Tata Elxsi: Should you Invest in this IT Stock?

Incorporated in 1989, Tata Elxsi is amongst the world’s leading providers of design and technology services across industries including Automotive, Media, Communications and Healthcare.

Image result for tata elxsi logo

It provides technology consulting, new product design, development, and testing services. Tata Elxsi also provides solutions and services for emerging technologies such as IoT (Internet of Things), Big Data Analytics, Cloud, Mobility, Virtual Reality and Artificial Intelligence.

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(A) Shareholding Pattern

Tata Sons Pvt Ltd & Tata Investment Corporation Ltd are the promoters of Tata Elxsi holding 45% of the total shares of the company. Key non-promoter shareholders include:

  • Mutual Funds: 3.48%
  • Foreign Portfolio Investors: 12.62%
  • Individual shareholders with share capital upto Rs. 2 Lacs: 29.69%
tata elxsi stock research with shareholding pattern

(B) Board of Directors

(i) Mr. N.G. Subramaniam – Chairman (Non-Executive and Non- Independent Director)

Mr. N. Ganpathy Subramaniam is Masters in Mathematics. He is also the Chief Operating Officer (COO) of TCS since February 2017 and has been part of TCS and the Indian IT Industry for the past 34 years. Prior to taking over the COO’s role he served as the Executive Vice President and Head of TCS Financial Solutions.

(ii) Mr. Manoj RaghavanManaging Director and CEO

Manoj Raghavan holds a B.Tech in Metallurgical Engineering from IIT Madras, an MBA from The Indian Institute of Foreign Trade, New Delhi. He also completed the Advanced Management Program from Harvard Business School. He has over 22 years of industry experience.He joined Tata Elxsi in 1997 as Regional Manager to set up and grow Japan operations.

Prior to taking over the role of CEO & MD, he served as the Executive Vice President and Head of the Embedded Product Design (EPD) division, spearheading the sales, overall delivery and P&L for this division.

(iii) Mrs. Shyamala Gopinath – Independent Non-Executive Director

Mrs. Gopinath holds a Master of Commerce degree and is a Certified Associate of Indian Institute of Bankers. She has vast experience in guiding and influencing the national policies in the diverse areas of financial sector.

Mrs. Gopinath retired as Deputy Governor of Reserve Bank of India.She is also on the Board of various Listed and Unlisted companies.

(iv) Mr. Sudhakar Rao – Independent Non-Executive Director

Mr. Rao holds a Master’s Degree in Economics from the Delhi School of Economics and a Master’s Degree in Public Administration from the Kennedy School of Government, Harvard University.

Mr. Sudhakar Rao is a retired Indian Administrative Service Officer. He held various assignments including Chairman & Managing Director of the Karnataka Urban Infrastructure development and Finance Corporation. He also acted as the Chief Secretary of Karnataka until retirement from government service on 30th September, 2009.

(v) Dr. Anurag Kumar –   Independent Non-Executive Director

Dr. Anurag Kumar obtained his B.Tech. degree from the IIT at Kanpur, and a Ph.D. degree from Cornell University, both in Electrical Engineering.

He has been elected Fellow of the IEEE, INSA, INAE and The World Academy of Sciences (TWAS).

(vi) Mr. Ankur Verma –  Non-Executive Director and Not-Independent

Mr. Ankur Verma, a B.E. in Mechanical Engineering and PGDM from IIM, Calcutta. He has around 15 years of experience in Investment Banking, Capital Markets and Corporate Strategy.

At present, Mr. Verma is the Senior Vice President, Chairman’s Office at Tata Sons Limited. Previously, Mr. Verma was Managing Director (Investment Banking Division) in Bank of America Merrill Lynch.

(C) Segments Diversification

The Company’s operations are classified into two business segments :

1. Software Development & Services

The software development and services segment basically consist of two business divisions that provide technology and design services respectively to customers across industries.

Embedded Product Design

The Embedded Product Design (EPD) division provides technology consulting, new product design, development, and also testing services. Especially for the automotive, broadcast, consumer electronics, healthcare, telecom, and transportation industries.

The key sectors addressed by Embedded Product Design include :

(i) Transportation

Tata Elxsi works with leading OEMs and suppliers in the automotive and transportation industries for R&D, design and product engineering services from architecture to launch and beyond. The Company works with leading car manufacturers and suppliers for developing electronics and software for powertrain, infotainment, connectivity, active safety, and comfort and convenience.

The dominant trends of Autonomous, Connected, Electric, and Shared Mobility (ACES) in the automotive market, are certainly enabled by the advancement of technology in electronics and software. While shared mobility has achieved scalable operations already, connected services and autonomous vehicle (AVs) technologies are in nascent stages in the market, with few existing vehicles adopting the technology.

(ii) Broadcast and Communications

Tata Elxsi addresses the complete product development lifecycle from R&D, new product development and also testing to maintenance engineering for Broadcast, Consumer Electronics and Communications.

Tata Elxsi works with leading broadcasters & operators to create solutions. Basically for smarter living, engaged entertainment and a digital future driven by IoT, analytics and artificial intelligence.

(iii) Healthcare and Medical Industry

Tata Elxsi’s Medical Device and Healthcare practice work with leading medical device OEMs and technology companies for market research and human factor engineering, hardware and software engineering, verification and validation, regulatory standards and compliance requirements along with technologies such as artificial intelligence, cloud and IoT. Revenue contribution from services to healthcare & medical industry increased to more than 10% during FY21.

Industrial Design and Visualisation

Tata Elxsi helps customers create innovative products, services, and experiences to build brands and help businesses grow. By intersecting design and technology, tata elxsi helps clients globally to bring new ideas and products to market. It is a small but important segment for Tata Elxsi. The management expects this segment to contribute more significantly to top & bottom line. As per the management, this specific service segment differentiates Tata Elxsi from its competitors.

In Industrial Design and Visualisation the company provides various services including :

  • Consumer research and strategy
  • Branding and graphics
  • Product design
  • Service design
  • User experience design
  • Transportation design
  • 3D-prototyping
  • Visualization and manufacturing support.

This business continues to deliver integrated services for customers along with the technology and software development business, enabling differentiation and added value, even as it addresses independent design projects in other sectors such as FMCG and consumer appliances.

2. Systems Integration and Support

Tata Elxsi implements and integrates complete systems and solutions for specialized applications such as Experience Centers, Training and Safety, and Design Visualisation.

Moreover the company continue to strengthen the solution portfolio to address emerging digital technology needs with our customers which includes

  • Professional services for cloud and infrastructure management
  • Virtual Reality (VR)
  • 3D Printing and Robotics.

(D) Revenue Mix of Tata Elxsi

Revenue segments of Tata Elxsi with further research on the stock

Revenue by Industry

stock research Tata Elxsi with key revenue segments contribution

Currently, Transportation and Broadcast industry certainly contributes major share to the company’s revenue. Although in long term the company look at 40:40:20. 40% from transportation, 40% from media and communication, and 20% from medical.

Revenue Mix by Geography

Export revenue of Tata Elxsi

More than 88% of the company’s revenue is from international markets thus the currency rate fluctuations affect the company’s results.

Increasing offshore business of Tata Elxsi

(E) Financial Parameters

(i) Net Sales

10 years sales growth of Tata Elxsi

(ii) Profit After Tax

10 years earning growth of Tata Elxsi

(iii) Operating Profit

10 years growth of operating profit of Tata Elxsi
  • FY 2014
    • During FY14, the Company had an improved top line and bottom line performance by containing costs of its animation and visual effects business.
    • Revenue grew by 25%, PAT grew by 223% and operating profit grew by 92.94%.
    • The company was also involved in developing the brand identity for both the hotels and designing various customer touch points to reflect the new visual identity the project was for project was for the St. James’ Court, A Taj Hotel and Taj 51 Buckingham Gate Suites and Residences, London, UK. which consequently results in increased in net profit and operating profit margin for the year 2014.
    • Moreover, the company supported India’s Mars Orbiter mission – Mangalyaan, by designing the Data Control Hardware that was installed in the Mars Orbiter and launched into space on November 5th, 2013.
  • FY 2016
    • the company’s operating profit grew by almost 90% and Net Profit also grew due to concerted effort in growing its revenues from design and technology services, and focusing on select industry segments i.e. creating niche business segments. As a result the company witnessed significantly improved business performance.
  • FY 2020
    • The Software development and services significantly impacted in the first quarter of FY20 due to an unanticipated and sudden reduction in business volume from a key customer in the automotive sector, due to their business situation thus the company’s revenue suffered.
    • Company faced headwinds in the automotive industry segment at the start of the year which led to a significant impact.

(iv) Free cash flow

Being an IT company, Free Cash Flow of Tata Elxsi remained positive every year & holds good cash reserves. Also, Company’s cash and cash equivalents as on 30 September 2020 amount to Rs 739.39 crore.
Company’s key valuation ratio is currently high i.e.
Enterprise Value/EBITDA = 39.02 & Yield % = 2.56% (lower than 5%)

Free Cash Flow of Tata Elxsi for stock research

(v) Employees Cost as % of Sales

Employee cost of Tata Elxsi for stock research analysis

(F) Significant Ratios

(i) PATM (%)

PAT margin of Tata Elxsi for stock research

(ii) EBITM (%)

stock research of tata elxsi with EBIT margin growth in 10 years

(iii) ROE (%)

ROE growth of Tata Elxsi

(iv) ROCE (%)

ROCE growth of Tata Elxsi for stock research

(v) Performance FY21 – 9 Months ended Dec 2020

financial performance of Tata Elxsi during FY21 for stock research
Financial Results For 9months ended Dec 2019 v/s 9 months ended Dec 2020

Quarter-3 FY21 Highlights

  • Transportation reported a smart recovery with revenue growth of 7.9% QoQ, led by deals and new projects in the automotive sector.
  • On the other hand, Media and Communications continued on the growth path with revenue growth of 8.0% QoQ.
  • Healthcare business accelerated further with revenue growth of 24% QoQ, supported by key deal wins and customer additions.
  • The company saw all-round market growth, with Americas reporting 15.9% growth QoQ, while Europe reported 6.2% QoQ growth aided by key automotive deal wins.
  • Overall sales grew by 12%, PAT grew by 45% and Operating profit by 39% YOY for 9 months ended Dec 20.
  • Earnings grew extraordinarily on account of savings of travel cost of employees. This is because most of the work force during the year worked from home and foreign travel stopped. Thus, these margins of such a level shall not be retained ahead.

(G) Management Discussion & Concall Highlights Dec 2020

(i) Major Investments

Transportation

  • Tata Elxsi has partnered with Tata Motors in developing their unified Connected Vehicle Platform that powers the Nexon EV range of electric cars.
  • With a collaborative approach, Tata Motors & Tata Elxsi developed a cloud based IoT Platform which provides Tata Motors with a common standard technology stack that delivers the scalability and high performance required to support the entire range of electric, commercial and passenger vehicles.
  • Company is consequently investing in strengthening capabilities in the development of Electric vehicles, including control software development, battery management systems, and validation.
  • Moreover company continue to invest in the development of IP in select areas, to create new monetisation opportunities and demonstrate expertise in specific areas of future growth. IPs such as ‘Autonomai’ and ‘Falcon Eye’ provide strong non-linearity for the company. Currently, IP contributes ~5% to the overall revenue and grew from ~2% of revenue three years ago.

Service Portfolio

  • Company has been investing in key digital technologies over the past few years in areas such as AI and Analytics, IoT and Automation, which have helped enhance the service portfolio, not only for existing customers but also to win new customers across the world.

Broadcast and Communication

  • The company company has built differentiated capabilities to support the development and launch of OTT services, and is certainly well poised to benefit from this long-term trend.
  • Tata Elxsi has driven the integration of ZEE5 with the video backend, multi-lingual front-end user experience, and in addition to multi-CDN networks.

(ii) Key Deal wins

During FY21, Tata Elxsi won deals across numerous high-growth areas including electric vehicles, OTT and connected cars, providing improved revenue visibility. Substantial growth is being seen in avenues like connected cars, autonomous vehicles, AR/VR experience and automotive electronics, with company’ s new deals to drive revenue.

(iii) Impact of Covid -19

  • In first quarter of FY20 the demand of automotive segment significantly impacted due to an unanticipated and sudden reduction in business volume from a key customer due to their business situation.
  • Therefore the company rallied to mitigate the impact of this sudden reduction in revenues through a set of actions to de-risk revenue dependency from this particular customer. As a result the Company has done well in recovering from this situation in the first quarter, with strong execution of its strategies and excellent operational management, to grow strongly in the subsequent quarters.
  • Because of lockdown in place in many parts of the world, the company is now focusing on more offshore business.

(H) Growth Opportunities

(i) Increase Demand of Technology & New Services

The increased permeation of software, electronics, and digital technologies enables bigger opportunities for innovation. Differentiation in the delivery & personalisation of the end-to-end customer experience certainly help the company to grow.

There are various new services available these days for instance with the penetration of high-speed internet, smart devices and content flooding in the market. The borders between entertainment, media, and telecommunications have dissolved. New services such as smart, connected homes & OTT are creating new revenue opportunities for operators & broadcasters.

(ii) Focusing on Offshore business

Tata Elxsi is focussing more on offshore business due to the travel restrictions. It is also benefiting from higher business from broadcast & communication vertical with increasing traction seen in sub-segments of Broadcast & communication vertical like operators (focussing in the US, Europe, SA, & ME), OTT players & devices (like set-top boxes etc).

(iii) Focused on expanding the communication and healthcare

Tata Elxsi compared to its peer, has decreased its dependence of automotive vertical. As a result it is more focused on expanding the communication and healthcare verticals.

(iv) Strong Business Position of Tata Elxsi

Tata Elxsi’s business profile is strong, aided by a diversified geographical presence across Europe, the US, India, Japan, the Far East, etc, its reputed clientele, and professional management team. Also, the company is uniquely positioned among its peers and offers relatively complex services supported by its expertise, execution capabilities and long-standing relationships with
its clients. This not only strengthens its value proposition, it also helps in generating higher margins.

(I) Key Risks/Concerns

Currency Fluctuation

87% of the company’s revenue comes from outside India in international currencies. Thus the currency fluctuation affects the company’s earnings.

Client Concentration

Company’s about 40% of revenues are dependent upon the top 5 clients. Therefore any decrease in orders from clients sites affects the revenues. For Instance, JLR is one of the major clients of the company. In FY20 the order size from JLR decreased, which impacted the company.

Geopolitical risk

Geopolitical risks and forex volatility are expected to play out for some time, and protectionist policies may impact business in certain geographies.

Conclusion

The IT stocks performed very well during 2020-2021. The sector is further bullish based on new technological trends. India is well poised for providing IT services across the globe and grab the upcoming trends with available skill at competitive cost. Companies with strong business profile shall grow further in this industry. The above research on Tata Elxsi is to highlight the business profile, financial performance & key factors impacting its performance. Do your own due diligence before investing.

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References:  Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry’s Publications.

Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. Thus, the report & references mentioned are only for the information of the readers about the industry stated.

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