TATA ELXSI : AT THE FOREFRONT OF TECHNOLOGY
Tata Elxsi caters to the demand for complete product development lifecycle from research and development, new product development and testing to maintenance engineering for broadcast, consumer electronics and communications, and continues to grow despite the current critical scenario across the world caused by the pandemic
Tata Elxsi is positioned among the world’s leading providers of design and technology services. These services are provided across various industries including automotive, broadcast, communications, healthcare and transportation. The company assists its customers to re-imagine their products and services via design thinking and the application of digital technologies such as Internet of Things, cloud, mobility, virtual reality and artificial intelligence. Tata Elxsi works with leading OEMs and suppliers in the automotive and transportation industries for research and development, design and product engineering services from architecture to launch and beyond.
It is also connected with leading car manufacturers and suppliers in developing electronics and software for powertrain, infotainment, connectivity, active safety, and comfort and convenience. The company has gained attention due to its unique products such as RoboTaxi, a concept vehicle that integrates AEye’s iDAR with Tata Elxsi’s Autonomai to create a fully autonomous vehicle and AR-V2X which is a first-of-itskind solution that blends the concept of augmented reality and connected car testing. Tata Elxsi caters to the demand for complete product development lifecycle from research and development, new product development and testing to maintenance engineering for broadcast, consumer electronics and communications.
The medical device and healthcare practices of Tata Elxsi come together and 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. The company partnered with Airtel to deliver an engaging digital platform for customers with an innovative hybrid DTH set-top-box – Internet TV – which brings together the best of online content and linear TV on one platform, bridging the gap between online and offline world for TV users. Headquartered in Bengaluru, the company has on roll 7,362+ employees and is spread over 35+ locations.
Sector Overview
The global sourcing market in India continues to grow at a higher rate as compared to the IT-BPM (information technology and business process management) industry. India is one of the key sourcing destinations across the world, accounting for approximately 55 per cent market share of the USD 200-250 billion global services sourcing business in 2019-20. Reportedly, Indian IT and BPM companies have set up over 1,000 global delivery centres in about 80 countries across the world. India has posed itself to be the digital capabilities hub of the world with around 75 per cent of global digital talent present in the country. The IT-BPM industry’s revenue was recorded at around USD 191 billion in FY20, growing at 7.7 per cent YoY. It is predicted to reach USD 350 billion by 2025.
Additionally, revenue from the digital segment is predicted to form 38 per cent of the total industry revenue by 2025. The Indian IT sector’s core competencies and strengths have inclined significant investment from major countries towards it. The computer software and hardware sector in India reported cumulative foreign direct investment (FDI) inflows worth USD 62.47 billion from April 2000 to September 2020. The sector stood at the second position in FDI inflows as per data released by Department for Promotion of Industry and Internal Trade (DPIIT). Geopolitical risks and foreign exchange rate volatility bundled with some slowdown in key industries such as automobiles continue to pose challenges for growth in the future. However, technology and digital spend by customers across verticals are predicted to go up, providing opportunities for service companies to pivot themselves and engage with customers.
Financial Overview
The financial performance by the company shows that on a consolidated quarterly basis the net sales and other operating income increased to Rs 231.28 crore in Q4FY21 as compared to Rs 211.52 crore in Q4FY20, a rise of 9.34 per cent. Operating profit was recorded at Rs 46.89 crore in Q4FY21 as against an operating profit Rs 47.21 crore in Q4FY20, registering dip of 0.69 per cent. Q4FY21 recorded a net profit of Rs 29.83 crore as compared to net profit of Rs 21.85 crore in the same quarter of the previous year, clocking gains of 36.55 per cent. On an annual basis, its revenue rose by 0.8 per cent from Rs 15,969.31 crore in FY19 to Rs 16,098.60 crore in FY20. The total income rose by 16.9 per cent in FY20 as compared to FY19.
The net profit was 11.6 per cent lower in FY20 at Rs 256.10 crore as compared to Rs 289.96 crore in FY19. The company witnessed improvement in the segment revenue for Q4FY21. Embedded Product Design (EPD), the company’s largest division, grew by 5 per cent QoQ, 15.5 per cent YoY whereas Industrial Design and Visualization (IDV) grew by 40.1 per cent QoQ, 39.2 per cent YoY. The system integration and support services clocked gains of 21.3 per cent QoQ, 23.9 per cent on YoY basis. The company has also reported strong cash generation with the operating cash flows and free cash flows numbers growing by 70 per cent. The EBITDA margin stood at 32.4 per cent in Q4FY21 as against 24.7 per cent in Q4FY20.
The PBT margin was recorded at 30.8 per cent in Q4FY21 as compared to 24.3 per cent recorded in Q4FY20. The PAT margin was registered at 21.9 per cent in Q4FY21 as against 18.2 per cent registered in Q4FY20. The transportation segment continued on its growth path with an increase of 3.2 per cent QoQ, led by strategic deals and new projects in the automotive sector. The media and communications segment observed another quarter of steady growth at 5.8 per cent QoQ. Healthcare business delivered another quarter of strong growth at 11.8 per cent QoQ due to large deal wins. Business growth was also led by the US and India with both reporting 21.1 per cent QoQ growth while Europe grew by 1.6 per cent QoQ.
Threats, Concerns and Risks
The corona virus outbreak has posed elevated levels of risk for global economies. The intelligence in the market predicts that businesses across the globe will remain uncertain as China, US, UK and major European countries struggle to cope with the pandemic. Geopolitical risks and forex volatility are expected to impact for some time and protectionist policies may impact business in certain geographies. However, the value proposition of Tata Elxsi of combining design and technology to solve problems, deep technology capabilities, diversified talent pool and execution excellence that has been established over the years continues to be relevant for today and the future.
Tata Elxsi collaborates with leading broadcasters and operators to create solutions for smarter living, engaged entertainment and a digital future driven by IoT, analytics and artificial intelligence which thereby introduce new revenue streams and enhanced customer experience.
Conclusion
India is the topmost offshoring hub for IT companies across the world. The sector has proven its capabilities in delivering both onshore and offshore services to global clients. The new emerging technologies currently offer an entire new ambit of opportunities for top IT firms in India. The industry is expected to grow to USD 350 billion by 2025 and BPM is expected to account for USD 50 to 55 billion of the total revenue. The penetration of high-speed internet, smart devices and content flooding in the market along with the line between entertainment, media and telecommunications have disappeared.
New services such as smart, connected homes and OTT are placing fresh revenue opportunities for operators and broadcasters. Tata Elxsi reports that it has witnessed inflow of some key deal wins which include a leading global automotive OEM selecting it for a multi-year and multi-million USD connected vehicle program for one of their key markets that will leverage its IoT platform and a leading European Tier I automotive supplier joining hands with Tata Elxsi as a strategic partner for next-generation cyber security services. Also, a leading US-headquartered medical devices company has awarded Tata Elxsi a multi-million USD deal for development and regulatory services.
Tata Elxsi collaborates with leading broadcasters and operators to create solutions for smarter living, engaged entertainment and a digital future driven by IoT, analytics and artificial intelligence which thereby introduce new revenue streams and enhanced customer experience. The company has delivered a stellar performance in the fourth quarter of FY21. It has also planned a wage hike rollout which would be executed by Q2FY22, and additional onemonth bonus would be given by Q1FY22 or Q3FY22. The company’s payout is also enhanced with dividend of Rs 24 (Rs 16.5 in FY20) along with a one-time special dividend of Rs 24.
A strong scalability in business can be predicted with a more than 20 per cent CAGR expected over FY21-24. High offshoring and low attrition has led to low cost of delivery and hence higher execution framework. The company depicts improving growth visibility pertaining to a boost in deal wins which also include strong deals in the pipeline within large accounts. Also, the IP deals and strong partnerships augment further growth for the company. Hence, predicting optimistic future outlook for the company, we recommend BUY for this stock.