Tata Elxsi Ltd - Taare Zameen Par!
Company Name – Tata Elxsi Ltd (Tata Elxsi)
Current Share Price – INR 7,492 (June 22, 2022)
Market Cap – INR 46,659 cr
1. What is interesting about the stock?
Tata Elxsi was founded in 1989 as an EPD (Embedded Product Design) business delivering design and technology services for product engineering and solutions. This business took a hit in the 2000s as a result of the Global Financial Crisis. The Company switched to the VFX sector (Visual Effects and design services) at the time. They worked on projects for Bollywood films including Taare Zameen Par, Bhaag Milkha Bhaag, the Krrish trilogy, and Ra-one. In 2010, they launched initiatives in Hollywood, where they collaborated on an animation project in Las Vegas with a production studio. The Company faced cost overruns because the VFX industry is a capital-intensive industry. Therefore, they refocused on the EPD business in 2012-2013.
In the EDP business, there are three verticals:
Automobile – The Company provides services to OEMs. The oldest vertical contributes ~36% of the revenues of the Company in FY22. It has created a platform called “Autonomai” to service C.A.S.E (connected automobiles, autonomous vehicles, shared mobility, and vehicle electrification) projects.
Media and broadcasting - In Broadcasting and Communications, Company provides services to all the OTT platforms. This vertical has the highest revenue contribution at ~39%.
Healthcare Services – Vertical is focused on healthcare & medical equipment companies and is contributing ~12% of the revenues, it is focused on healthcare & medical equipment companies.
Industrial Design & Visualization – This business line offers consumer research and strategy, product design, service design, branding and graphics, user experience design, transportation design, 3D prototyping, visualization, and manufacturing support services, and contributes ~11% of the revenues of the Company.
Tata Elxsi is based in Bangalore and has operations in the United States, the Middle East, Europe, Asia Pacific, and Africa. It also has 5 nearshore centers in Munich, Philadelphia, Detroit, Barcelona, and Kawasaki, and is opening a new center in Kozhikode.
Automobile vertical – The Autonomai platform is an advanced middleware platform with perception capabilities using data from automobile sensors, helping in detecting, recognizing, and categorizing objects in the vicinity of the self-driving car. It has also developed a RoboTaxi on this platform. Apart from this, the Company is also working on control software development, battery management systems, and validation. The Company has been expanding the team and tie-ups with academia to further enhance this domain. Vertical is growing at 30% on a YoY basis in FY22. The Company is also collaborating with Renesas, a Japanese semiconductor manufacturer, to create an electric vehicle ecosystem in India.
Media and broadcasting vertical - Sky, Comcast, India's largest OTT, Zee5, and NOS are among Tata Elxsi's significant media and broadcasting clients. In this area, the Company is Google's certified Widevine partner. Falcon eye is the name of Tata Elxsi's video test automation platform. It works on various systems, including X-box, Playstation, and others. In addition, Tata Elxsi and mimik Technology Inc., a pioneer in hybrid edge cloud technology and business solutions, have formed a collaboration to capitalize on the expanding availability of 5G networks and mobile edge computing platforms. Tata Elxsi will be able to offer pre-integrated solutions for intelligent content delivery networks (CDNs) and media distribution, such as over-the-top (OTT) video delivery, multi-feed video aggregation, and contextual content curation, to market as a result of the cooperation. This segment grew 32% on a YoY basis in FY22.
Healthcare vertical - The Company assists in developing software for labeling since pharmaceutical labeling is a complex operation. Under this vertical, it also provides solutions for life-saving injectables, the development of a variety of healthcare gadgets, and medical device regulatory approval procedure. engage, the Company’s platform enables hospitals and healthcare providers to create a consistent patient experience across all channels and provide treatment at any time and location leveraging design thinking and digital technologies such as IoT (Internet of Things), Cloud, Mobility, Virtual Reality, and Artificial Intelligence. This segment grew by 72% on a YoY basis in FY22.
Industrial Design & Visualization (IDV) – In this domain, the Company has worked with brands like Horlicks, Sunny Oils, and Orient Coolers on marketing campaigns and package designs. IDV's income increased by 36% on a YoY basis in FY22. The Company's revenue growth was fueled by strategic design-led digital deal wins.
In addition, the Company also provides system integration and support services for specialized applications such as experience centers, training and safety, and design visualization. The Company is also working with Lenovo for smart XR device solutions for office and industrial environments.
Deep expertise and long-term relationships with reputed clients with three decades of experience and competence in design and engineering across sectors
Diversified revenue base with Europe accounting for ~31% of revenues, followed by the Americas (42%), India (16%), and the rest of the world (~11%) in FY22
Lowest delivery costs (including subcontracting) and highest offshore result in higher margins and efficiency for the Company with a 5-year profits CAGR of 26%
The sector has become highly competitive with Indian players becoming more aggressive and project engagements becoming more strategic and longer-term
As most of the clients are large corporations, client concentration is high and the bargaining power of the Company is limited. This also links the fortunes of the Company with that of the clients’
Coforge (erstwhile NIIT Technologies) - is another listed Indian software development company with subsidiaries in the United States, Singapore, Australia, the United Kingdom, Germany, and Thailand, primarily to market and mobilize software projects.
L&T Technology Services – another listed Indian company, from the L&T Group, is a provider of engineering, research, and development (ER&D) services.
Tata Elxsi's CEO and Managing Director is Manoj Raghavan. He's been in the business for more than 22 years. He was in charge of increasing the Company's activities in Japan, South Korea, Taiwan, Singapore, and China. Before taking over as CEO and MD, he headed the Company's North American operations, which he helped become the Company's top revenue generator.
2. Key Historical Financials
Company revenue increased by 35% in FY22 and 32% in Q4FY22 on a YoY basis
EBITDA margin has expanded in FY22 – operating leverage
Cash flow convertibility (CFO/EBITDA) has fallen FY22 – due to higher receivables (working capital)
ROCE/ROE levels are quite strong at 48%/37% in FY22
3. What is my view on company valuation?
The stock has appreciated from INR 3,810 to INR 7,492, a ~125% return in a year. The Company is practically debt-free. It is trading at the P/E (TTM) ratio of 85x, which is very high compared to its peers: Coforge (32x) and L&T Technology Services (34x). Multiple is also significantly higher vs the 5-year P/E average of 26x.
The Company is trading at a premium due to its significant growth potential, market share increases, superior profit profile, specific digital engineering skills, and strong financial parameters. The Company has also successfully transitioned to longer-term contracts, which signifies higher trust with its clients and longer visibility of revenues.
However, all this has been fully priced at the stock price, and hence, long-term investors can evaluate investing after a significant correction.
4. What are the risks to the investment analysis?
The Company operates in a fast-changing domain and so needs to be constantly evolving or face the risk of technological obsolescence
A lot of the Company’s work is highly confidential and proprietary, and so it has been very strong in its processes to avoid any kind of regulatory, Intellectual Property theft, or competitor-led risks that can lead to significant damages to the clients and the Company
The Company is vulnerable to currency rate swings since exports account for 87% of its income. In addition, protectionist policies and wage inflation can affect margins adversely
High attrition rate (~20% in FY22)
About the Author
I write about the stock market, cryptocurrency, blockchain. I have Bachelor of Arts degree with more than 10 years of experience in finance and cryptocurrencies.
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.