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Tata Elxsi Analysis – Best time to buy or wait?

The Indian IT industry has been the hottest sector in the past two years. However,the global economic crises, Startup funding slowdown and various other factors have led to stunted growth of the IT industry along with other sectors. While the long-term view still remains strong, in the short term, it becomes important that we choose companies for our portfolio after proper research. In this article we will talk about one such IT company  – TATA ELXSI.

Tata Elxsi is a global design and technology services company. Their product portfolio includes engineering and design, technology, and consulting services for automotive, broadcast, communications, healthcare, and transportation industries. Tata Elxsi is no small fish; it is a subsidiary of the Tata Group, which is one of India’s largest conglomerates. I have also made a report on Tata Steel share price target which is another giant company from the group.

Table of Contents

What does Tata Elxsi do?

Tata Elxsi offers end-to-end product engineering and design services to various industries. These services include product ideation, design and development, testing and validation. Some of their clients are multinational companies like Ford, Nissan, Mahindra, Jaguar Land Rover, Motorola, Comcast, Panasonic, and the list goes on.

Tata Elxsi is focusing on application areas that are expected to grow in the near future. These ambitious goals are driven by long-term trends in digital technology. The company have expanded their portfolio of patents and IP solutions across different industry segments. 

Tata Elxsi has generated returns of 8077% in last ten years! It is one of the Highest return IT stocks in last ten years.

Tata Elxsi's Performance last year

Despite the challenges posed by the pandemic and geopolitical unrest, Tata Elxsi made significant progress during the year 21-22. The company did not shy away from adopting newer working methods. Tata Elxsi not only grew lits revenues, profits, margins, cash generation, and but also returns on capital during 2021-22. Its  operating revenue touched Rs. 2,471 crores in the year 2022.

The company’s Healthcare business continued to grow strongly, while both Transportation & Media and Communications reported sustained growth. The company also won strategic deals in EV and autonomous technologies, highlighting its technology and engineering leadership. But before we delve into the business, let’s talk about the ER&D(Engineering Research & Development) market in India, which is precisely what Tata Elxsi does. 

Future of ER&D market

India has become the premier location for offshoring ER&D services, with a 10-15% market share in engineering and design for various industries. According to Tata, India’s contribution to the global ER&D market will increase from US$ 31 Billion in CY 2019 to US$ 63 Billion by CY 2025. While the CAGR of this market is 12-13%, the Indian ER&D service providers witnessing an impressive CAGR of around 17%.

Tata Elxsi provides ER&D services for Transportation, Media & Broadcasting, and Healthcare verticals. This generates almost 75% of the company’s revenue. The majority of this business comes from high-demand markets like the US and European countries. Indian Rupee’s moderate devaluation over key foreign currencies has helped Tata Elxsi mitigate some of the effects of cost inflation in recent years. Now let us discuss the performance of each individual segment of their business.

Automotive Industry

As per Tata, the demand for new electric vehicles and the demand for predictive technologies is expected to grow. Advancements in Machine learning and AI supports this rising demand. The Company has built strong capabilities in providing services and solutions for CASE(Connected, Autonomous, Shared, and Electric) trends in the automotive industry, focusing on developing an intuitive passenger experience for their growing customer base. 

The Company provides various software development services, with strong capabilities in AUTOSAR, ADAS, V2X, digital cockpit, and other related technologies to cater to the increasing need for digitalisation in the automotive sector.

OTE and Tele Market

The demand for digital channels for business, education, entertainment, and communication services is rising. Global telecom services market is estimated to record a CAGR of 5.4% from CY 2021 to CY 2028. This growth is an effect of increasing demand for high-speed connectivity (All thanks to Jio), growing mobile users, and the digitalisation of the economy.  The OTT market is expected to reach US$ 139 Billion in CY 2028, with a CAGR of 17.7%, and Tata Elxsi has a strong presence in this segment by offering various solutions like TEPlay, QoEtient, and iCX.

Healthcare

The healthcare industry has also seen a rapid acceleration towards digitalisation due to the pandemic, with digital technologies being increasingly used to improve health and well-being. Tata Elxsi has offered cutting-edge solutions for helping global companies streamline existing processes for improved efficiency and create new business opportunities and revenue streams. TEDREG, a regulatory intelligence platform, provides actionable insights to manufacturers for new market launches and product sustenance. The digital health market is expected to grow to more than US$ 400 Billion by CY 2025.

Software Development Services

The company’s software development and services division generated Rs. 2,421 crores in revenues and registered a growth of 35.9% YoY. This is combined from all divisions including transportation, broadcast & communications, and healthcare deals.

Tata Elxsi reported strong revenue growth across its transportation, media, broadcast, & communications, and healthcare segments. Its transportation segment posted strong growth due to its focus on diversification, accelerated customer acquisition, and de-risking revenue dependency. The company has been engaged with world-renowned automotive OEMs and suppliers for the development of future mobility. Its media, broadcast, and communications segment accounted for 39% of Tata Elxsi’s operating revenues, generating Rs. 960 crores, and reported a growth of 32%. Its healthcare segment especially grew by 72% compared to the previous year and contributed 12.5% to the company’s total revenues.

Financial Analysis of Tata Elxsi

Tata Elxsi's Business Overview

In the fiscal year 2021-22, Tata Elxsi reported that their operating revenues increased by 35% compared to the previous year, mainly driven by an increase in volume of their sales. This, along with a constant currency growth of 34% YoY. EBITDA was up 47% YoY, and EBITDA margins were up 240 bps. The net profit for the year was registered at Rs. 549.7 crores, up 49% YoY. The offshore share of onsite-offshore revenue mix was at 74.5%, highlighting the company’s mature offshore delivery processes and project management capabilities. Employee engagement was high, with a relatively low attrition rate due to the company’s initiatives to provide a healthy working environment. The top 10 clients accounted for 46.5% of customer revenue concentration, and the US contributed 42%, Europe 31%, and India 16%.

Tata Elxsi's Key Financial Ratios Comparison

Particulars (in Lakhs)2021-222020-212019-20
Net profit after tax54,96736,81225,610
Income tax expense19,58214,3749,634
Depreciation and Amortisation5,5344,4384,341
Operating profit before working capital changes78,94554,89736,515
Net cash (used in)/generated from operating activities48,30343,73925,576
Net cash (used in)/generated from investing activities10,82943,7733,898
Net cash (used in)/generated from financing activities32,61012,64612,371
Cash and cash equivalents at the end of the period15,11110,04222,842

Profitability

tata elxsi net profit
Tata Elxsi net Profit in crores
  • Operating Margin: As per Tata Elxsi’s FY22 annual report, the operating margin is 31.03%, indicating excellent operational efficiency.
  • Return on Equity (RoE): Tata reported its RoE as 37.23%, which is equivalent to pre covid levels (2018). The Return on Equity has been hovering from 35% to 46% for the last 10 years. However, the important thing to note is that TataElxsi’s Net Profit has grown to 550 crores. 

    This is 49.45% higher than the last year. This implies that Tata Elxsi is able to generate more profits with the same level of equity. A variety of factors such as increased revenue, improved cost management, or greater operational efficiency can lead to higher RoE.

Efficiency

  • Inventory Turnover Ratio: Tata Elxsi’s inventory turnover ratio is at 7839, which grew from 954 in 2020 and 2058 in the year 2019. This means that Tata Elxsi is able to sell its goods and services much faster than ever, indicating high demand for its products. 

Valuation

  • As of April 29 2023, Tata Elxsi’s P/E ratio is 57.97, double that of industry P/E. A higher P/E ratio suggests that the stock price is high relative to its earnings. This may mean potential overvaluation of the stock.
  • EV/EBITDA – EV/EBITDA for Tata Elxsi is 40.28, more than double the industry average. On books, Tata Elxsi is overvalued at its current price point.

Technical Analysis of Tata Elxsi​

Technical Analysis of Tata Elxsi​​ #2

As of April 7th, Tata Elxsi’s share price was ₹6661.25, down almost 47% from its all-time high of ₹10760 in August 2022. However, the stock is now trading above the 50% level, which typically acts as strong support.

As the stock continues to rise, it may experience selling pressure from those who were stuck with entries during the fall as they may close their positions. If the overall market supports it, we may see higher highs, but if not, lower levels around ₹4700 may be seen in the coming months.

 In fact, the price has even formed a higher high after a long time. On a daily timeframe, the stock has given a breakout from the triangle pattern and formed a double top pattern, indicating that it should perform well in the short term. However, it’s recommended to wait for a retest of the ₹6200 mark before entering.

Should you buy Tata Elxsi at current price?

You may have noticed that the current price of Tata Elxsi is quite high, which might make you hesitant to invest. It’s true that the valuation is currently on the higher side. Looking back at the historical stock prices, we can see that the company has been trading at expensive valuations on:

  • 25-03-2020 at 500
  • 21-12-2020 at 1468
  • 29-11-2021 at 5363
  • 24-11-2022 at 6611
  • 17-08-2022 at 10760
  • 22-09-2022 at 8990
  • 24-11-2022 at 6615

However, it’s important to note that as long as the company’s growth remains strong, the stock will continue to trade at higher valuations.

Tata Elxsi competitors and Peers

COMPANYPRICERs.MCAPCr.P/BP/EEPSRs.ROE%ROCE%P/SEV/EBITDA
Infosys1,259.105,22,446.277.8122.4556.0834.3346.414.2114.93
HCL Tech.1,055.552,86,440.926.9725.0042.2325.2730.907.0516.31
Wipro379.402,08,217.763.3222.6916.7224.5827.653.5014.57
LTIMindtree4,487.851,32,770.058.3031.19143.8729.7440.129.2220.74
Tech Mahindra1,036.401,00,962.224.0126.7338.7819.6523.812.9116.92
Tata Elxsi6,660.2541,477.6721.9858.12114.6037.2351.2016.7940.56
L&T Technology Serv.3,676.7038,835.038.2834.97105.1325.2635.246.6121.20
Persistent Systems4,639.7535,691.288.7545.11102.8423.1630.209.9828.48
Mphasis1,82034,299.726.8524.2675.0228.7736.114.6416.10
Oracle Finl. Service3,665.9031,705.435.2817.89204.9432.5141.578.1411.77

Tata Elxsi share price target 2025

Tata Elxsi which is currently trading at ₹6662 can touch its previous highs of ₹10660 by 2025 if the overall market supports it. Its a great IT company with strong fundamentals that you can have in your portfolio for long term.

Tata Elxsi is growing at a strong pace. With its evolving technology and good management, the stock will continue to create value for investors. You can decide your entry level according to your risk appetite. Finally, it is important that you believe in the business before investing. We shall meet again in the next post! Signing off for now.

2.7/5 - (16 votes)

Disclaimer: Stock targets and forecasts are for educational purposes only and may not be reliable for investment decisions. Use this information at your own risk. This is not an offer to buy or sell stocks. Dailybulls.in and its authors are not liable for any losses. It is not investment advice; seek professional advice before making any investment decisions. Exercise caution and be informed when investing.

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