TATA Elxsi Stock Analysis

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Let’s delve deeper into TATA Elxsi Stock Analysis.

Business:

  • Part of strong Tata Group and was incorporated in March 1989.
  • Amongst the world’s leading providers of design and technology services across industries including Automotive, Broadcast, Communications and Healthcare
  • It address 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 OEMs and suppliers in the automotive and transportation industry for R&D, design and product engineering services from architecture to launch and beyond. Service offering include AUTOSAR development, Model based design, Hardware design and development, Verification and validation, Functional safety etc. (Automotive)
  • They work with broadcasters and operates to create a solutions for smarter living, engaged entertainment and a digital future driven by IOT( Internet of things), analytics and AI (artificial intelligence). Company has built differentiated capabilities to support the development and launch of OTT services. (Broadcast)
  • They work with medical device OEMs and technology companies for market research and human factor engineering, verification and validation (like adopt automation in V&V process), regulatory standards and compliance requirements along with technologies such as artificial intelligence, cloud and IOT basically offering Product engineering, Value analysis like product line extension for new market segments (Healthcare)
  • Company’s largest division is EPD (Embedded Product Design Division) which provides technology consulting, new product design, development and testing services for automotive, broadcast, consumer electronics, healthcare, telecom and transportation industries.

What is IOT and why it held so much importance especially now?

  • IOT (Internet of things) simply means taking all the things in the world and connecting them to the internet especially after the pandemic importance and future of IOT is more so relevant.

What is AUTOSAR ?

  • A consortium founded in 2003 by automotive giants like BMW, Daimler, VW, Ford,GM etc in which automobile manufacture, supplier, software and tool developers work together in one roof.
  • The objective is to make standardized application software with basic functions as modern day cars have many ECUs (Electronic controlling unit) with thousands of functions which often rewritten from scratch.
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What is OTT?

  • Stands for over the top (OTT) in simple words content is delivered via an internet connection. Like Zee5 or Netflix work on OTT platform.

Companies operations are classified into two business segments:

  • Software development and services
  • System integration and support services

Recent Developments and Important highlights about business.

  • Company has partnered with Tata motors in developing unified connected platform that powers the Nexon EV range of electric cars.
  • Company has partnered with ZEE5 to provide integration of ZEE5 with video backend, Multi- front end user experience and multi – CDN networks.
  • Company has alliance/Consortium/Support Partner with names like Apple, Qualcomm, Autosar, Dell, Microsoft, Siemens to name some.
  • Companies key clients include pansonic, whirlpool, unilever, Tata BP, Hitachi, canon amoung others.

Management and Shareholding:

  • Trust worthy name of Tata with its Chairman Mr. N Ganapathy Subramaniam who is also COO of TCS since February 2017 who served before that as Executive vice- president and head of TCS Financial solutions.
  • He has indepth knowledge about technology trends, systems and policies of leading global corporations and international business.
  • In promoter group Promoter holding include 44.53% Tata Sons holds 42.2% and Tata Investment Corporation holds 2.3% .
  • Mutual funds holds 2.44% with total Institutional holding upto 14.6%.

FUNDAMENTALS/FINANCIALS:

  • Company’s business works on Asset light model (On 31 March 2020 PPE accounts for 5.9% of Total assets) and PPE remains more or less with the range in amount terms but assets increasing year after year hence reduced % of PPE of total Assets year by year which is also helping in improving FCF YoY.
  • Also needed to highlight is the conversion factor for PAT into FCF which is also improving and for FY20 was as high as 91%.
  • Total FCF of Company generated in last 5 years comes to around 803cr compared with Total capital expenditure in PPE and intangible assets which comes to around just 131cr that means company must be cash rich which can be seen by continuous increasing Cash and Bank in amount as well as % of Total Assets and hence always paying good dividend.
  • Other income is rising YoY due to interest from Fixed deposits which rose from just 8.5cr in FY16 to 32.7cr in FY20 due to Increase n Fixed deposits which forms part of C&B from just 143cr in FY16 to 430cr in FY20.
  • Also as company’s 88% of Revenue comes from Outside India Foreign currency gain/loss also majorly effect other Income . As for FY20 company had a gain of around 20cr which resulted in Other Income shot up to 58cr.
  • As on 31 March 2020 cash per share in books stands at 107 per share which is around 8.3% of CMP and Combined with Dividend per share at 16.5 per share so together 123.5 per share i.e. around 9.6%.
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Particular (in Cr)31 March 202031 March 201931 March 201831 March 201731 March 2016
PPE82.387.381.792.387.8
% of Total Assets5.9%7.6%8.6%12.9%14.6%
PAT256290240175155
FCF233.4183.4185.4118.182.9
FCF/PAT91.2%63.2%77.2%67.5%53.5%
C&B balance664.2515.8394.3251.5182.4
% of Total Assets47.8%45.1%41.2%35.2%30.4%
Dividend Per share16.513.511.016.014.0
Other Income5843421812
  • One of the very few companies whose Revenue has never declined in last 10 years and grew at CAGR of 15.6%.
  • EBIT margin has been increasing YoY from FY16 to FY19 from 20.9% to 24.4% but reduced to 18.6% in FY20 due to rise in Employee cost which rose by around 15% in FY20 YoY however Revenue rose by just around 1% and hence employee cost as % of revenue shot up to 59% in FY20 from around 53% in FY19 and similar reduction is seen in PAT margin.
  • Employee cost rose significantly due to both rise in number of employees and also cost per employee which resulted in Margin per employee reducing just to 10lac although rising employees shows company high growth expectation of business by company and who effect will be seen in future.
ParticularFY20FY19FY18FY17FY16
Revenue from operation16101597138612371075
Net Profit- Ex Other Income218.04261.19212.28163.12147.08
NP Margin -Ex Other     
Income13.5%16.4%15.3%13.2%13.7%
Total expenses1315.81206.91065.6967.6851.7
Employee cost950.9842.6748.7665.7576.5
% of Revenue59.1%52.8%54.0%53.8%53.6%
No of Employee (Number)65776060528752054452
Cost Per employee (Lac)14.513.914.212.712.9
Revenue Per Employee (Lac)24.526.426.223.624.1
Margin per Employee (Lac)10.012.512.110.911.2
Other Expense234.9240.4214.3198.5181.7
% of Revenue14.6%15.1%15.5%16.0%16.9%
EBIT- Ex Other Income299.59390.03320.7269.7224.5
EBIT Margin- Ex Other     
income18.6%24.4%23.1%21.8%20.9%
  • Company’s dependence on US and Europe has been always around 75% of total Revenue while contribution from India has been reducing which is offset by Other Countries share which rose from 7% to 12.5%.
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Revenue by Geography

CountryFY20FY19FY18FY17FY16
India11.9%12.1%12.7%15.5%15.7%
US34.6%30.7%29.6%32.9%31.7%
Europe40.9%44.2%43.8%43.5%45.6%
Others12.5%13.1%14.0%8.2%7.0%
Total Revenue100%100%100%100%100%
Exports88.1%87.9%87.3%84.5%84.3%
  • Inspite Pandemic impact companies Revenue and Pat in Q1FY21 gave decent numbers as Revenue degrew by 8.9% and Pat de grew by 16% QoQ ,Pat degrew much higher due to employee cost which have remained around the same level 251cr vs 254cr QoQ.

  • EPD division ( Embedded Product Design) which contributes more than 85% of revenue earns revenue from 3 industry verticals mainly.
  • Over time Dependence on Transportation(Automobile) sector has been strategically reduced by company and Broadcast,Communication & healthcare improving both of them are currently in much demand and will play a major role even after Covid19 has gone.
EPD – Industry VerticlesQ1FY21Q4FY20Q3FY20Q2FY20Q1FY20Q1FY19
Transportation42.1%47.1%48.6%48.2%46.6%53.4%
Boradcast & Communication45.0%40.9%39.2%40.9%41.3%36.3%
Healthcare & Medical      
Devices8.6%7.7%8.3%6.5%7.7%3.2%
Others4.3%4.4%3.9%4.2%4.4%7.1%
  • Customer concentration is very high for the company i.e. in Q1FY21 Top 5 customers contributed 38.9% and Top 10 customers contributed 50.7% of revenue while a single customer dependence max was 16.7% which thereby need wider diversification to reduce any significant risk on loss of any major customer.

PROs

  • One of the very few companies whose Revenue has never declined in last 10 years and grew at CAGR of 15.6%.
  • Company has continuously reduced its dependence in automobile sector while Broadcast, Communication and healthcare segments promise high growth in long term and as and when Automobile start reviving the drag while turn into significant revenue push.
  • Return ratios are attractive ROE 25%, ROCE at 34%, with Cash rich/Dividend paying company which together stands at 9.6% of CMP.
  • Company has tie ups/alliance with big names.
  • Company FCF generation is improving and outstanding thus making it cash rich.
  • Company R&D expenditure expenditure remain at around 1.4% of Total revenue and increased employee shows positive outlook for business.
  • Institutional holding at 14.6% .

CONs

  • Company is fairly valued trading at a PE of 29 but as highly technology driven business demands premium valuations although currently should be on watchlist and any fall should be used to add as based on DCF comes to around 1192 a base case estimate neither pessimistic nor optimistic.
  • High concentration of Top 5, Top 10 customers.
  • Significant portion of revenue comes from Outside India thus exposes to adverse changes in Foreign currency.

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Arman Nahar
C.A. who is a USA CFA L3 candidate | Cleared L1 & L2 | Doing independent equity research since 2016 | Screens stocks for investment | Makes in-depth valuation models | Crafts portfolios.
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