Tata Elxsi - Moving up the value chain - Views on News from Equitymaster

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Tata Elxsi - Moving up the value chain

Aug 8, 2000

Tata Elxsi Limited, a leading player in systems integration and design and development, has posted encouraging results for the three-month period ended June 30, 2000. While the revenues of the company increased by 21%, the profits of the company jumped by 241% to Rs 13.5 m in 1QFY01 compared to corresponding previous quarter. The profits have climbed up considerably due to value added services provided by the company to its domestic customers. Originally in the business of manufacturing of computing systems and components, the company has changed its focus to software services and exports. These include the sophisticated and technologically advanced CAD/CAM, film & video, scientific computing and commercial and networking markets. Its film and video segment has recorded significant increase in business during the 1QFY01 and has a strong order book position. The company enjoys a market share of more than 30% in this segment. It has recently been assessed at SEI CMM Level 5 for its software operations, which contributes around 40% of its total revenues.

Although the company is shifting its focus to software services, its hardware business still constitutes around 60% of its total business. Since the hardware business is a low margins business (3-4%), as the company moves up the value chain the margins of the company would increase further.

Tata Elxsi has a reputed client base in the above segments. Some of its customers include Zee Telefilms (in the F&V segment), Kinetic Engineering and Escorts (in the CAD/CAM segment), Ahmedabad Stock Exchange and Bharat Heavy Electricals Ltd. (in the commercial and networking segment).

The stock quotes at a P/E of 55 times its 1QFY01 annualised earnings. The company is changing its business model and increasing its value chain which will enable its to sustain its valuations in future.

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