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Why is Tata Elxsi one of the most expensive IT stocks in India?

Why is Tata Elxsi one of the most expensive IT stocks in India?

Last week, Tata Elxsi published its results for the third quarter and announced that their net profit jumped 40% when compared to the same period last year. And while this isn’t exactly spectacular news in its own right, it does look pretty impressive considering the stock has been on a remarkable run for the past few years. So we thought we could look at the company and see what’s brewing at Tata Elxsi.


Tata Elxsi

The Story

Tata Elxsi is no small fish. Granted, it’s not the first company that you think of when you hear the name Tata. But they are doing some incredible work — Most of it related to Embedded Product Design (EPD). Think of a feature-loaded infotainment system, or parking sensors, or voice assistants, or safety systems. Elxsi helps auto component manufacturers design and engineer these products to perfection. And it’s not just automakers — They also help broadcast and communication companies design new-age set-top boxes, cloud services and app frameworks for Smart TV and OTT platforms. They do a lot of sophisticated design work. And they have a client base that includes the likes of Ford, Jaguar Land Rover, Nissan, Mahindra, Motorola, Comcast, Echostar, Panasonic and many more.

In the meantime, Tata Elxsi’s revenue has exploded. The company made Rs 1610 crore in the last financial year and clocked net profits to the tune of 256 crores. The company’s margins are growing and the share price has jumped a remarkable 2600% in the past seven odd years.

But it wasn’t always like this. Tata ventured into Embedded Product Design in the late '90s. The company did reasonably well and it had a sizeable international clientele. That is until the Global Financial Crisis made landfall. Many industries were affected and several clients had to cut Tata loose. For instance, Tata Elxsi derived a substantial portion of its business from Japanese companies operating in the US. They had built a very strong relationship with these people. But as sales declined, these companies started pruning on their R&D spends. Fewer investments in new product design work obviously meant little business for Tata.

So in a bid to keep the business alive, they started dabbling in VFX work — initially, catering to Bollywood projects. That was okay. But then, they slowly started venturing into Hollywood. And if you know anything about the VFX business, you know it’s capital intensive. You’ll have to spend a lot of money upfront, hope you can garner enough business and pray that you eke out a profit after successfully delivering on a project. It’s not for the fainthearted. And soon, Tata saw its profits disappear. Yes, they were still profitable but future prospects were looking pretty grim. This was 2013. However afterwards, they realigned their focus, got back into embedded product design and with the boom of automakers and broadcasting companies in India, they managed to turn the tide.

But that’s not to suggest that everything has been rosy either. One of the biggest concerns for investors 5–10 years ago, was Tata Elxsi’s dependency on Jaguar Land Rover. The company had been working with the famed carmaker since 2000 and the ties only grew stronger after Tata acquired JLR. At one point, the carmaker alone contributed 25% to the company’s top line. That’s not the kind of dependency you love to see. And sure enough, when JLR’s fortunes started turning, it’s contribution started waning in tandem as well. Thankfully Tata was able to offset the negative impact by driving sales across other channels. But even today, JLR alone contributes 16% to the company’s revenues.

Also, we haven’t yet talked about the auto slowdown. As we already pointed out, Tata Elxsi tends to a lot of automakers. So the last couple years have been a bit topsy turvy considering auto sales haven’t exactly been booming. And while the company has in fact laid out a plan to diversify and focus on other businesses like rail communication and aerospace stuff, their contribution is still marginal. On the flipside, broadcasting and communication business is booming. With the sudden rise in data and content generation, big broadcasters and OTT platforms are using Tata Elxsi’s expertise to stay ahead of the game. It’s growing at 20% every year and it was the biggest revenue generator for the company in the last quarter. Also EPD work in the health care and medical business saw very healthy growth thanks to Covid. And while its relative contribution to the top line isn’t substantial, the company makes pretty sweet margins here. And all of this has culminated rather spectacularly this quarter — with Tata Elxsi earning operating margins of 30%, highest in its lifetime.

In fact, as it stands it’s one of the most expensive stocks in the IT industry (with a P/E of 46 compared to the industry average of 25). Meaning, people are betting big on the company’s future potential and they are willing to pay top money for the stock right now. Will this momentum continue? We don’t know. But what we do know is that Tata Elxsi has scripted a rather remarkable turnaround this past decade and there’s no doubt that the company is making quite a name for itself.

Anyway, that’s it from us. But do let us know your thoughts about the company on Twitter. We promise we will retweet the most interesting stuff from our handle.

Until then…

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