Tata Elxsi is software products and sevices company promoted by much renowned Tata group. It was created as a joint venture between Tata and Elxsi, a maker of mainframe computers and incorporated in 1989 as a hardware manufacturer of computer servers. Elxsi went bust in early 90’s as mainframes went out of fashion. Only the name remained after so many years.
Tata Elxsi has four product divisions – Product Design Services, Industrial Design Division, Visual Computing Labs and System Integration Services. However, it reports revenues as two segments – Software Development Services and System Integration Support & Services. It is not very clear as to which product division fall under what segment but seems that the first two product divisions are reported combined in Software Development Services while System Integration Services and Visual Computing Labs are reported with System Integration Support & Services. Software Development Services form major chunk of the total revenues. [already confused with so many similar sounding divisions/segments?]
Product Design Services division appears to be usual service company operation in software, hardware, systems, vlsi, basically whatever comes in the way. It claims to have domain and technology expertise in VLSI design, embedded software, networking, telecom, multimedia, storage, wireless and high-performance computing. This perhaps cover almost all the domains in electronics Industry. This division completes with lot of Indian companies operating in embedded and VLSI space vying for outsourcing pie from companies operating in electronics space. This division might be constituting more than 80% of the revenues.
Industrial Design Services is somewhat more interesting as it is different from other IT companies. This division provides complete product solutions to clients across multiple industries like FMCG, consumer electronics, transportation etc. This division has worked on many successful product designs including the Pureit water filter and Pond’s for Hindustan Unilever, Horlicks Junior and Women’s Horlicks for GlaxoSmithKline and styling intent and Class A surface development for car makers such as Jaguar, Land Rover and Nissan. As interesting it may sound, but we do not know how much money it really makes and contributes out of the total pie.
Nothing much to take note for System Integration Services where it competes with number of System Integrators (SIs) across the globe. Visual Communication Labs division is interesting with its hand behind special effects and animation in many Indian Movies.
With major chunk of revenues coming from Product Design Services division, the growth is tied to overall growth of embedded and IT industry. The strength lies in the brand name associated with Tata group. This can also bring in work from Tata group companies and companies enjoying close relations with Tata. There is also a possibility that it get merged with TCS, another Tata company and leading IT Services company. However, there has been no signal from any of the companies for this. There is no significant competitive advantage apart from being a Tata group company. Recently company has been showing very bullish signs and have taken the fancy of analysts. Appointing Mr. S Ramadorai, ex-TCS CEO as Chairman has added more fuel to the fire.
It needs to be seen how the company can diversify the business from Product Design Services to other three divisions. Company has already been investing heavily in VCL division. Results are yet to be seen. It would also be interesting if the company gets in product development or IP development in a big way. The space is very crowded and it will be difficult to make a mark but the upside is very high if it gets successful.
Coming to numbers, for year ending March 2010, Tata Elxsi reported revenue of Rs 3.88 billion down from the previous year (Rs 4.19 billion). Net profit was Rs 488 million versus Rs 581 million. Total capital employed was Rs 2.14 billion. That comes to 12.6% Net Profit Margin and 22.8% ROE. The dividend yield has been always good. The market cap had started seeing action 6 months back after being subdued for a long time. Perhaps the time of making obscene money on the stock is gone.
Disclaimer: I hold the stock. I bought it at very low price when it was grossly undervalued. I can sell it anytime I need money or find another opportunity or just feel like doing so.