Tata Elxsi

Investors with a two-year horizon can buy the shares of Tata Elxsi, a niche software services provider, considering the improving prospects in its key business segment and the stock’s availability at an attractive valuation. At Rs 166, the share trades at nine times its likely 2009-10 per share earnings. Investors also have an added incentive in owning the share as it is a relatively high dividend-yielding stock. The dividend yield is around 4-5 per cent, based on payouts so far.

Despite 2008-09 being a challenging year for all software players, more so for niche providers, Tata Elxsi has seen its revenues grow 4.3 per cent to Rs.419.4 crore, while net profits expanded 10 per cent to Rs 58.2 crore. After a tepid first quarter, the company has seen further improvement in revenue growth in the September quarter.

Tata Elxsi broadly operates in two segments – software development services (mainly product design and industrial design services) and system integration. The relatively high-margin software development services segment has increased contribution over the years and forms a pie of nearly 90 per cent of the overall revenues in the current fiscal. Recovery in some of the key sectors where the company operates such as automotive, semi-conductors, broadcast and consumer electronics augurs well for the company. Even in 2008-09, revenues from its software development services went up by nearly 8 per cent, while system integration revenues declined. Pointers are also emerging on improving business confidence in key segments.

Gartner reports indicate that semi-conductor revenue in 2010 is expected to bounce back to the same revenue level as 2008 at $255 billion, a 13 per cent increase from 2009. In another report, Gartner also predicts that worldwide smartphone sales will grow by 29 per cent year-over-year to reach 180 million units in 2009. Car manufacturers around the world are increasingly adopting “electronics” for more comfort features and design and also for new concepts such as electric and fuel-efficient cars. Studies by Strategy Analytics Automotive Electronics suggest that electronics is likely to account for 35 per cent of the total cost of a car by 2010. All these point to the possibility of increasing outsourcing of design services to companies such as Tata Elxsi. Internally, the company has frozen wage hikes till a strong recovery is signalled, which should reduce the strain on margins. Rupee appreciation against the dollar is a key risk, but the US geography accounts for only about 30 per cent of revenues and the rupee’s direction against the yen, euro and pound have been more or less favourable for the company.

via BL