Best Artificial Intelligence Stock: Tata Elxsi or Affle India?

Artificial Intelligence (AI) is undoubtedly one of the hottest topics around the world.

While a set of people are scared of AI snatching away their jobs, the other set is optimistic about the benefits they can reap using AI.

It seems the headcount of people optimistic about AI is more as the global AI market is anticipated to grow at around 40% for the next five years to become a US$ 422.4 billion (bn) market.

The Indian AI market is expected to grow at a CAGR of 20.2% and become a US$ 7.8 bn industry by 2025.

One of the major investments into the AI industry is the increase of public funding by 67% to US$ 1.3 bn in the Digital India mission.

Moreover, there has been a 14X rise in the number of AI startups in the country in the past two decades.

Recently, we covered an editorial comparing two AI stocks - Kellton Tech and Saksoft.

In this piece, we'll focus on two more renowned tech companies, which are making revolutionary progress when it comes to AI - Tata Elxsi and Affle India.

Business Overview

Tata Elxsi has been leading the design and technology market for the past 30 years. It offers its expertise for digitally transforming businesses around the world. AI has become one of the primary tools for doing the same.

The company offers AI-based application development, product development, framework integration, video analytics, and a lot more for helping businesses across the globe to transform and grow digitally.

Tata Elxsi has a presence across industries. However, most of the revenue is generated from servicing the following industries.

• Automotive
• Healthcare
• Media and communication
• Semiconductor

Affle India primarily offers advertisement and marketing solutions with the help of technology and digitalisation. It has started incorporating AI for enhancing customer outreach and gaining insights about the market and capturing data.

The company's main source of revenue is the consumer platform business from which it generated 99.2% revenue in 2023.

At present, Affle India offers AI-based services such as computer vision, chatbot development, app development, natural language processing (NLP), and more.

The industries this Affle serves include:

• Healthtech
• Foodtech
• Fintech
• E-commerce
• Gaming
• Edtech
• Travel and hospitality
• FMCG

Revenue growth

The revenue of both these companies has grown significantly in the past five years. However, Affle India's revenue growth has been much better, at a CAGR of 41.9% in the past 5 years, which is 2.9x the revenue growth of Tata Elxsi.

Here's a snapshot.

Revenue	FY 19	FY 20	FY 21	FY 22	FY 23	5-year growth	3-year growth
Tata Elxsi	16,404	16,746	18,659	25,154	32,208	14.45	19.96
Affle India	2,494	3,338	5,168	10,817	14,340	41.88	40.52

Data Source: BSE, Equitymaster

E-commerce, fintech, foodtech, and gaming are some of the industries where the effect of digitisation can be felt significantly. This is one of the prime reasons for the multifold growth in Affle India's revenue.

On the other hand, Tata Elxsi's main clientele includes automobile companies, healthcare, media, and broadcast, where the penetration of digitisation is lower but steady.

Profitability

Profitability is another important aspect, which needs to be evaluated for understanding any company's performance.

Tata Elxsi's net profit grew at a CAGR of 21.1% in the past five years, while that of Affle India grew at a CAGR of 38.1%.

Net Profit Growth

Companies	FY 19	FY 20	FY 21	FY 22	FY 23	5-year growth	3-year growth
Tata Elxsi	2,899.70	2,561.10	3,681.20	5,496.70	7,551.90	21.1	27.06
Affle India	488	655.2	1,031	1,834	2,453	38.12	33.5

Data Source: Equitymaster, Investors Presentations & BSE

The reason behind Affle India's superior growth is again the digital penetration in the industries it deals in. Even with half of the revenue generated by Tata Elxsi, Affle India managed to increase its profitability because of controlled expenses.

Affle India's EBITDA rose from Rs 1,303 m to Rs 2,930 m between FY21 and FY23. That of Tata Elxsi from Rs 5,224 m to Rs 9,611 m during the same period.

Valuations

Next, we need to check how these companies are valued. The two common ratios extensively used to gauge a company's true value are price to earnings ratio and price to book value ratio.

Valuations

Tata Elxsi	FY21	FY22	FY23
Average P/E ratio	30.8	68.7	67.9
Price / Book Value ratio	8.4	23.6	24.6
Affle India	FY21	FY22	FY23
Average P/E ratio	59.3	68.1	213.4
Price / Book Value ratio	17	25.6	39

Data Source: Equitymaster

The average P/E ratio of Affle India grew to 213.4 in FY23 from 59.3 two years back. This indicates the stock is expensive at present and the sudden jump in the price-to-earnings is mainly due to the exponential growth in the digitisation of the consumer platform business.

On the other hand, Tata Elxsi's price-to-earnings ratio has remained stable over the last two years after doubling between FY21 and FY22.

Similarly, the price-to-book value (P/B) ratio of Tata Elxsi has been consistent in the past two years but surged 3x in FY22.

On the contrary, Affle India's P/B ratio has been more consistent over the past three years.

R&D

Coming to the research and development segment, Tata Elxsi has an upper hand without a doubt.

It is primarily due to the abundance of resources available to the firm being a Tata Group company. In FY2023, the total number of patents filed by the company was 111 out of which 36 patents are already granted.

It has been awarded the 'Innovative Company of the Year' at the 9th Annual Confederation of Indian Industry Industrial Innovation Awards, in 2022, in the large enterprise space.

Affle India, on the other hand, filed 21 patents in the US, India, and Singapore. Theseare mostly related to futuristic use cases, out of which 6 patents were granted in the US in FY23.

Though Affle India does not have resources like Tata Elxsi, that does not restrict it from focusing on the innovation part.

Moreover, as Affle India's main revenue comes from consumer platform business, they can dedicate their research and development efforts to the same segment.

Dividends

Investors love dividends and companies that pay dividends regularly. Tata Elxsi never disappoints its shareholders and on top of that, the dividend payout ratio of the company is unmatchable in the industry.

It paid 81.2% of its earnings as dividends in FY21 and 50% in FY23.

Here is a snapshot.

Tata Elxsi Dividend History

Particulars	FY19	FY20	FY21	FY22	FY23
Dividend Payout Ratio (%)	29	40.1	81.2	48.2	50
Average Dividend Yield (%)	1.2	2.1	2.6	0.7	0.7

Data Source: Equitymaster

Affle India, on the contrary, hasn't offered any dividends yet to its shareholders. It re-invests the profit it generates for expanding the business.

It is quite interesting to see that even after revenue growth and profit margins of Tata Elxsi are lower than Affle India, the former pays dividends regularly while the latter doesn't.

Here comes the benefit of being a Tata Group enterprise. Tata Group is known for its dividends, and Tata Elxsi is no exception.

ROE

Before investing in any stock, one must understand how the company is generating returns on the amount invested by its investors.

This can be evaluated with the help of ROE or return on Equity.

ROE of Tata Elxsi and Affle India

Company	FY19	FY20	FY21	FY22	FY23
Tata Elxsi	30.8	23.5	27.2	34.3	36.2
Affle India	29.3	67.4	28.6	37.6	18.3

Data Source: Equitymaster

As can be seen from the above table, Tata Elxsi's ROE has been consistent over the years and grew from 30.8% in FY 2019 to 36.2% in FY 2023.

On the other hand, Affle India's ROE jumped in FY2020 as due to the lockdown, the use of digital platforms increased drastically.

However, it dropped to 18.3% in FY 2023, which is half of what Tata Elxsi has delivered.

Future prospects

Understanding the future plans of any company is crucial before investing in it.

Tata Elxsi

• One of the most anticipated future projects of Tata Elxsi is autonomous vehicle technology. It is going to change how infrastructure development works in the country and around the world. Tata Elxsi is determined to merge the benefits of AI with vehicles used for infrastructure projects. It is expected, that this technology can be a huge success in the mining industry, airports, ports, and agricultural sector.
• Another industry, which is expected to grow with AI technology, is the life science or healthcare industry. There have been inorganic digitisation in this industry via mergers and acquisitions.

Complex problem-solving with AI is the focus at present in the healthcare industry. There has been an increase in the demand for ARs and VRs, which are clinically approved. In the drug research segment, AI has been a boon as it made research easier and simpler.

Affle India

• Smartphone penetration is at a lower level in emerging countries including India, while that in USA or UK is around 80%. So, emerging markets can be a better playground for Affle in the future, especially India.
• One of the major threats to the digital world is digital ad fraud. Many elderly people shy away from using online applications for fear of getting their phones hacked or losing money.

Affle India has been working on this and came up with its Ad fraud detection platform 'mFaas' which is a real-time solution for these kinds of frauds. With the increase in smartphone penetration, the demand for this platform is expected to grow as well.

Final thoughts

Choosing between Tata Elxsi and Affle India cannot be based on how the companies are growing, but rather on the investor's goals.

If one is looking for regular earnings from dividends and stable returns on their investments, then Tata Elxsi can be a good option in the AI space.

On the other hand, Affle India offers better growth prospects. So, anyone looking for long-term growth can opt for Affle India.

At present, Affle India seems to be expensive while Tata Elxsi's valuation seems fair.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...