Tata Elxsi Ltd (Rs 175)    (BSE Code – 500408 NSE Code – TATA ELXSI)

(P/E – 9, Dividend Yield – 4%, Market Cap – Rs545 cr)

Tata Elxsi Ltd (TEL) is a technology company with a distinct focus on design. It delivers outsourced product design and R&D services and solutions to customers worldwide through four core practices: product design services, engineering design services, system integration services, and visual computing labs. The company has a team of more than 2,000 engineers and designers. Tata Elxsi broadly operates under two divisions – software development services (85% of revenues) and systems integration. The software development division comprises of two high growth areas – product design services catering to clients in consumer electronics, multimedia, wireless communication and automotive electronics. The visual computing division develops graphics and special effects and creates animation films.

Tata Elxsi’s product design services offerings address a wide variety of specialized technologies ranging from automotive systems, very large-scale integration (VLSI) design, embedded systems, networking, digital signal processing, multimedia and storage systems. Tata Elxsi’s engineering design services business holds a strong potential for sizeable growth in the coming years, with incremental technology spending in the industry like automotive styling, consumer products and packaging design of FMCG goods. The visual computing lab division of Tata Elxsi is focused on providing world-class, quality animation (2D & 3D), special effects, and gaming services to customers worldwide. This division has already done some great projects in the domestic market including movies like Bunty aur Babli, Jodha Akbar, Salaam Namaste, Rang De Basanti. The company has also done some big projects in Hollywood such as XXX2 and Into the Blue.

In the Telecom segment, TEL works with telecom network manufacturers and phone companies in the wireline, wireless as well as wireless-broadband space. Tata Elxsi develops applications and software components that are built into telecom infrastructure. The company develops solutions value-added services such as MMS and Mobile TV to be integrated to mobile phones. Wimax is another focus area for the company and has deal wins in the US in this segment. All these factors represent strong opportunities for Tata Elxsi, which it is well placed to tap, thanks to its existing working relationships in the design engineering space such as Tensilica, ARM, Altera and Xilinx

TEL has reported a top-line CAGR of more than 16% since past nine years. PAT has grown at a CAGR of nearly 31% since FY2000. The company was able to maintain its top-line in the fledging market in FY2009 and also delivered a 10% growth in bottom-line over FY08 PAT. For the year ended March 2009, Tata Elxsi reported 4% growth in the net sales at Rs 418.6 cr. and operating profit grew 6% at Rs 81.41 cr. The PAT was up10.5% at Rs 58.1 cr.. On a equity of 31.14 cr (Promoters’ stake- 44%) the EPS stood at Rs 18.65 and the dividend declared was 70%. For the Q1 ended June 2009, TEL posted net profit of Rs 7.21 cr (up 1.4%) on net sales of Rs 90.47 cr.(down 6.5%) cr.. Due to cyclical nature of TEL’s business, Q1 is the weakest and the company can be expected to post moderate growth in top line and bottom line for FY10. At the current price of Rs 175, the stock trades at a PE of 10.3 times FY09 earnings (Rs 16.9) and at 8.7 times FY10 earnings (Rs 20). At CMP of Rs 175, the TEL stock is available at a dividend yield of 4%.

Going forward, TEL is looking to enter the defence market where it sees significant growth opportunity. The defence market is the least affected by the downturn and there are large budgetary allocation and spends. TEL has already been engaging with overseas defence companies in areas such as security, surveillance and communications. The security-related deals include functions such as image capturing using radar or satellite and processing them to gain intelligence. In the communication space, projects include setting-up WiMax networks for secure communications. Research firm Frost & Sullivan estimates the Indian defence market to touch $36 billion by 2013. Strong presence in the product design and engineering segment, emerging opportunities in developing full-length animation films, which Tata Elxsi appears well placed to tap, and an expanding presence in lucrative markets may drive growth for the company. The skill-intensive nature of its business sets its apart from other software companies and deserves better valuation. In another important development, at the Board Meeting held on September 07, 2009, Mr. S. Ramadorai was appointed as Chairman of the Company. Investors can start accumulating the stock at current levels and add more on declines for decent returns of 40%-50% over the next 6-8 months