Fundamental Analysis of Tata Elxsi: The shares of Tata Elxsi went up more than 10x from their June 2020 levels in less than 2 years. The stock recorded its all-time high of Rs 10,760 in August last year. However, the performance has been dismal since then with the stock coming down to Rs 7,750.

So what really happened at the company? Such a boom and then some 30% fall? What can present and future investors expect in the coming quarters? We’ll attempt to answer these and other questions by performing a fundamental analysis of Tata Elxsi.

Fundamental Analysis of Tata Elxsi

We’ll start our analysis by getting acquainted with the history and business of Tata Elxsi. We’ll learn what it does as a technology company Later, we’ll look at the global software development industry landscape. Then we’ll move at pace through the financials of the stock. A highlight of the future plans and a summary conclude the article at the end.

Company Overview

Owned by the salt-to-software conglomerate the Tata Group, Tata Exlsi was founded more than three decades ago in 1989. It was established to provide electronic, embedded systems and software application development services.

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Fast forward to today, it is one of the leading companies in design and technology services. It employs over 11,000 people and has a strong presence in more than 16 countries. Over the past several years, the technology company has built several in-house platforms to service its clients.

Tata Elxsi has three key verticals: automotive, media, broadcast & communications, and healthcare. It provides a broad range of technology services including software development and allied services under these verticals. 

The image below highlights the performance and contribution of three industry verticals of Tata Elxsi for the financial year 2022-23.

Fundamental Analysis of Tata Elxsi - tata elxsi annual report
Source: Tata Elxsi Ltd. Annual Report FY 2022-23

Its offerings include solutions for autonomous driving, electrification, advanced driver-assistance systems, signal processing, network architecture, wireless protocols, regulatory compliance services, agile-based technical documentation remediation framework, and more.

We got a good understanding of the business and the different verticals of the company. Let us now move forward to read about its various reporting segments for our fundamental analysis of Tata Elxsi.

Segment Analysis

For reporting purposes, Tata Elxsi segregates its services into two operating segments: software development & services and system integration & support services. The latter is rather small in size than the former. Furthermore, its contribution to the total EBIT share is negligible at 0.4% only. 

The table below represents the revenue share, EBIT share and EBIT margin of the two business segments of Tata Elxsi for the financial year FY 2022-23.

SegmentsRevenue ShareEBIT ShareEBIT Margin
Software development & services97.599.634.79
System integration & support services2.50.44.84
(figures in %)

Talking about the geographical presence, the European region contributes to 42% of the total revenues followed by the US region with a 36% share.

The figures below represent the share of different geographies in the contribution of the total revenue of Tata Elxsi for the fiscal year ended 2022-23.

Geographical SegmentsRevenue Share
India17
Europe42
US36
Others5
(figures in %)

We read above how Tata Elxsi has cost competitiveness as it primarily services offshore clients in Europe and the US. In the next section, we’ll learn about the engineering research and development (ER&D) (the sector in which the company operates) landscape.

Industry Overview

As per data from NASSCOM, the revenue of the Indian ER&D industry is projected to grow fast and reach $ 41 billion in value in 2023. It is a 13.9% year-on-year growth of over $ 36 billion the industry attained in the 2021-22 period. 

tata elxsi annual report 2022-23
Source: Tata Elxsi Ltd. Annual Report FY 2022-23

The rapid growth is driven by higher ER&D spend by corporations across the globe. Among other industries, automotive, telecom and medical devices are seeing record deals putting Tata Elxsi in a sweet spot as it provides design-led ER&D services within these key verticals.

Furthermore, the sector is experiencing a big shift as clients are increasingly taking maintenance,  regular updates, and data analytics services as well. This is a big shift from the erstwhile design and deployment model. The transformation has helped ER&D players in increasing the product life cycle, consequently opening up multiple monetisation areas.

Tata Elxsi – Financials

Revenue and Net Profit Growth

The revenues and net profits of Tata Elxsi grew at a fast pace in the last three financial years. All three verticals of Tata Elxsi saw explosive growth in the recent fiscals. The recovery in the automobile industry, rising healthcare spending in the wake of the Covid-19 pandemic and growth of OTT platforms aided the company to record higher sales.

The table below showcases the growth in the revenue and net profit of Tata Elxsi over the recent financial years.

Fiscal YearOperating RevenueNet Profit
20233,145755
20222,471550
20211,826368
20201,610256
20191,597290
5-Yr CAGR14.5%21.1%
(figures in Rs Cr except for CAGR)

Profit Margins

Being a technology company with low variable costs, higher sales growth resulted in margin improvement for the company. Both EBITDA margin and net profit margin stood at their high of 30.6% and 24% in FY23.

The figures below represent the EBITDA margin and net profit margin of Tata Elxsi over the last five financial years.

Fiscal YearEBITDA MarginNet Profit Margin
202330.624.0
202231.022.2
202128.620.2
202021.315.9
201928.718.2
(figures in %)

We learnt above how the sales and net profits of Tata Elxsi grew in recent years. Let us see its impact on the overall profitability of the stock in the next section on return on equity (RoE) of our fundamental analysis of Tata Elxsi.

Return on Equity / Net Worth (RoE / RoNW)

The two return ratios: return on capital employed (RoCE) and return on equity / net worth (RoE / RoNW) are used to measure the profitability of any company. Since Tata Elxsi has been a debt-free stock for many years, we’ll study RoE / RoNW only.

The recent years, higher earnings helped the company to post higher RoE figures. The technology stock clocked RoE of 36% and 34% in FY23 and FY22 respectively.

The table below presents the return on equity / net worth (RoE / RoNW) of Tata Elxsi for the past few years.

Fiscal YearRoE
202336
202234
202127
202023
201931
(figures in %)

Debt Analysis

We’ll keep the debt analysis brief as being a technology company, Tata Elxsi is a debt-free stock. Hence, an in-depth leverage analysis is not required.

Future Plans of Tata Elxsi

So far we looked at the previous fiscals’ data for our fundamental analysis of Tata Elxsi. Let us try to get a sense of what lies ahead for the company and its investors.

  1. The management of Tata Elxsi is optimistic about the opportunities arising from software-defined vehicles and Advanced Driver Assistance Systems (ADAS) as OEMs focus extensively on crafting in-vehicle experiences for buyers.
  2. The company has expertise in customer premises equipment (CPE) like set-top boxes and gateways giving it an added advantage to tap the growth of ongoing on-demand video and OTT platforms segments.

Fundamental Analysis of Tata Elxsi – Key Metrics

We are almost at the end of our fundamental analysis of Tata Elxsi. Let us take a quick look at the key metrics of the stock.

CMP₹7,559.95Market Cap (Cr.)₹46,918 
EPS₹121.0Stock P/E62
RoE36%Dividend Yield0.8%
Promoter Holding44%Book Value₹335
Debt to Equity0.09Price to Book Value23.1
Net Profit Margin24%EBITDA Margin31%

Conclusion

As we conclude our fundamental analysis of Tata Elxsi, we can say that the business happened to be in a fast-growing space as the respective industries grew fast on a low base and changing dynamics. Going forward, it will be interesting to see whether the company will be able to continue its pace of growth.

However, the fall in share price hints that Dalal Street thinks it may not grow at the same pace in the future. In your opinion, can the stock increase its earnings at the same pace in the future? What are your thoughts on Tata Elxsi? How about we continue this conversation in the comments below?

Written By – Vikalp Mishra

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