Can Tata Elxsi generate wealth like TCS or Infosys? Tata Elxsi Fundamental Analysis

If I ask you, what is the future of this world? 

Your answer probably would be “digital”. 

Certainly, there is no doubt about the fact that the future is digital. Now, if I ask you - What are the key trends in the digital world? The answer is: IoT (internet of things where everything would be connected to each other including your phone, TV, Car, lights and other appliances. Another key trend is cloud computing where everything would be stored in the cloud (not literally the cloud. I hope you understand cloud computing). And then automation would be a key trend which even includes automatic cars.

Next question is: Do you know any Indian company that works on such exciting future technologies? Well, one of the company is Tata Elxsi. Over the past 1 year, Tata Elxsi has created a lot of buzz in the market where its share price has jumped from the low of Rs 500 to current level of Rs 2700 giving more than 5 times return in just 1 year! So in this article, we will investigate more about Tata Elxsi.

Company & its business

• 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.
• It is the part of most prestigious Tata group of India.
• Tata Elxsi provides integrated services – from research and strategy, to electronics and mechanical design, software development, validation and deployment, and is supported by a network of design studios, global development centers and offices worldwide.
• Tata Elxsi is helping customers reimagine their products and services through design thinking and application of digital technologies such as IoT (Internet of Things), Cloud, Mobility, Virtual Reality and Artificial Intelligence.
• As of today, Tata Elxsi has a market cap of Rs 16,000 Cr. So it is a mid cap company.

Tata Elxsi is not a traditional IT company like TCS or Infosys. The major difference between Tata Elxsi and a regular IT company is that IT companies' bread and butter business is from the software maintenance and support whereas Tata Elxsi is a pure play software development and product development company working on the future technologies of the world.

Now let us deep dive into their business. So that you can understand what exactly is Tata Elxsi working on.

Software development & services

1) Embedded Product Design: Tata Elxsi is majorly working with 3 industries in designing and building their embedded products.

• OEM Business:

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

For example, they have 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.

They are investing in strengthening capabilities in the development of Electric vehicles, including control software development, battery management systems, and validation. For example, Tata Elxsi’s has developed advanced autonomous vehicle middleware platform ‘Autonomai’, with deep learning and AI capabilities, which is designed to help OEMs and system suppliers build, test and deploy customizable autonomous vehicle applications.

• Broadcast, consumer electronics and communication:

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 and OTT services like Netflix, Amazon prime, etc. are creating new revenue opportunities for operators and broadcasters.

Tata Elxsi addresses the complete product development lifecycle from R&D, new product development and testing to maintenance engineering for Broadcast, Consumer Electronics, and Communications.They work with leading broadcasters and operators to create solutions for smarter living, engaged entertainment and a digital future driven by IoT, analytics and artificial intelligence thereby enabling new revenue streams and enhanced customer experience. For example, Tata Elxsi has partnered with Zee entertainment where it has integrated video backend, multilingual front-end user experience, and multi-CDN networks.

• Healthcare:

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.

Tata Elxsi has developed cost-effective fixed dose drug delivery dispenser for liquid drugs that allows dispensing a fixed & accurate amount of dose each time and prevents wrong dosage.

2) Industrial Design & Visualization: Tata Elxsi helps customers create innovative products, services, and experiences to build brands and help businesses grow. Their services span across consumer research and strategy, branding and graphics, product design, service design, user experience design, transportation design, 3D-prototyping, visualization and manufacturing support.

For example, Tata Elxsi received India’s best design award for Packaging design (Sunny Sun-lite refined sunflower oil jar) and product design (Orient Ultimo Tower Cooler)It received iF design award for its innovative and exceptional design concept for a Mixed reality based smart assistive wearable device.

3) System Integration & Support Services: Tata Elxsi implements and integrates complete systems and solutions for specialized applications such as Experience Centers, Training and Safety, and Design Visualisation.They continue to strengthen their solution portfolio to address emerging digital technology needs with their customers, including Professional services for cloud and infrastructure management, Virtual Reality (VR), 3D Printing and Robotics.

Revenue breakup by segment: The latest revenue breakup of Q3 of FY21 shows that 88.3% of business is from Embedded product design and segment is consistently the major contributor. In terms of QoQ growth, Embedded product design has grown at a rate of 8.5% and Industrial design and visualization has grown at 25.3%.

Revenue by geography: In terms of revenue breakup by geography, Europe and America are the biggest contributor with a contribution of 36.5% and 36% respectively.

Revenue by industry: In terms of revenue by industry, Transportation is the biggest segment with 41% contribution. It is followed with broadcast and communication. As compared to Q3 of FY20, the transportation contribution has reduced from 48.6% to 41% and broadcast contribution has increased 39.2% to 44.3%.

Client concentration: In terms of client concentration, the biggest client of Tata Elxsi contibtuted 11.7% and top 5 clients contributes 35.4%. As compared to Q3 of FY20, the contribution from top client has reduced from 15.7% to 11.7% which is a good news because it is not good to have overdependence on a single client.

Overall, on company and its business, I would rate it 10/10.

Future Growth Prospects

In the latest Q3 report for FY21, company has shown very strong growth in both revenues and profitability.
Their Healthcare business continues to accelerate, while Media and Communications reported another strong quarter of sustained growth.There is a sustained recovery in the automotive market for the second consecutive quarter. This quarter has seen OEMs reinitiating key R&D programs, leading to resumption of projects as well as deals with Tier1 suppliers. 

Key Trends in software business:

Healthcare: Receiving medical diagnosis and digital consultations through smartphones and tablets is preferred over visiting a healthcare provider today. This in turn is propelling the adoption of Telemedicine. In the future, telemedicine is expected to evolve into healthcare through IoT devices, including personal digital assistants and wireless infrastructure. Taking appointments, receiving pre-consultation, and follow-ups would happen through a voice command, which will be further enhanced by access to quick and seamless connections.

Education: As students and teachers adopted digital learning, modes of education delivery and the content are becoming immersive, adaptive and personalized. In the future, education would be a combination of traditional institution practices along with e-learning.

Automobile: Future of automobile is electric, connected, shared and autonomous. All these trends require softwares. Tata Elxsi has a wide rage of offerings including engine management software, battery management software, vehicle test & calibration, etc.

OTT Services: What started by Netflix is now a big industry known as OTT ( Over the top) services. There are many new players that have entered into OTT space including Amazon Prime, Hotstar, ZEE5, etc. There is huge grown potential in this segment. These companies require end to end software management and Tata Elxsi offers solution in the form of cloud storage, personalized UI and AI-based content discovery, automated content creation using cognitive video platform, etc.

Technologies like connected vehicles, cloud based IoT platform, automation, product design and artificial intelligence would continue to generate more demand. On top of this, as the world inches more towards digitalization, the demand for software development would continue to increase.
Tata Elxsi has recently won many deals. 

Let's look at the key deal win:

• Tata Elxsi added a new age automotive OEM in North America, for software and vehicle electronics development.
• A leading European Tier1 automotive supplier awarded Tata Elxsi a multi-million $ deal for vehicle electronics and software.
• A leading US based OTT technology company selected Tata Elxsi’s FalconEye test automation solution.
• Tata Elxsi was selected by a North America headquartered medical device company, as a strategic supplier for regulatory compliance and development services.
• A leading global technology company selected Tata Elxsi for a multi-million USD research and design project.
• A leading North American Tier1 automotive supplier selected Tata Elxsi for a new program in autonomous driving technology.

Clearly, the pipeline is looking strong and the future growth prospects look very bright. Hence, on future growth prospects, I would rate it 10/10.

Financials

#1 Growth Ratio: 

Over the last 10 years, Tata Elxsi revenues have grown from Rs 411 Cr to Rs 1,747 Cr at a CAGR of 15.5% and Profits have grown from Rs 32 Cr to Rs 335 Cr at a CAGR of 26.4%. That is an exceptional performance. Tata Elxsi is one of the few companies that has consistently grown in terms of revenue for the last 10 years. Overall, on growth ratio, I would rate it 10/10.

#2 Profitability: 

The operating profit of Tata Elxsi are very good with TTM operating margin at 27%. Latest ROE and ROCE for FY20 are 29.5% and 39.1% respectively which is fantastic. Hence. On growth ratio, I would rate it 10/10.

#3 Debt to equity: Tata Elxsi has a negligible debt. Hence, on debt to equity, I would rate it 10/10.

Valuations

In the last 1 year, Tata Elxsi is on its dream run. The share price has jumped from the lows of Rs 500 during Mar 20 crash to current levels of Rs 2700. That's more than 5 times jump within a year.

Now the biggest question is - Can it continue this dream run?

If we look at the valuations of the company, it is currently trading at a PE of 48 and its 5 year median PE is around 27. So clearly Tata Elxsi is training at much higher valuations than its median PE. This makes the share relatively expensive at current levels. Those who entered into this share after the march crash would have made good money. 

The major reason for higher valuation is due to its great performance as well as the current euphoric state of the market. Considering the kind of exciting business company operates in, there is a huge huge scope of growth. They already have won many new deals which will continue to generate more revenue and I think Tata Elxsi would grow at a very good rate. Hence, this is one share investors should keep an eye and can consider buying on dips.