Analysis: Tata Elxsi Ltd

The current section of the “Analysis” series covers Tata Elxsi Ltd, a Tata group company focusing on information technology services. The company focuses on engineering R&D and design services for sectors like automotive, media & communications, medical etc as well as systems integration.

“Analysis” series is an attempt to share with all the readers, our inputs to the company analysis submitted by readers on the “Ask Your Queries” section of our website.

To benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.

Tata Elxsi Ltd Research Report by Reader

Dear Mr Malik,

I have done a bit of analysis of Tata Elxsi Ltd basis the framework that you have shared and your earlier inputs on similar exercises. Request your input and feedback on the company and our analysis.

Thanks and Regards,

Anirudh Mahanot

Financial Analysis of Tata Elxsi Ltd:

Sales Growth: Company has been growing its sales at 17% CAGR for the last 10 yrs.

Profitability: Tata Elxsi Ltd has improved its profitability margins from its low operating profit margin (OPM) of 12% and net profit margin (NPM) of 3% in FY2013 to 26% OPM and 18% NPM. It has been sustaining its operating margins above 20% for more than 5 yrs.

Tax Payout: Company has been paying its taxes consistently above 33%.

Interest Coverage: Tata Elxsi Ltd is a zero-debt company since 2014.

Debt to Equity Ratio:  Tata Elxsi Ltd has been debt-free since 2014.

Current Ratio: 5.82, much better than the minimum desired level of 1.25

Cash Flow: Tata Elxsi Ltd is a cash flow positive company and has been consistently growing it for the last 10 years.

Cumulative PAT vs Cumulative CFO: We can see from the earlier table that Tata Elxsi Ltd.’s cPAT is ₹1,172 cr ~ cCFO of ₹1,128 cr. It implies that the company has been able to collect its receivables and convert profits into cash over the last 10 years.

Business & Industry Analysis of Tata Elxsi Ltd:

i) Comparison with industry peers:

Sales growth as compared to peers: Tata Elxsi Ltd is growing its sales at 17% CAGR for the last 10 years. When compared with their peers, Mindtree Ltd and Persistent Systems Ltd have been leading the pack with 21% CAGR sales for 10 years. While rest of the companies are in the 17-18% CAGR band, similar to Tata Elxsi Ltd.’s growth. Now let us look deeper into Mindtree Ltd & Persistent Systems Ltd.’s growth. If we look at their profit margins (OPM & NPM), they are the lowest in the peer set. We can also see that their Sales (CAGR, 10yrs) > Profit (CAGR, 10 yrs.), which indicates that Mindtree Ltd & Persistent Systems Ltd have been growing their sales at the cost of profitability.

In the same period, Tata Elxsi Ltd has improved its profitability margins (OPM 21%, NPM 16%) over time, which is also reflected in the profit CAGR of 22% for 10 yrs. > Sales CAGR 17%. It clearly shows that Tata Elxsi Ltd has been converting its sales into profits and has been growing its profit margins as well.

Another point worth considering at this point is FCF/CFO, which is also highest for Tata Elxsi Ltd (79%) as compared to Mindtree Ltd (55%) and Persistent Systems Ltd (57%); implies that Tata Elxsi Ltd has better free cash flows and lower capex requirements.

Productivity comparison with peers: A few key points that emerge are:

a) Tata Elxsi Ltd has improved its per-employee productivity, revenues (₹20.4 L to ₹24.7 L) and profit (₹2.5 L to ₹3.8 L) over the last 5-6 years and is currently above average amongst the peer set.

b) Tata Elxsi Ltd has been consistently increasing its headcount, which shows that it has been able to attract newer talent and grow its team.

c) Tata Elxsi Ltd has also been able to retain its employees much better than its peer set has, which helps the company in multiple ways.

d) Utilization levels of 75% are below the industry average of close to 80% utilization. However, it is an improvement from the erstwhile 70% utilizations.

ii) Other Important Criteria for IT Companies:

Nature of business contracts: Tata Elxsi Ltd has half the contracts on a fixed price basis, which leads to better profit margins and has half on time & material contracts, which are usually low risk, and provides stability to the business and earnings.

Percentage of repeat revenues: More than 90% of the revenues are earned from repeat clients, which shows stickiness with their customers and inherent strength in the proposition to its clients.

iii) Geographical and business segment diversification:

Tata Elxsi Ltd is well-diversified geographically across the US, Europe, India and the rest of the world (ROW).

Business segment-wise, Embedded Product Design contributes about 86% of the revenue, which caters mainly to Transportation (48.6%), Broadcast & Communication (39.2%) and Healthcare & Medical Devices (8.3%). EPD as a business segment has been growing faster than IDV and SIS, and the overall contribution of EDP to the revenue has grown from 80% to 87% over the last 5 years.

iv) Customer concentration:

Tata Elxsi Ltd.’s top client contributes about 15.7% of the revenue and hence the dependence on the single largest client and its bearing on the company’s revenues is quite high. However, the revenue contribution from the top client has gone down from 22% to 15.7% over the last 4 quarters. We need to look in detail at this client and assess whether the revenue contribution has gone down due to intended diversification by the company or negative business impact on the top customer itself.

When we look at the Top 5 (37.8%) and Top 10 (50.8%) customers’ contribution to revenues and exclude the top client revenue contribution of (15.7%), the rest of the 4 clients in the top 5 contribute about 22% to revenue (5.5% average per client) and rest of the 9 clients in top 10 contribute about 35% to revenue (4% average per client). This is a decent customer diversification.

Management Analysis of Tata Elxsi Ltd:

Mr. Madhukar Dev who had been the MD & CEO of Tata Elxsi Ltd since 1999, retired in Oct 2019 after successfully leading TEL for 20 yrs. Post Mr. Dev’s retirement, Mr. Manoj Raghavan has been unanimously appointed by the board as the MD & CEO starting 2nd Oct 2019. He has been in the company and industry for more than 20 years.

Tata Elxsi Ltd has appointed MD & CEO from the professionals working within the company who had history and experience in the business and industry with them. So far, it has demonstrated a good succession plan and encourages existing employees to aspire and aim for the top job within the company.

I could not find anything negative or alarming for both Mr. Madhukar Dev and Manoj Raghavan while searching for frauds, and SEBI notices in the public domain.

Salary vs Net Profit: Mr. Madhukar Dev’s remuneration has been in the band of 2.5-3% and increased in line with the increase in PAT of the company. Remuneration criteria for the newly appointed MD & CEO, the commission over and above fixed salary is linked to the net profit of the company, which is a healthy practice and shareholder-friendly.

Dividend Payment track record: Dividend CAGR 10 Yrs. (16%) ~ Sales CAGR 10 yrs. (17%). Tata Elxsi Ltd has been consistently paying a dividend and growing along with the revenue and profit growth of the company.

Promoter Holding of Tata Sons Limited: Promoter holding has been steady at around 44-45% for the last 10 years.

Credit Rating history:

Tata Elxsi Ltd has improved its credit rating from AA-(stable) to AA (stable) and has sustained over 5 years.

Margin of Safety:

• Earnings Yield: 6.5% (10 Yr. G-Sec yield is at 6.1%)
• Free Cash flow (FCF/CFO): 79%
• SSGR (self-sustainable growth rate): 138%

With PEG of 0.5, FCF/CFO of 79% and SSGR of 138%, Tata Elxsi Ltd provides a good margin of safety. It should be able to sustain its growth without leverage.

Happy investing,

Anirudh Mahanot

Dr Vijay Malik’s Response

Dear Anirudh,

Thanks for sharing the analysis of Tata Elxsi Ltd with us! We appreciate the time & effort put into the analysis.

While analysing the history of Tata Elxsi Ltd, an investor notices that in FY2008, the company had formed a subsidiary named Tata Elxsi (Singapore) Pte. Ltd. However, it closed down this subsidiary in FY2016.

FY2016 annual report, page 15:

During the year under review the formalities for closure of company’s wholly owned subsidiary, Tata Elxsi (Singapore) Pte. Ltd. has been completed. Presently the Company do not have any subsidiary Company.

As a result, during FY2008-FY2015, the company published both standalone as well as consolidated financials. Whereas before FY2008 and from FY2016, the company published only standalone financials.

We believe that while analysing any company, an investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire company including its subsidiaries, joint ventures etc. The consolidated financials of a company present such a picture.

Further advised reading: Standalone vs Consolidated Financials: A Complete Guide

Therefore, in the case of Tata Elxsi Ltd, during the last 10 years, we have analysed the consolidated financials from FY2013-FY2015 and standalone financials from FY2016 onwards.

With this background, let us analyse the financial performance of Tata Elxsi Ltd.

Financial and Business Analysis of Tata Elxsi Ltd:

Sales of Tata Elxsi Ltd have grown at a pace of 17% year on year from ₹622 cr in FY2013 to ₹2,471 cr in FY2022. The sales of the company have increased every year since FY2013.

The operating profit margin (OPM) of the company has witnessed an increase from 12% in FY2013 to 31% in FY2022. In FY2017 and FY2020, the OPM of the company declined from the previous year. In FY2017, the OPM declined to 22% from 23% in FY2016 whereas, in FY2020, the OPM declined sharply to 21% from 26% in FY2019. During FY2013-FY2022, the net profit margin (NPM) of Tata Elxsi Ltd increased from 3% in FY2013 to 22% in FY2022.

To understand the reasons for the financial performance of Tata Elxsi Ltd, an investor needs to read the publicly available documents of the company like its annual reports from FY1997 onwards, conference calls, credit rating reports as well as its corporate announcements. Then she would understand the factors leading to the near consistent increase in its revenue and profit margins along with the decline in operating profitability in FY2017 and FY2020.

In addition, it would help an investor if she read the following article about the business analysis of IT (information technology) services companies, which highlights the major factors influencing their business like the mix of onsite-offshore business, time & material or fixed-price mix, employee utilization and attrition levels, the share of the revenue from existing customers, foreign exchange movements, business segment mix etc.

How to do Business Analysis of IT Services Companies

After going through the above-mentioned article and the documents, an investor notices the following key factors, which have led to the significant improvement in the business of Tata Elxsi Ltd, which she needs to keep in her mind before making any predictions about the performance of the company.

1) Strong focus on R&D by the company:

If an investor analyses the origins of Tata Elxsi Ltd, its primary focus was the systems solutions segment where it used to install software & hardware solutions of MNCs companies in its customers’ operations.

FY1997 annual report, page 2:

Distribution, value-added reselling and provision of solutions built around products from Silicon Graphics, USA, for domestic customers.

This was a low-value adding activity where the business was very volatile and the company hardly had any pricing power. In FY1997, despite selling systems equal to the previous five years, its revenues did not increase because the systems’ prices declined substantially.

FY1997 annual report, page 2:

The sale of 562 systems referred above almost equalled the total number of systems sold so far by the Company in the last 5 years…However, due to a significant drop in prices, in line with the international trend, the turnover in the books did not register any increase.

During this period, the company made frequent losses and as per the earliest available annual report of FY1997, it was carrying accumulated losses of more than ₹7 cr in FY1996, which was significant considering its size at that point in time.

FY1997 annual report, page 2:

It took Tata Elxsi Ltd many years to overcome its accumulated losses, which it could only in 1999.

The company realized that in order to establish a strong business it would have to focus on research and development (R&D). As a result, it spent a significant portion of its sales on R&D.

In FY1997, it spent about 6.7% of its sales on R&D (FY1997 annual report, page 5). Over the years, until now, the company has been spending about 2.5% to 4.0% of its revenue on R&D.

Tata Elxsi Ltd has realized that investment in R&D, platforms and intellectual property (IP) is necessary for its survival as well as sustainable growth.

Conference call, April 2018, page 11:

Madhukar Dev:…potentially IP is very, very important for us not just for augmenting our margins but for survival itself. In the future we will not be winning business by demonstrating past experience and capability. In future we will win business demonstrating our IP which can be integrated into customer solutions and that is why the IP programs of the company are very important.

Nowadays, the focus of Tata Elxsi Ltd on R&D/IP is such that it keeps on further spending money on platforms even though any specific platform may not give it immediate business. This is to highlight its capabilities to its reputed and demanding customers.

Conference call, October 2020, page 6:

Nitin Pai: The reality is platforms and products do require continuous investment. And in that sense, at times, they can also be more difficult than the services business because services, you will deliver when required while products you will have to keep enhancing, keep developing even if there are no active customers…we are definitely and consciously doing is making sure that the platforms are part of the value proposition that we take to customer.

As a result of the focus on R&D, it could develop intellectual properties (IP) resulting in the development of many platforms, which have helped Tata Elxsi Ltd in gaining business from many prestigious customers.

At present Tata Elxsi Ltd has many platforms in its different business verticals like Autonomai, Automate, Tether in automotive; QoEtient, TEplay, FalconEye in media; TEDREG for regulatory intelligence, TEngage in healthcare etc. These platforms establish the capabilities of Tata Elxsi Ltd in front of its customers and help it win deals from prestigious companies.

Credit rating report, April 2017, page 2:

The company’s customer profile includes global majors such as Jaguar-Land Rover (JLR), Comcast, Time Warner Cable, Tata Motors, Broadcom and Qualcom among others.

A focus on R&D services-related business has helped Tata Elxsi Ltd get continuous (sticky) business from its customers. This is because in R&D services choosing the lowest cost bidder does not prove to be a successful strategy for the customers, which increases the switching costs for the customers resulting in high-margin repeat business for Tata Elxsi Ltd.

Conference call, July 2021, page 13:

Manoj Raghavan:…in the case of R&D services, it is also to do with the relationship that you build to the customer over a long time. See, globally also it is known right, not all R&D succeeds. So, if you have a partner with whom you have built a relationship and we have been delivering value and success to that customer, it is a lot of risk for him to move away from us and go into another relationship…it is relatively not easy to make that switch.

Due to the customer-relationship-based nature of R&D services, many times, attempts of organizations to change suppliers/vendors have failed, which makes switching suppliers difficult.

Conference call, July 2021, page 13:

Manoj Raghavan:…some of these large organizations that go ahead and do a vendor consolidation…But in every such case…especially in the engineering space, they have not really been successful because though it is all pushed by the procurement or the finance guys, the engineering guys feel that this is not the right way to move forward.

As a result, the transformation of Tata Elxsi Ltd from a reseller of systems/solutions into an IP-led solution/R&D partner of customers has led the company to transition from an originaly loss-making company into a profit-making company generating significant cash flows for its shareholders.

Further advised reading: How to do Business Analysis of a Company

2) Continuous focus on high-margin segments:

Tata Elxsi Ltd realized that to earn a high-profit margin, it would have to focus on high-value-adding R&D services. Therefore, over the years, it had continuously focused on high-value-adding R&D-oriented services. It continuously tweaks its product and service offerings by getting out of areas, which are getting commoditised and entering into new areas, which offer a higher value-addition. This strategy has allowed the company to earn a higher profit margin than its competitors.

Conference call, July 2018, page 10:

Niketh Shah: if you look at the existing competition in the listed space, they are not anywhere close to your margins.

Madhukar Dev:…the minute we see any of our offering getting commoditized, we try and exit that and we get into an area where the value-add is significant and therefore the premium that we can command does not get diluted.

A continuous focus on the high-margin products & services and maintaining the premium is essential because as per Tata Elxsi Ltd, it is very very difficult to get a price hike from any customer once a lower price is agreed upon.

Conference call, January 2021, pages 19-20:

Manoj Raghavan: Most of the services that we offer are on the upper end of the spectrum, and it is more value-selling. We rarely compete on pricing and so on and go down.

Ritesh Rathod:…Can you go back to a client and ask for a price hike?

Manoj Raghavan: Especially large customers, nobody will entertain a price hike, whatever you say. So what is really essential is, you don’t end up signing a customer at a very low rate because you know that it will be next to impossible to go back and get a rate hike…once we arrive at a particular rate structure for customers, it is usually at least a 3-year sort of a rate structure that we agree on.

Let us see a few incidences where the company’s focus on the high-margin segment has helped it achieve good business performance.

2.1) prioritizing medical as well as media & communications segments over automotive division:

Tata Elxsi Ltd earns maximum profit margin in its medical business followed by media & communication and then automotive business.

Conference call, January 2022, page 16:

Manoj Raghavan: Our medical business continues to be on a higher side; the margins continue to be on the higher side, followed closely by media, communication, and automotive.

In addition, the company found that the competition in medical as well as media segments is lower than in the automotive segment. In medical and media segments, many times, Tata Elxsi Ltd is the sole supplier seeking business whereas, in automotive, it is usually, 2-3 companies competing for the deal.

Conference call, October 2019, page 20:

Manoj Raghavan: Competition is less in the media & communication and health care segments. In many cases, both in media & communication and in the medical business, we are sort of their single vendor…in the automotive scenario you have 2 or 3 companies bidding for some of these opportunities.

Therefore, in order to achieve diversification from the automotive business and to earn a better profit margin, Tata Elxsi Ltd is focusing more on medical and media & communication segments.

In the past, Tata Elxsi Ltd used to have 60% of revenue from the automotive segment, 30% from media & communications and the remaining from medical and other smaller divisions.

Conference call, April 2018, pages 6, 9, and 10:

Madhukar Dev: About 60% is automotive.

Naveen Bothra:…how much is from media?

Madhukar Dev: About 30%.

Naveen Bothra: Healthcare, medical and all these things include 10%?

Madhukar Dev: Yes.

The company decided that in the long-term, it would reduce the share of the automotive/transportation segment from 60% to 40% whereas increase the share of media from 30% to 40% and increase the share of medical from 10% to 20%.

Conference call, July 2020, page 8:

Manoj Raghavan: In the long term, we definitely look at 40:40:20, 40 from transportation, 40 from media and communication, and 20 from medical.

As per the Q4-FY2022 earnings presentation, April 2022, page 18, in FY2022, Tata Elxsi Ltd had 41.2% revenue from transportation, 44.5% revenue from media and 14.3% revenue from the medical segment.

Therefore, over the years, an increase in the share of medical and media from 40% (= 10% + 30%) to about 60% (= 14.3% + 44.5%) has contributed to an increase in the profit margins of Tata Elxsi Ltd.

2.2) Restructuring systems integration & support and other low-margin businesses:

The company has a history of taking such strategic decisions where it reduced its focus from low-margin businesses. For example, in its systems integration business where it used to provide installation services for software products of MNCs, it shifted its focus away from simple reselling/installing the software to those deals, which involved consulting/solution-centric approach. As a result, it could improve profit margins.

FY2010 annual report, page 14:

Systems Integration & Support: Due to the low margins on hardware products, the Segment is focusing on a solutions centric approach which includes more of software and services and reducing its dependence on pure hardware business.

In FY2014, when the OPM of Tata Elxsi Ltd increased to 18% from 12% in FY2013, the company highlighted its focus of the company on solution-oriented business in the systems integration division as one of the reasons for the improvement in profits.

FY2014 annual report, page 3:

During the year under review, Your Company’s concerted effort in growing its revenues from the embedded and industrial design services, focussing on solutions and services in the systems integration business, and containing costs of its animation and visual effects business, resulted in improved top line and bottom line performance

Moreover, even in the case of software products, a continuous decline in the cost of IT products hampered its annual maintenance contracts (AMC) business. This is because, the customers preferred to buy newer products/versions, which came with warranty support and in turn, they avoided buying AMCs post-warranty period and put strong pricing pressure on AMCs.

FY2008 annual report, page 28:

Systems Integration and Support: The challenge here is to provide support services at price levels which ensure a reasonable margin in the context of continually decreasing replacement costs of IT products which obviate the need for annual maintenance support.

The customer support division also had a history of performing poorly due to the impact of extended warranties offered during maintenance contracts.

FY2001 annual report, page 6:

Customer Support: Business marginally declined to Rs. 10.53 crores (including sale of product upgrades) due to extended warranties being offered at the time of hardware sales in earlier years which ate into current revenues from maintenance contracts.

The revenue performance of the systems integration business also was volatile because many large orders were one time, which may not be repeated.

FY2005 annual report, page 19:

System integration: Due to the inherent nature of this business viz. value-added reselling and maintenance revenues, there is a greater upward and downward volatility in this segment over the years, driven by large customer orders in any year which may not repeat in the following year.

As a result, Tata Elxsi Ltd has continuously focused away from the systems integration business. In FY2022, it contributed only 2.2% to the revenue (Q4-FY2022 earnings presentation, April 2022, page 16).

Even previously, during FY2002, the company decided to step away from govt. orders as well as other low-margin orders in its Enterprise Computing and Networking Group.

FY2002 annual report, page 19:

Enterprise Computing and Networking Group: This business, which is largely characterised by large value and low margin orders, has been consciously restructured over the last few years in order to increase the profitability by keeping away from the low margin desktops and government orders

Advised Reading: How to study the Annual Report of a Company

The company also exited the semiconductor business when it could not generate satisfactory performance.

Conference call, January 2021, page 4:

Manoj Raghavan: No, I think about 3-4 years ago, we exited the semiconductor space. Even though we have a few customers in the semiconductor space, but we are not actively pushing that business. It is more legacy business that is continuing.

These business decisions have added to the profit margins of the company.

2.3) Cut down on Visual Computing Labs business:

In the visual computing labs (VCL) business, which focused on 2D, 3D visual effects and animations, Tata Elxsi Ltd had been facing challenges. In India, it found limited opportunities for its skills whereas the international/Hollywood business was proving challenging.

FY2008 annual report, page 27:

Visual Computing Labs:…the international markets pose a challenge, especially the US, where often the remuneration for the services provided by this division is linked to the commercial success of the project. Your Company has hitherto consciously stayed away from undertaking assignments based on this model where the risks are not commensurate with the revenue potential and is exploring ways of bridging this market requirement.

However, in FY2010, it decided to focus on the Hollywood business, established a studio in the area, and hired local employees, which an investor would appreciate would be very expensive.

FY2010 annual report, page 13:

Visual Computing Labs: During the year, an overseas VFX studio was set up at Santa Monica near Hollywood…and staffed with local industry veterans to address the VFX requirements of the Hollywood industry. The studio represents a strategic move by the VCL Division…overcome the constraint of having a remote studio located in India, which was perceived as an obstacle to getting more business from the Hollywood industry.

In FY2013, Tata Elxsi Ltd faced significant losses in its visual computing labs (VCL) business. The division had expanded the studio in Hollywood and had established a joint venture (A2E2) with M/s A Squared Entertainment, LLC, USA; both of these initiatives failed and led to significant losses.

FY2013 annual report, page 12:

VCL undertook two significant initiatives to help scale its business. It expanded its studio in Los Angeles in anticipation of a large volume of work from Hollywood and entered into a Joint Venture to develop and produce its own IP. While both initiatives showed initial promise, the outcomes were not up to expectations and impacted the bottom-line of the company significantly.

Tata Elxsi Ltd had taken these business initiatives after an international management-consulting firm had guided it. However, it suffered losses of about $4 million because of these business decisions, which would be in addition to the fee paid to the management consultant for its advice.

FY2013 annual report, page 3:

Your Company had undertaken a set of strategic growth initiatives for VCL. These were based on the recommendations of an international consulting firm and meant to accelerate the non-linear growth. The initiatives did not deliver as per expectations and negatively impacted the bottom-line of the overall company.

The losses of $4 million included $1 million in equity investment and $3 million in repayments to the lenders of the JV (A2E2) when they enforced the guarantee provided by Tata Elxsi Ltd.

FY2013 annual report, page 58:

In the previous year, the Company remitted USD 1,000,001 as Share Application Money to A2E2 against which shares were yet to be allotted…Subsequently the company received a demand from the Banker of A2E2 to whom the company had given a financial guarantee towards the outstanding dues of Rs. 1,589.57 lakhs (USD 30.19 lakhs) due by A2E2 to its banker. The Company has settled it’s obligation towards the bank guarantee

As a result, the company stopped these initiatives to prevent further losses.

FY2013 annual report, page 3:

After due consideration, these initiatives have been curtailed to ensure that the negative impacts does not continue further.

The credit rating agency, ICRA, also highlighted the weak performance of the VCL division in its report of October 2015, page 1:

ICRA also takes note of the weak performance under its visual computing labs division and limited revenue visibility given relatively short term nature of the projects.

Later on, Tata Elxsi Ltd deprioritized this business and merged the VCL division with its Industrial Design & Visualisation (IDV) division.

Credit rating report by ICRA, April 2017, page 2:

With the merger of erstwhile Visual Computing Labs (VCL) division with ID during the previous fiscal, the company offers digital content creation including 3D computer graphics, animation and special effects for corporate films and entertainment industry under IDV.

Advised Reading: Credit Rating Reports: A Complete Guide for Stock Investors

Therefore, the steps taken by Tata Elxsi Ltd over the years to reduce business in low margin and loss-making divisions have helped it to maintain and improve profit margins.

3) Focus on large and long-term contracts by Tata Elxsi Ltd:

Historically, Tata Elxsi Ltd used to engage in small and short-term projects with its customers where the size of the contracts used to be less than USD 1 million and the duration of the contract used to be about 4-6 months.

Conference call, October 2018, page 18:

Madhukar Dev: Yes, okay. Traditionally, our engagements are short duration projects. And a long engagement would be maybe nine months and the average would be four to six months.

Its dependence on short-term projects affected its business as it limited its growth potential.

Credit rating report by ICRA, April 2017, page 2:

Credit Weakness: Moderate revenue visibility on account of high proportion of project based revenue which is of short duration.

The company also realized that due to short-term contracts, in order to show sustained growth, it has to continuously run after fresh business. Therefore, it changed its strategy and started focusing on long-term contracts.

Conference call, October 2018, page 14:

Madhukar Dev: Yes. What we have been trying to do is to look at engagements which cross the four quarter boundary, so if we can have a multiyear engagement…consequently, the contract values are much larger than the shorter engagements. So instead of facing this challenge and pressure of finding new engagements every few months, we are trying to see if we can build on the credibility that we have in the market and look at longer duration engagements

By FY2021, Tata Elxsi Ltd had succeeded in gaining a significant portion of its business via long-term contracts.

Conference call, January 2021, page 20:

Manoj Raghavan: Earlier the average median about 2 years ago was about 6 months deals or 8 months deal. Now, it is definitely above a year or multi-year also. So yes, the average size of projects has increased. The duration is increased; the average revenue is also increased per customer

It was now closing deals of three to five-year durations.

Conference call, April 2021, page 13:

Manoj Raghavan: I would say at least the large deals that we have been closing are definitely multi-year deals. We have closed three-year deals, five-year deals and so on.

Due to its focus on long-term contracts, the average deal size for Tata Elxsi Ltd increased significantly from less than $1 million previously to now multi-million dollar deals.

Conference call, October 2019, page 11:

Manoj Raghavan:…2, 3 years back, our deal sizes would be in the 100K to 500K sort of a range. And for us, $1 million was a pretty good opportunity and good deal. Right now, we are looking at opportunities in 10 million, 20 million sort of pipeline. In a few cases, above 50 million also.

In order to increase the average deal size, the company changed its assessment of the performance of its sales team. It started focusing on the total contract value (TCV) of any deal while measuring the performance of its sales team, which contributed to an increase in average deal size for the company.

Conference call, January 2020, page 20:

Manoj Raghavan:…the total contract value has been growing significantly. What we have done is, over the last couple of quarters we have sort of changed the way we measure and monitor our sales team. Their incentives are based on the TCV booking that is done. So, we are actually pushing the sales engine to really go after large deals.

During Covid times, the company benefited a lot due to long-term deals as it could continue to execute its long-term deals instead of finding new short-term deals during lock-downs.

Conference call, April 2020, page 10:

Manoj Raghavan:…into this COVID and post-COVID scenario, I would say it’s not as bad as if we would have been with smaller projects and so on, as there would have been cancellations immediately. And every quarter we would have had to hunt for new logos, new business and so on. So, I would say you can safely say that a lot of that is in the past. So, we are happy to have a lot of long-term customers and multi-year deals, which gives us the confidence.

Transition to long-term deals has led to a lot of stability in the business of Tata Elxsi Ltd.

Conference call, April 2022, page 14:

Manoj Raghavan: I think the sort of consistency in revenue that you have seen quarter‐on‐quarter is large because of the movement from project‐based engagements to annuity and long‐term customer relationships.

Previously, the business of Tata Elxsi Ltd used to show some seasonality with Q1 showing weakness and Q4 showing strength in performance.

Conference call, April 2018, page 1:

Madhukar Dev: Those of you who have been following this company will know that the Q1 has historically been a weak quarter for us

Conference call, April 2021, page 3:

Manoj Raghavan: And all of you who have been following our results for many years know that Q4 is typically a good quarter for our SI business as our customers spend their residual infrastructure budgets for the fiscal year and as it is also the year end for them.

However, in recent years, due to the transition of business towards high-value, long-term deals, the effect of seasonality on the performance of Tata Elxsi Ltd has declined.

Conference call, April 2022, pages 17-18:

Manoj Raghavan: If you look at it, not just the last four quarters, but last seven quarters also we have been consistently growing, so I think that is again due to all the efforts that we are putting in. One is mining the accounts, and two is getting those new logos and getting those multi‐year deals also…So as long as we continue to open new logos and get into these large multi‐year deals and so on, I think the trajectory is good for us.

In addition to bringing stability in the revenue, the long-term deals with the customers have helped in the improvement of profit margins of Tata Elxsi Ltd as well.

Conference call, April 2021, page 5:

Manoj Raghavan: There are many levers for margin improvement…One is more long-term projects, more long-term engagements and so on.

Nevertheless, an investor should not be carried away by the multi-year, multi-million dollar deals because, at the end of the day, every company follows yearly budgets and if the business of the company faces a slow-down, then it may go slow on the project and defer purchasing services of Tata Elxsi Ltd.

The company faced this challenge from its top client, Jaguar & Land Rover (JLR) when it cut down its R&D budget during a slowdown in the automobile industry.

Conference call, October 2019, page 12:

Manoj Raghavan:…for example, our top client and what happened to them, even though we have signed up a multiyear contract but when the business situation worsened, they did not cut the IT budgets because they had to keep the company running, but they cut the R&D budgets. So even if I say I won a $50 million deal, that doesn’t mean much, except for the yearly PO that we have.

Therefore, in the presence of long-term, multi-million dollar deals, an investor should be cautious that even though these deals indicate a long-term commitment from the customer; still, the customer could back off after finishing the scope of its current purchase order. These deals are not take-or-pay agreements like in the case of manufacturing or mining organizations.

An investor should keep it in her mind while projecting the future performance of the company.

4) Improvement in the repeat business from its existing clients:

Over the years, Tata Elxsi Ltd has been able to get a higher share of its business from its existing clients. In the past, for example, in the late nineties, it used to get about 60% of its business from repeat clients.

FY1998 annual report, page 6:

…a customer loyalty track record of 60 % of orders being repeat, TATA Elxsi looks all set to be a key proponent in Engineering the Information Revolution.

The company realized the importance of repeat business from existing clients to such an extent that it deprioritized new customer acquisition stating that it plans to reduce its total number of customers.

Conference call, April 2018, page 18:

Madhukar Dev: No, in fact we are looking to reduce the number of clients and we want to deepen the relationship with existing clients.

A focus on getting repeat business from existing clients increased the share of repeat business to more than 90% by FY2020.

Conference call, July 2019, page 11:

Madhukar Dev:…very often customers who tried us before, trust us more than they believe anybody else that is why more than 92-93% of our revenues in any period come from our existing customers.

Repeat orders from existing customers have brought stability to the revenues of the company as well as higher profit margins because it increases the stickiness of the customer by increasing the cost of switching to new vendors.

5) Offshore-onsite mix in the business of Tata Elxsi Ltd:

Offshore work allows the company to get the work done from its Indian offices with employees based in India. On the other hand, onsite/onshore work requires the company to post employees on the customers’ premises in foreign countries for doing the work. As a result, the onsite work is expensive due to higher wages in the foreign locations, travel costs of employees etc. whereas the same work can be completed at a much lower cost if it is outsourced to India as offshore work.

Over the years, Tata Elxsi Ltd has witnessed significant movements in its business mix of offshore and onsite. In FY2004, the company had about 80% of its business as offshore.

FY2004 annual report, page 18:

Company’s customers are spread out in various countries and the delivery model provides for both offshore work (i.e. in India) and onsite (i.e. at the customer premises). Currently, this mix is about 80:20.

However, over time, the share of offshore revenue continued to decline and by Q1-FY2019, it had declined to 56%.

Conference call, July 2019, page 17:

Madhukar Dev:…the offshore/onsite is about 56%/44%.

With the onset of the Coronavirus pandemic and travel restrictions, the share of offshore work in the business mix increased. In FY2022, Tata Elxsi Ltd had about 74.5% of its revenue from the offshore business. (Q4-FY2022 earnings presentation, April 2022, page 19).

The increasing share of offshore has contributed to the increased profit margins of Tata Elxsi Ltd. In FY2021, when the OPM of the company increased to 29% from 21% in FY2020, the company stated that an increase in the share of offshore business had contributed to it.

FY2021 annual report, page 24:

The onsite offshore revenue mix has also shifted this year, with the offshore share rising by 920 bps to 66.9%. Operating margins have also improved as a result of this.

However, the company has stated that with the relaxation of travel restrictions, the share of onsite work would increase; though it would still not go to the pre-pandemic levels of about 50% offshore/onsite mix.

Conference call, January 2021, page 4:

Manoj Raghavan:…we may not go back to the earlier situation; 50% of our revenues would come from onsite or so. I would still guess there will be a few customers who want to have the comfort of engineers being near to their locations, so I would say we would be somewhere in between.

Therefore, as the travel restrictions are lifted, the share of onsite business may increase and the profit margins may come down.

6) Share of fixed-price contracts vs. time & material contracts in the business of Tata Elxsi Ltd:

In fixed-price contracts, the customer assigns a fixed value and timeline to the work. Thereafter, Tata Elxsi Ltd has to complete the work within the budget. In case, it is able to complete the work at a lower cost, then it can earn good profit margins. On the contrary, if it faces a cost overrun, then it may make a loss as well on the project. Therefore, fixed-price contracts are high-risk, high-return businesses.

Conference call, January 2021, page 13:

Manoj Raghavan:…fixed price means we take a lot more risk in terms of ownership and delivering value to our customers…If we take some wrong deals and if you take full ownership and take it in a fixed price and so on and if you do not, if we underestimate or if the complexity of the program goes up then rather than what we had estimated, then there is also the possibility of losing money in those deals

On the other hand, in time & material contracts, the customer pays Tata Elxsi Ltd based on the amount of time taken to complete the project and the amount of material (number of employees) used to complete the project. Therefore, Tata Elxsi Ltd charges the customer based on the number of employee hours consumed to complete the project and there is very little possibility of making a loss in time & material contracts. Therefore, time & material contracts are a safe business with comparatively low-profit margins.

Conference call, October 2019, page 9:

Manoj Raghavan:…time material is a steady margin as you guys know. Fixed bid depends on each individual engagement and amount of risk that is taken and deliveries that we have to make and so on.

In the past, the share of fixed-price contracts in the business of Tata Elxsi Ltd has been in the range of 45%-46%. For example, in Q1-FY2020, the share of fixed-price contracts was 45.7% (Q2-FY2020, earnings presentation, page 5). However, in recent years, the share of fixed-price contracts in the business of Tata Elxsi Ltd has increased. In Q4-FY2022, the share of fixed-price contracts increased to 52.4%.

Thus, over time, Tata Elxsi Ltd has witnessed an increase in the share of fixed-price contracts, which has improved its profit margins. However, improving margins due to fixed-price contracts come with increased risk.

Conference call, January 2021, page 13:

Manoj Raghavan: Yes, fixed price over a period of time has been going up…yes, I would say the fact that fixed‐price projects have increased have also helped to an extent with the margins, but again it is a double‐edged sword.

7) Improving employee utilization levels:

Employee utilization level is an important productivity parameter of any IT services company. It is similar to capacity utilization for manufacturing companies. A higher employee utilization level indicates that the IT services company is able to generate higher revenue from its workforce.

During Q1-FY2020, the utilization level for Tata Elxsi Ltd had declined to 65%.

Conference call, July 2019, page 17:

Madhukar Dev: The utilization dropped to about 65%

However, the company improved its efficiency level and increased the utilization level to more than 80% in FY2022.

Conference call, January 2022, page 4:

Gaurav Bajaj:…our utilization has been at an all‐time high. Earlier, we used to be in the band of 73 to 75, now that utilization is almost 80% up, it is almost 83%.

Improving utilization level has consistently contributed to improving profit margins of Tata Elxsi Ltd. For example, in FY2018, when the OPM of the company increased to 25% from 22% in FY2017, the improving utilization level was one of the reasons.

Credit rating report, March 2018 by ICRA, page 1:

With higher employee utilization, margin-accretive contract wins and cost rationalization measures, TEL’s operating margins expanded from 22.3% in FY2017 to 24.8% in 9M FY2018.

Similarly, in FY2021, when the OPM of the company increased to 29% from 21% in FY2020, then Tata Elxsi Ltd highlighted improving utilization level as one of the major reasons.

Conference call, January 2021, page 3:

Manoj Raghavan: The major lever that we have used is utilization – our utilization rates have gone up. We have, of course, done hiring the quarter, but we are able to deploy our internal resources and up the utilization, and that is also another reason why you see a sharp uptick in our profitability.

Looking at the current utilization level of 83%, an investor may think that the company still has a scope of 17% to increase utilization and thereby, profit margins. However, an IT services company needs a healthy level of bench strength i.e. employees not tied up in any active project who can be deployed in projects at a short notice. This is necessary for the smooth functioning of existing projects as well as the quick start of new projects.

Tata Elxsi Ltd has also intimated to its shareholders that its optimal utilization level is about 75%. Beyond this level, it may face challenges in onboarding new customers.

Conference call, October 2019, page 16:

Manoj Raghavan:…we would definitely push the utilization to go up to around 75%. I think that a company of our size and the various areas that we work in, 75% is an optimal point to reach. Beyond that, I think we will struggle when we get a new customer and so on.

Conference call, January 2020, page 5:

Manoj Raghavan:…we would definitely need a strong bench to be able to not only meet the growth expectations of our customers but also new customer additions and so on. So, I would say 75%, 76% is a good place to be in.

Therefore, an investor should keep it in her mind that the current employee utilization level of Tata Elxsi Ltd of 83% is not sustainable in the future and the company is attempting to bring it down by hiring aggressively in recent years.

Advised reading: How to do Business Analysis of IT Services Companies

8) Strong clarity of the company in its strategic business decisions:

The management of Tata Elxsi Ltd has shown clarity in what they want to do and what they do not want to do in their business. There are many instances where the management clearly communicated it in their vision whether it is related to producing the goods that it designs or becoming a full-fledged software product company or while making acquisitions.

The strong clarity of vision helps the company avoid misallocation of capital.

In FY2019, the company stated that it has no intention of entering into the manufacturing of the products it designs because it does not have skills in supply chain and inventory management etc.

Conference call, July 2018, page 15:

Madhukar Dev: No, we will only make prototypes or get them made. We will not get into manufacturing because we do not have those skills to manage supply chains and plant efficiencies, inventory, logistics and that is too much of a digression from our core area.

Similarly, the company clearly communicated that it does not plan to become a specialized software product company because; then it may end up competing with its customers. It plans to stay primarily a software services company.

Conference call, July 2021, page 12:

Manoj Raghavan: We do not want to compete with our customers. If you start launching your own product, sometimes in this industry, customers will start worrying whether is this the company that we need to work with, they get worried about helping a competitor, right, build up capability. So, we would never be a full-fledged product company.

Similarly, the company clearly stated that it does not have any plans of entering the two-wheeler space in its transportation business.

Conference call, July 2019, page 10:

Madhukar Dev: Right now, we do not have any plans to get into the two-wheeler market.

In the past, the company had consciously reduced its focus on govt. business in its Enterprise Computing and Networking Group due to lower margins. Similarly, now the company has stated that it does not plan to expand its aerospace business because most of it is govt. led programs; even though it had worked on the Mangalyaan mission.

Conference call, October 2020, page 7:

Nitin Pai: We had worked in space programs before, including the Mangalyaan mission…but we also recognize that many are government-led programs. So to that extent, the conditions of working and how you deliver, etc., are quite difficult. So we are not expecting to have any large revenues out of space per se.

Another instance of the clarity of the management is visible in its approach toward acquisitions. Tata Elxsi Ltd is carrying a significant cash balance for the last many years, which it wants to use to acquire companies to improve its capabilities & value proposition to the customer. However, despite the long wait of multiple years, the company had not jumped on to any acquisition because the opportunities that it is getting are expensive.

Conference call, April 2021, page 8:

Manoj Raghavan: We are in discussion with different companies, but the only thing is the good companies, valuations are very expensive even at this point in time. And those that we believe can really add value to us comes at a premium.

As a result, the company has not yet done any acquisition, which has protected its capital. The company paid out capital to the shareholders as increased dividends during Covid times to put money directly in the hands of shareholders in the time of need.

Conference call, April 2021, page 14:

Manoj Raghavan:…as a Tata group, we felt that we have to really give back to the society especially in the tough year and that is the reason why the Board decided to give a special dividend because people are struggling, people are suffering, it will help them. That is the only logic where we decided that, okay, this year let us be liberal with the returning the money to the stakeholders.

Therefore, the clarity in the strategic business vision of the company has helped it maintain good capital allocation.

Advised reading: How to identify if Management is Misallocating Capital

9) Competition coming from multiple directions:

Tata Elxsi Ltd is an IT services player focusing mainly on engineering R&D services for its customers. It is a niche/specialized player; however, it faces competition from all the large IT services companies, most of which have engineering R&D divisions. This competition has been growing for a very long time now.

FY2007 annual report, page 13:

There is a growing trend of existing IT and IT-enabled companies initiating services delivery in outsourced R & D and product engineering with a view to expand their portfolio offerings and accelerate growth, thereby adding to competition and pressure on skilled manpower availability and wage bills.

Almost all the large IT services companies like Accenture, Capgemini, TCS, Wipro, and HCL are a competitor for Tata Elxsi Ltd because each of these companies has an engineering R&D division.

Conference call, July 2021, page 7:

Nitin Pai:…we do compete with everybody who is a scaled IT player, whether it is an Accenture, Capgemini, TCS, Wipro, and HCL and so on. They have always been there, they have always had some amount of engineering work, and we continue to compete with them.

Moreover, looking at the attractiveness of the engineering R&D services segment, many companies are building capabilities by acquiring others and in turn, increasing competition for Tata Elxsi Ltd.

Conference call, July 2021, page 11:

Manoj Raghavan: You look at the global industry, I mean in the last three, four years, ER&D segment has always been touted as a fastest growing segment and you know that companies like Accenture or Capgemini, they have made a number of acquisitions to really strengthen the ER&D phase.

For companies like Tata Elxsi Ltd which rely on outsourcing of research by MNCs, another source of competition comes from the captive development centres opened by these MNCs in India, which shifts the business away from IT services companies to these captive centres.

FY2005 annual report, page 18:

The new tendency of global customers to open software centers in India whilst leading to a potential loss of business opportunity through business tending to get shifted to the global customer’s captive India centre

The credit rating agency, ICRA has also classified this industry as highly competitive in its reports for Tata Elxsi Ltd due to competition from large IT companies with higher bargaining powers.

Credit rating report by ICRA, March 2018, page 2:

Credit weaknesses: Competitive industry – The industry is characterised by intense competition from players enjoying scale benefits and higher bargaining power. While the company is well placed in terms of niche service offerings, multi disciplinary designing capabilities and established presence, pricing environment remains challenging with presence of other players.

Credit rating report by ICRA, March 2019, page 1:

intense competition in the industry, characterised by the presence of large players who can offer managed services.

Therefore, an investor should always consider the competition from multiple players while assessing the future business potential of Tata Elxsi Ltd.

Going ahead, an investor should keep a close watch on the profit margins of the company to assess whether it is able to maintain its profit margins. An investor needs to understand that the current operating profit margin (OPM) of the company may not sustain itself going ahead. The company itself has acknowledged it.

Conference call, April 2021, page 5:

Manoj Raghavan: There are many levers for margin improvement…And definitely this year has been very-very different primarily because of COVID and lot of expenses including travel, even normal expenses, employee related expenses, celebrations, none of that has actually happened. So, it is a one-off sort of a situation. We don’t want to leave an impression that these margins will continue.

Conference call, July 2021, page 4:

Manoj Raghavan: From a margin perspective…I would like to reiterate that these are extraordinary times and there will be expenses which will go up once travel and everything starts.

In FY2021, overseas travel expenses of Tata Elxsi Ltd declined sharply to about ₹27 cr from ₹68 cr in FY2020 (Annual report for FY2021, page 95).

Therefore, an investor should be cautious while projecting the current profit margins of Tata Elxsi Ltd into the future.

Advised reading: How to do Financial Analysis of a Company

Over the years, the tax payout ratio of Tata Elxsi Ltd has been in line with the standard corporate tax rate. Up to FY2019, the payout ratio is exceeding 30% and thereafter, it is exceeding 25%, which is in line with the prevalent tax rates.

Operating Efficiency Analysis of Tata Elxsi Ltd:

a) Net fixed asset turnover (NFAT) of Tata Elxsi Ltd:

Tata Elxsi Ltd is primarily an information technology (IT) services company, which relies on human capital i.e. its employees to generate value. Therefore, it does not depend on fixed assets like plants & machinery to generate its sales.

In such a situation, the parameter of net fixed asset turnover (NFAT) is not highly relevant for assessing the asset utilization efficiency of the company.

Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors

b) Inventory turnover ratio of Tata Elxsi Ltd:

The business of the company, which is an IT services company, does not require any inventory to produce any manufacturing goods. The only business division of the company that required holding some inventory is the systems integration and supports division, which buys specialized IT hardware for installation on customers’ premises. However, nowadays, this division contributes only about 2% to the sales. Therefore, the impact of inventory holding and efficiency in the inventory management of this division does not significantly affect Tata Elxsi Ltd.

Therefore, on an overall basis, just like NFAT, the inventory turnover ratio (ITR) also does not provide any meaningful insights into the analysis of Tata Elxsi Ltd.

Further advised reading: Inventory Turnover Ratio: A Complete Guide

c) Analysis of receivables days of Tata Elxsi Ltd:

Over the years, receivables days of Tata Elxsi Ltd have deteriorated from 63 days in FY2016 to 79 days in FY2022.

The receivables days had increased to the maximum of 85 days in FY2020; however, it was due to the difficulties faced by its customers during the Covid lock-down when it had to extend a higher credit period to them. Nevertheless, afterwards, the situation seems to be improving and in the last two years, the receivables days are stable at 79 days.

Conference call, January 2021, page 19:

Manoj Raghavan: Yes, during COVID, we have had some price pressures. We had to give some temporary concessions, and you know credit terms and so on. But I think we are out of all of that

The company had to give liberal credit terms to its customers during Covid times because even before Covid, in FY2020, many of its customers had started showing signs of a slowdown like delays in granting or deferment of projects.

Conference call, July 2019, pages 5-6 and 22:

Madhukar Dev:…there was an engagement that we were hoping to start in April. We were selected in March. We were told that you would start within 30-days with a reasonably significant growth trajectory to follow. We are sitting in the middle of July. We have been selected. The paperwork is in place. We are yet to start work.

Madhukar Dev:…there were about half a dozen such engagements which were to start during the quarter, which has not begun till June 30th. So, the combined effect would be significant.

The trend of receivables days over the last 6-7 years indicates an increase in the efficiency of receivables collection by Tata Elxsi Ltd has gone down. One of the key reasons for the same seems to be a decline in the performance of the automobile industry, which directly affects JLR, which is one of its largest customers.

Conference call, July 2019, page 2:

Madhukar Dev:…there were a lot of challenges and trying to compensate for the loss of business which was somewhat abrupt from Jaguar Land Rover.

In addition, the attempts by the company to grow its automotive/transportation business outside JLR may also have an effect as the company might have granted a longer credit period to new customers.

Conference call, January 2019, page 8:

Madhukar Dev: See, more than two years ago, we embarked on a journey of growing business in the auto sector, outside of JLR. And we have expanded it to almost double the size of our JLR revenue now…Concerning JLR’s business situation, at present, yes, we all know that it is a challenging environment in which they are operating. And there are bound to be some cuts in both revenue and capital expenditure

As Tata Elxsi Ltd.’s business comes from the R&D and capital expenditure budget of its customers; therefore, whenever, there is any problem with the main operating business of its customers, then the business of Tata Elxsi Ltd also takes a hit. During downturns, most commonly, the customers cut down on the R&D budgets and capital expenditure. They also defer the grant of projects as well as initiation of already allotted projects to Tata Elxsi Ltd.

At times, customers also raise disputes about the payments demanded by Tata Elxsi Ltd for the work done. On other occasions, Tata Elxsi Ltd is not able to recover its money because the customer would have already filed for bankruptcy. Tata Elxsi Ltd faces such challenges in the collection of receivables, especially during economic downturns.

For example, during the dot-com bubble at the start of this century, Tata Elxsi Ltd faced an increase in bad debt when some of its customers filed for bankruptcy and some others disputed its claim of payments.

FY2004 annual report, page 20:

Remarks for the increase in bad debt: Due to certain customers filing for bankruptcy/ raising disputes not resolved

Similarly, during the global financial crisis in 2008-2009, Tata Elxsi Ltd once again faced increased instances of disputes with its customers related to receivables.

FY2008 annual report, page 29:

Remarks for the increase in bad debt: Non-payment due to unresolved technical issues

During this period, many customers delayed payments and a few even filed for bankruptcy.

FY2009 annual report, pages 27-28, 32:

Several customers are facing recession in their respective industries, resulting in some of them slowing down their engineering outsourcing, apart from indicating other signs of financial pressures such as slowing down payments, pressing for price reductions in already negotiated and current contracts and in some extreme cases, even filing for winding up.

Remarks for an increase in Provision for doubtful debts and bad debts written off: These represent irrecoverable amounts arising from customers calling off the project abruptly due to the economic slowdown, customers refusal to pay owing to delivery issues etc

In FY2012, Tata Elxsi Ltd had to write off about ₹12 cr of receivables (FY2012 annual report, page 71). In FY2014, it wrote off about ₹30 cr of receivables (FY2014 annual report, page 79). In FY2021, the company wrote off about ₹7 cr of receivables (FY2021 annual report, page 95).

In FY2022, the company is carrying about ₹7.5 cr in its provisions for doubtful debt (FY2022 annual report, page 161). In addition, on March 31, 2022, more than ₹15 cr of receivables are overdue for more than one year from their payment date (FY2022 annual report, page 152).

Going ahead, an investor should monitor the trend of receivables days of Tata Elxsi Ltd to assess whether it is able to bring them down to the levels of 63 days, which it used to have in FY2016.

Further advised reading: Receivable Days: A Complete Guide

When an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of Tata Elxsi Ltd for FY2013-2022, then she notices that over the years (FY2013-FY2022), the company is not able to convert its profit into cash flow from operations.

Over FY2013-22, Tata Elxsi Ltd reported a total net profit after tax (cPAT) of ₹2,229 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹2,163 cr.

It is advised that investors should read the article on CFO calculation, which would help them understand the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors would also understand the situations when the companies would have their CFO higher than the PAT.

Further advised reading: Understanding Cash Flow from Operations (CFO)

Learning from the article on CFO will indicate to an investor that the cCFO of Tata Elxsi Ltd is lower than the cPAT primarily due to the following factors:

• ₹532 cr stuck in its receivables over FY2013-FY2022. The receivables of the company increased from ₹141 cr in FY2013 to ₹673 cr in FY2022.
• Non-operating income of ₹264 cr over FY2013-FY2022, which is added in calculating PAT; however, it is deducted while calculating CFO.

The Margin of Safety in the Business of Tata Elxsi Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it can convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.

An investor may calculate the SSGR using the following formula:

SSGR = NFAT * NPM * (1-DPR) – Dep

Where,

• SSGR = Self Sustainable Growth Rate in %
• Dep = Depreciation rate as a % of net fixed assets
• NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
• NPM = Net profit margin as % of sales
• DPR = Dividend paid as % of net profit after tax

(For systematic algebraic calculation of SSGR formula: Click Here)

SSGR estimation depends significantly on net fixed asset turnover (NFAT). However, in the case of Tata Elxsi Ltd, which is an IT services company without any manufacturing facility, NFAT is not a very significant parameter. Therefore, while analysing the business of Tata Elxsi Ltd, SSGR does not provide best of the results.

Therefore, an investor should focus on the free cash flow (FCF) analysis of Tata Elxsi Ltd.

b) Free Cash Flow (FCF) Analysis of Tata Elxsi Ltd:

While looking at the cash flow performance of Tata Elxsi Ltd, an investor notices that during FY2013-FY2022, it generated cash flow from operations of ₹2,163 cr. During the same period, it did a capital expenditure of about ₹477 cr.

Therefore, during this period (FY2013-FY2022), Tata Elxsi Ltd had a free cash flow (FCF) of ₹1,686 cr (=2,163 – 477).

In addition, during this period, the company had a non-operating income of ₹264 cr and an interest expense of ₹34 cr. As a result, the company had a total free cash flow of ₹1,916 cr (= 1,686 + 264 – 34). Please note that any capitalized interest is already factored in as a part of the capex deducted earlier.

Tata Elxsi Ltd has used this money primarily to pay dividends of about ₹990 cr (excluding dividend distribution tax) to its shareholders.

The remaining money is available with the company as a cash & investment balance of about ₹965 cr on March 31, 2022.

To use the surplus cash, Tata Elxsi Ltd has been trying to acquire other companies for the last 4-5 years; however, it has not found any suitable opportunity until now.

An investor may note that in the last 3 years, Tata Elxsi Ltd seems to have some debt on its books; however, the majority of it is future lease liabilities shown under debt under the new Indian Accounting Standards (IndAS).

Going ahead, an investor should keep a close watch on the free cash flow generation by Tata Elxsi Ltd to understand whether the company continues to generate surplus cash from its operations.

Further advised reading: Free Cash Flow: A Complete Guide to Understanding FCF

Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin of safety in the business model of any company.

Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

Additional aspects of Tata Elxsi Ltd:

On analysing Tata Elxsi Ltd and after reading annual reports, RHP, its credit rating reports and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.

1) Management Succession of Tata Elxsi Ltd:

Tata Elxsi Ltd is a part of the Tata group of companies. The company is professionally managed where long-term employees of the company have been appointed as its MD&CEO over the years. Mr Madhukar Dev led the company for almost 20 years (from 1999 to 2019). Later on, another long-term employee of the company, Mr Manoj Raghavan took over as the current MD&CEO.

Therefore, the company is not bound by the limitation of options for senior leadership positions, which is faced by promoter-run companies relying on family members to occupy senior positions.

There have been many instances where Tata Elxsi Ltd changed its senior leadership to improve its business performance. For example, in FY2019, the company brought in new people to head their American and European businesses.

Conference call, April 2019, page 23:

Madhukar Dev: In the last year, we brought in a new person to head our America business…And before that, we have gotten a person to head our European business.

In FY2021, when the Industrial Design & Visualization (IDV) was underperforming, then the company changed its leadership by bringing in a new person to head it and it redesigned its selling strategy by restructuring its sales team.

Conference call, April 2021, page 5:

Manoj Raghavan:…industrial design business, yes, we have been underperforming for the last many years. However, we did do a number of things, including change the leadership and so on.

As a result, being a professionally run company, it is able to manage its succession planning well.

Further advised reading: How to do Management Analysis of Companies?

2) Managing employees and attrition levels are one of the biggest challenges for Tata Elxsi Ltd:

Over the years, the attrition level at Tata Elxsi Ltd has fluctuated significantly.

In FY2014, the attrition level of the company used to be about 18% indicating that almost one out of every five employees would leave the company by the end of any year. The company realized the huge cost of a high attrition rate and implemented many human resource initiatives, which led to a decline in the attrition levels. By FY2018, the attrition level had declined to 12%.

Conference call, April 2018, pages 16, 17:

Madhukar Dev: On an annualized basis we are at 12% attrition.

Manish Bhandari: So, has the attrition level come down in last three years if you are to look at it?

Madhukar Dev: Yes, if I recall four years ago it was 18% or something.

The continued errors by the management led to a further decline in attrition levels and in FY2021, the attrition level declined to about 6%.

Conference call, January 2021, page 14:

Manoj Raghavan: Attrition is slightly above 6%. So attrition is not a concern for us.

However, all the efforts of the company to contain attrition at a lower level failed when during the coronavirus pandemic, the demand for employees in the information technology field increased, which coupled with the “work from home” environment increased the attrition levels sharply.

In FY2022, the attrition level at Tata Elxsi Ltd increased to 20.8% from 7.4% in Q4-FY2021 (Earnings presentation, Q4-FY2022, April 2022, page 17).

One of the reasons for higher attrition in the niche R&D-focused companies like Tata Elxsi Ltd is the entry of MNC product companies entering and establishing their own development centers in India. These companies poach employees from existing players working in similar segments by paying high salaries.

Conference call, April 2018, page 16:

Madhukar Dev:…product companies which have captives or setting up captives in India. They look at service companies as a hunting ground because they do not have any P&L responsibilities, their cost centres for their parent organization, they are able to throw a lot more money than a service company can

As per Tata Elxsi Ltd, increased attrition during Covid times is due to the entry of many IT services companies into the digital segment where they are aggressively hiring employees from existing companies in the field like Tata Elxsi Ltd.

Conference call, January 2022, page 16:

Manoj Raghavan: Those companies that have had a digital play were still able to continue their operations, service their customers and deliver value to the customers. So we see a lot more of the companies, even the traditional companies, are aggressively getting into the digital play. They want to have a digital play and what that means is more demand for engineers who can help them create that digital play, which has a spiraling effect on the entire industry.

During the Covid pandemic, due to the prevalence of work-from-home, Tata Elxsi Ltd faced situations of new employees leaving without ever visiting any of its offices. The company hired them virtually and they resigned virtually. This attrition was very high in the lower levels of the hierarchy.

Conference call, January 2022, page 23:

Manoj Raghavan: Yes, so a lot of attrition is in the lower level…during this COVID time, a lot of people have been working from home, and including the new hires that we have done, a lot of them have not visited our office at all. We have hired them virtually, and we have lost them virtually

Even though the company has been able to retain its senior management employees, still it is facing a shortage of human resources to meet the growing demands of its business. There is a significant shortage of

Conference call, January 2022, page 22:

Manoj Raghavan:…we need a senior‐level project manager, subject matter expert, architect, and so on. Hence, people who will actually hold those projects and who will be able to deliver those projects, so the supply for those critical profiles is where there is a shortage. We are working overtime to see how we can bring that sort of talent

In order to retain its employees and control the sharply rising attrition, the company gave a special one-time bonus to all the employees in FY2022.

Conference call, July 2022, page 2:

Manoj Raghavan:…an additional Rs.33 crores of employee expenses on account of the special one-time bonus for all our employees

Going ahead, an investor should keep a close watch on the attrition level of Tata Elxsi Ltd to assess whether it is able to retain its employees and benefit from the time & resources spent on training them to make them project-ready.

This is especially important because, for companies like Tata Elxsi Ltd operating in niche areas, the employee skills are not highly fungible i.e. an employee from one business division cannot be deployed in another division easily. In addition, at the senior management levels, the fungibility is even less.

Conference call, January 2020, page 16:

Manoj Raghavan:…if a person who is really working on EV, electric vehicles, you don’t want to put that person into a media communication, OTT space, right? Because of all the training, all the investments that we have made. So, that is the difference between IT companies and companies like us, very difficult. There could be some amount of fungibility at the junior levels, but as they specialize and as they grow becoming more senior their fungibility comes down.

Properly managing employee costs are important for Tata Elxsi Ltd because while offering it large contracts, its customers start asking for volume discounts like the manufacturing industry whereas in the IT services industry, if the size of the project increases, even then the cost of deploying incremental employees is the same.

Conference call, January 2019, page 20:

Madhukar Dev:…large companies have purchase departments who purchase services as well as components. They’re very used to demanding volume discounts. Now volume discounts do not make sense in a services business, which is manpower intensive…And we spend a lot of time and effort trying to explain that our incremental cost is the same whether it is the first unit or the hundredth unit. And therefore, a volume discount is really not relevant.

Therefore, the demand for volume discounts from customers may directly affect the profit margins of the company in case it does not manage its employee costs properly.

Advised reading: How to do Business Analysis of IT Services Companies

3) Uncertain pension liabilities of Tata Elxsi Ltd for its senior managers:

In FY2020, Tata Elxsi Ltd provided for a hefty pension liability of about ₹22 cr for the outgoing MD&CEO Mr Madhukar Dev. This liability was previously not provided for during his decades-long service in the company and was only determined by the board in FY2020.

FY2020 annual report, page 115:

During the year, the board has approved for special retiral benefits to the Managing Director who retired in October 2019. Accordingly, the Company has made a provision of ₹2,163 lakhs towards future pension and medical benefits by giving corresponding charge in the statement of profit and loss under employee benefit expense.

The company stated that it has provided for this large pension liability because the company does not provide any stock options (ESOP) to employees.

Conference call, October 2019, page 5:

Manoj Raghavan:…a mandate from the Tata Group especially for long-serving CEOs of the Tata Group and they have a policy for the CEO’s pension….Additionally, Tata Elxsi did not have any stock options or any other schemes of really supporting the senior management.

This large pension liability was one of the major reasons for a sharp decline in the operating profit margin of Tata Elxsi Ltd in FY2020 to 21% from 26% in FY2019.

Conference call, October 2019, page 3:

Manoj Raghavan:…one important thing is our PBT margin for the quarter is 17.7%. But if you have noticed, there is a one-time provision that we have provided for the accrued retirement benefits for ex-MD. If you remove that one-time provision, margins is about 23.1%.

Therefore, going ahead, an investor should be ready to witness a large pension liability whenever any MD&CEO who has worked for the company for a long time, retires. This is because; it seems that Tata group companies have an issue in granting ESOPs to employees.

Conference call, January 2019, page 14:

Madhukar Dev: We do not have ESOPs. So there is no lock-in for any of our employees.

Conference call, January 2020, page 21:

Manoj Raghavan:…typically Tata Group companies have an issue in issuing ESOP.

Advised reading: Are professionally managed companies safer for shareholders?

4) Exchange rate fluctuations and hedging activities of Tata Elxsi Ltd:

The company hedges about 50% of its overall exposure in foreign currencies. This is because as per the company, almost 50% of revenue in any foreign currency is spent in the same currency by way of salaries, purchase of software/hardware solutions for reselling etc.

Conference call, January 2020, page 20:

Nitin Pai: Typically, what we do is, about 50% of the FOREX are expenses that we have to incur in the same currency. So, whatever is the outstanding amount, typically we hedge about 50%

However, at times, this hedging policy has not proved efficient enough because, on certain occasions, the company has faced significant adverse impacts due to exchange rate fluctuations.

One such period was FY2008 when the despite a nearly 33% increase in sales, the profits of the company did not increase

Its profits did not increase because a sharp appreciation in India Rupee ate into its profitability despite its hedging activities.

FY2008 annual report, page 13:

One of the significant events during the year was the steep and sudden appreciation of the rupee against various foreign currencies…The net effect of this has been to adversely impact your Company’s turnover and value of receivables, in spite of the hedging activities undertaken during this period

In FY2010, the company reported a significant decline in its revenues as well as profits. In addition, it suffered a loss due to exchange fluctuations of about ₹8.5 cr (FY2010 annual report, page 61). This loss was due to a sharp appreciation of the Indian Rupee against almost all foreign currencies.

FY2010 annual report, page 12:

The Rupee also strengthened during the year – against the dollar by 12%, the Pound by 7%, the Euro by 11% and the Yen by 7% – resulting in lower export realizations. These factors contributed to the turnover dropping by 10%…and Profits after Tax dropping by 17.54%

In FY2015, the company suffered a loss of ₹6.3 cr due to foreign exchange fluctuations (FY2015 annual report, page 82). In FY2017, the loss due to foreign exchange fluctuations increased to more than ₹21 cr (FY2017 annual report, page 75), which was a key reason for the decline in the operating profit margins of the company in FY2017 from the previous year.

The hedging policy of the company seems to leave room for improvement because it leads to a large fluctuation in the impact of foreign exchange movements. For example, in FY2019, the impact of foreign exchange fluctuations was about ₹26 cr. from a forex profit in Q2 to a forex loss in Q3.

Conference call, January 2019, page 12:

Madhukar Dev: As shown in our published results, the impact is a Rs. 26 crores swing between the positive of Q2 and the negative of Q3.

The credit rating agency, ICRA, has also highlighted foreign exchange fluctuations as one of the major challenges for Tata Elxsi Ltd.

Credit rating report by ICRA, October 2015, page 1:

The ratings also take into account…the vulnerability of the Company’s revenues and margins to adverse movements in foreign exchange rates.

Advised Reading: Credit Rating Reports: A Complete Guide for Stock Investors

Going ahead, an investor should monitor the forex gains and losses of Tata Elxsi Ltd to assess the efficiency of its hedging policy. This is because, at times in the past, foreign exchange fluctuations have nullified the benefits of the entire sales growth achieved by the company.

5) Geopolitical and country-specific risks faced by Tata Elxsi Ltd:

Tata Elxsi Ltd earns a large part of its revenue via exports. In FY2022, about 84% of its revenue was from foreign countries and only about 16% of its revenue was from India (Q4-FY2022 Earnings presentation, April 2022, page 17).

Because of the high dependence on foreign countries, many times, the business performance of Tata Elxsi Ltd is impacted by geopolitical factors.

For example, in FY1999, the business of the company was impacted when the USA imposed sanctions against India after she conducted nuclear tests in May 1998. Due to sanctions, US companies were barred from selling software/hardware to Indian companies. As a result, the Education and Research segment of the company was impacted.

FY1999 annual report, page 6:

In the Education and Research segment, the imposition of sanctions by the U.S. Govt. in May ’98, on supplies to certain Indian entities, considerably affected business expansion for the Company in these accounts during the current year.

In FY2002, the business performance of the company suffered due to the attack by Al-Qaeda on the World Trade Center and the subsequent US-Afghanistan war.

FY2002 annual report, page 5:

In the overseas markets, the already adverse economic conditions were aggravated by the terrorist attack on 11th September, 2001 on the World Trade Centre towers in New York, the subsequent anthrax scare in the US and the attack on Afghanistan, all of which combined to restrict expansion of business.

Later on, the business of Tata Elxsi Ltd from one of its largest customers, JLR, was impacted when Britain exited the European Union (Brexit).

The business of Tata Elxsi Ltd has continuously been affected by the tightening of visa policies by different countries especially the USA and UK. It has repeatedly highlighted visa restrictions as one of the challenges for its business.

FY2005 annual report, page 20:

Concern areas continue to be exchange risk and visa restrictions.

FY2014 annual report, page 3:

challenges due to the changes in immigration policies in countries such as US and UK that increases the cost of deploying resources in those regions

Advised Reading: How to study the Annual Report of a Company

Therefore, an investor should always be vigilant that due to the global nature of the company’s business, any adverse event in any part of the world may have affected the business of Tata Elxsi Ltd.

6) Instances of weaknesses in processes at Tata Elxsi Ltd:

An investor comes across certain instances where it becomes apparent that the business processes at Tata Elxsi Ltd left room for improvement.

In FY2002, the company declared a dividend; however, it later had to reverse this decision when stock exchanges intimated to Tata Elxsi Ltd that its dividend declaration did not meet the criteria mentioned in the listing agreement.

FY2002 annual report, page 5:

This dividend was rescinded after the Company received a subsequent communication from some Stock Exchanges on which it was listed to ensure compliance with the provisions of Clause 16 of the Listing Agreement

In FY2010, Tata Elxsi Ltd did not deposit undisputed sales tax dues to govt. authorities in Canada within time limits, as these were overdue for more than 6-months and were highlighted by the auditor of the company in the annual report.

FY2010 annual report, page 32:

As at March 31, 2010, except for sales tax dues of Rs.915,106/- in Canada which were in arrears for more than six months from the date they became payable

In the FY2003 annual report, Tata Elxsi Ltd for the first time reported its related party transactions with its promoter Tata Sons Ltd. As per the company, it had started transacting with Tata Sons Ltd for the first time in FY2003; because in FY2002, the value of sales as well as outstanding with Tata Sons Ltd was nil.

FY2003 annual report, page 36:

However, while analysing the said related party transactions, an investor is surprised to note that the outstanding amount to be received from Tata Sons Ltd was higher than the sales & services done to Tata Sons Ltd. It might be due to an error in the annual report or there might be transactions other than sales & services between the company and Tata Sons Ltd, which should have also been disclosed.

Moreover, in the subsequent years, while disclosing the related party transactions of the company, it did not provide the details of counterparty company-wise transactions and outstanding i.e. it did not mention the size of transactions with individual companies. Instead, Tata Elxsi Ltd clubbed all the transactions with “Company with significant influence” as one. Similarly, it clubbed all the transactions with entities like “Subsidiaries of Tata Sons Private Limited” or “Other related parties” as one.

FY2022 annual report, page 173:

Even though Tata Elxsi Ltd might have fulfilled the minimum disclosure criteria as per statutory requirements by presenting the said “clubbed” data; however, it falls short of providing good insights to the readers of the annual report in assessing the exposure that Tata Elxsi Ltd has to different Tata group companies.

An investor may contact the company directly if she wishes to take a detailed counterparty-wise breakup of its related party transactions.

Advised reading: How Promoters benefit from Related Party Transactions

The Margin of Safety in the market price of Tata Elxsi Ltd:

Currently (June 24, 2022), Tata Elxsi Ltd is available at a price-to-earnings (PE) ratio of about 88 based on earnings of FY2022.

However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, which takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.

In the absence of any strength in the business model of the company, even a low PE ratio of the company’s stock may be a sign of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.

• 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
• How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
• Hidden Risk of Investing in High P/E Stocks

Analysis Summary

Overall, Tata Elxsi Ltd seems a company, which has grown its sales at a decent rate of 17% year on year for the last 10 years. The growth has been associated with nearly consistent improving profit margins except for FY2017 and FY2020. In FY2017, the profit margins declined due to forex losses whereas, in FY2020, the profit margins declined due to a large pension liability of the outgoing MD&CEO.

Otherwise, over the last decade, the profit margins have improved due to consistent efforts of the company to focus on high-margin R&D services business in addition to reducing the focus on low-margin or loss-making business divisions. Over the years, Tata Elxsi Ltd has reduced its share of the revenue from the automotive segment and increased the share from high-margin medical and media segments. It has deprioritized the low-margin systems integration segment as well as the loss-making visual computing labs division.

Strategic decisions like a focus on long-term and large-value deals, as well as a focus on getting repeat business from existing clients instead of continuously chasing new customers, have also helped the company in improving its profitability. Recent changes in the business mix like an increase in the share of offshore revenue as well as fixed-price contracts and a simultaneous increase in the employee utilization level have increased its profit margins.

A strong clarity of the business vision of the company for avoiding unnecessary diversifications and unsuitable and expensive acquisitions has protected the capital of the company, which is essential in the face of growing competition from large IT services companies.

In recent years, Tata Elxsi Ltd has faced an increase in its receivables days due to its attempts to generate new business in the automotive division outside JLR as well as the support extended to customers during Covid times. Nevertheless, the company has generated a significant surplus cash flow; about half of which it has distributed to the shareholders as dividends.

Tata Elxsi Ltd is a professionally managed company, which has seen only two MD&CEOs in the last 25 years. It has promoted long-time company veterans as MD&CEO. Its employee retention policies seemed to bear good results when its attrition levels had declined from 18% in FY2014 to about 6% in FY2021. However, in recent years, it has seen strong poaching attempts on its employees and its attrition rate has increased to 20% in FY2022. It has attempted to retain employees with a special one-time bonus in FY2022 and has increased the pace of hiring.

The business of Tata Elxsi Ltd is exposed to geopolitical, country-specific developments as well as foreign exchange fluctuations. Its business was impacted during US sanctions on India after nuclear tests, the US-Afghanistan war after the 9/11 attacks, and Brexit apart from phases like the dot-com bubble of 2000, and the global financial meltdown of 2008-09. Phases of appreciation of the Indian Rupee against major foreign currencies have affected the profitability of Tata Elxsi Ltd.

Going ahead, an investor should keep a close watch on the profit margins of the company including factors like the share of offshore as well as fixed-price business. She should monitor the employee utilization levels as well as the attrition level. She should monitor the receivables days of the company to assess its collection efficiency as well as analyse any acquisition if announced by the company. The investor should monitor the forex losses suffered by the company to assess the suitability of its hedging policy.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views on Tata Elxsi Ltd. However, investors should do their own analysis before making any investment-related decisions about the company.

You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks”

I hope it helps!

Regards,

Dr Vijay Malik

P.S.

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Disclaimer

Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.