-led engagements,” said a Mumbai-based fund manager.

Financial Metrics and Valuation

Tata Elxsi reported a revenue of ₹873 crore for Q4 FY25, up 9.2% YoY, but the operating margin slipped to 28.3% compared to 30.5% a year ago. The net profit stood at ₹202 crore, a modest growth of 6.5%. The return on equity (ROE) remains healthy at 34.7%, but margin slippage and slower top-line growth are raising red flags for analysts.

The stock is currently trading at a P/E ratio of over 60, significantly higher than industry peers like LTTS, KPIT Technologies, and Persistent Systems, which trade in the 35–45 range.

Choksey’s Target Explained

Deven Choksey’s ₹4,965 target implies a downside of approximately 9% from the current levels. The target price is based on:

• Forward earnings multiple of 45x FY26 EPS

• Assumption of single-digit revenue growth in FY25

• Slight erosion in EBITDA margins due to rising input and wage costs

• Re-rating in the overall IT sector as per global demand trends

This cautious outlook reflects the firm’s measured stance on stocks that may be trading more on sentiment than on fundamentals.

Investor Outlook: What Should You Do?

For existing investors, the recommendation could prompt profit-booking, especially if they had entered the stock at lower levels. Those planning to enter fresh positions in the IT sector may find better value in diversified players or midcap stocks with stronger earnings momentum and lower valuation multiples.

Investment advisors suggest rebalancing exposure toward firms with robust order pipelines, larger digital transformation mandates, and more diversified client bases.

Time for a Reality Check on Tata Elxsi

Tata Elxsi’s long-term story around design-led digital transformation and its strong brand backing from the Tata Group remain attractive. However, in the current market environment, where valuations are under intense scrutiny, caution seems warranted.

Deven Choksey’s sell call may act as a wake-up call for momentum investors who have overlooked the shift in earnings trajectory. Until revenue growth and margin stability return with clarity, the stock could face continued resistance.