Tata Elxsi shares jump 20% in 2 days to all-time high. Here is why

“India’s weighting in the widely tracked MSCI Emerging Markets (EM) index shot up to appx. 12.3% now from appx. 8.1% in end of Oct-2020. The two factors that have driven fresh inclusions and an uptick in the weightings of existing Indian constituents are: i) the new regime on foreign ownership limit (FOL) taking effect in the Nov-20 review; and ii) domestic stocks’ strong outperformance to other EM counterparts,” said Edelweiss Alternative & Quantitative Research.

According to Edelweiss Alternative & Quantitative Research, the market cap cut-off date could be between April 18 to 29, 2022 and the announcement could be made on May 13 while re-balancing could be effective from May 31. 

Apart from Tata Elxsi, the other stocks that are in Edelweiss radar for possible inclusion include Voltas, JSPL, Astal, and Varun Beverages.

“The start of the review period is almost a month away from now and stock price movements in the interim might spring a surprise,” said Edelweiss Alternative in a note. 

Some analysts are cautious on the stock given the run-up it has witnessed in the past one year. Despite solid all-round perfection in Q3, HDFC Securities had recommended reduce on the stock in January. 

“Despite strong growth and excellent margin performance, we maintain our reduce rating on Tata Elxsi due to diminishing margin of safety (it is trading at a premium valuation. The growth of 5.5% QoQ was in line with the estimate, while margin came was better than expectation. EPD (embedded product design) growth was strong but weakness was witnessed in the IDV (Industrial Design & Visualisation) segment (15.4% QoQ). The margin expanded 235bps to 33.2%, led by growth, offshoring (75%), and better utilisation (83%); however, considering the increasing cost structure, EBITDA margin should stabilise at 30%. Further margin upgrades seem difficult, given the supply-side challenges and rising attrition (up to 18.2%),” the brokerage said, maintaining that it remained positive on the company’s growth prospects and growth leadership in engineering, research and development segment.