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Yet Another Little-Known Tata Stock the Next Tata Elxsi?

Feb 7, 2024

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 Yet Another Little-Known Tata Stock the Next Tata Elxsi?

A leading business daily hailed the milestone of the Tata group crossing Rs 30 trillion marketcap.

Performance of stocks from the group have been mixed over the past year.

Certainly, a few stocks from the Tata group have offered mouth watering returns.

Tata Investment Corp - 154%

Tata Motors - 112%

Tata Power - 88%

Titan - 45%

Tata Consumer - 59%

But there were others that offers relatively modest returns. Especially, TCS and Tata Elxsi.

Meanwhile, the new joinee in the group Tata Technologies, failed to retain investor interest after its blockbuster listing in December 2023. The stock was believed to be the next TCS. Tata Technologies has corrected by 10% since then.

But Tejas Networks, a 20-bagger stock since March 2020, is arguably one of the most interesting in the pack.

With gains of over 50% in the past year, Tejas Network, a lesser-known Tata Group company, has emerged as the dark horse.

Tejas Networks is a part of the Tata Group, with Panatone Finvest (a subsidiary of Tata Sons) being the majority shareholder.

Tejas Networks shares gained momentum after Tata Sons acquired a controlling stake in the company. In July 2021, Panatone Finvest signed a definitive agreement to acquire a 43.3% stake in Tejas Networks for nearly Rs 1,850 crore.

As per the latest shareholding pattern, Panatone Finvest holds a 55.8% stake in the company.

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Tejas Networks designs and manufactures high-performance wireline and wireless networking products for telecommunications service providers, internet service providers, utilities, defence and government entities. It operates in over 75 countries.

Due to the nature of the telecom industry, the company needs to continuously invest in R&D to stay competitive and compete with global players.

Tejas Networks has 350 patents and it spent 25% of total revenues of financial year 2023 towards R&D.

The company manufactures its products in India through partnerships with reputed companies. It also has an in-house manufacturing facility which primarily focuses on final integration, testing and quality control.

The company fetches around 36% of total revenues from international markets. It has geographical presence in USA, UK, Mexico, Brazil, South Africa, Nigeria, Kenya, UAE, Bangladesh, Philippines, Singapore and Malaysia.

Tejas Networks faced stiff competition from globally reputed players such as Nokia, Huawei, Ciena and others which have a long-standing presence and a more diversified portfolio. However, the government issued new security guidelines which restricted import of telecom equipment from certain countries from June 2021. This significantly reduced competition for the company.

The company also benefited from the China plus One megatrend.

The recent performance of Tejas Networks has elicited comparisons with Tata Elxsi, which until 2020 was one of the least known stocks in the group.

Like Tejas Networks benefitted from the telecom tailwinds, Tata Elxsi also had several economic tailwinds favouring its moat.

Since 2018, the automotive sector was set to see massive investments in technology in a decade. Most of it was coming due to the shift towards electric and autonomous vehicles.

The NASSCOM had predicted that Indian tech R&D spending has the potential to grow almost 10 times to US$ 120 bn by 2030.

Back in 2018 and 2019, in most parts of the world the technology for EVs was still nascent and most companies were still trying to come up with affordable and sustainable technologies.

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This had brought in plenty of opportunities for Tata Elxsi.

Tata Elxsi derives nearly 90% of its revenues from designing products for transportation, broadcast and communication and medical sectors. It offers services for emerging technologies such as Big Data Analytics, Cloud, Mobility, Virtual Reality and Artificial Intelligence.

Now, the stock of Tejas Networks may have delivered massive gains like Tata Elxsi, over past four years. But does the business have the elements to sustain such valuation?

Let's figure out with my 'SAFE' test:

First is S stands for - Sustainability of the Business

Typically, a technology led business can be subject to frequent risk of obsolescence given how disruptive the sector is.

But for Tata Elxsi, it was never about developing technology for technology's sake. The company's management has always believed that it is the role of design to humanize technology and protect the interests of end-users. The function of design is expanded to include delighting the consumer, educating a kid, increase work efficiency, improve system protection, guide the use of AI, and so on.

Tejas Networks, on the other hand, does expose itself to the risk of obsolescence if its products do not undergo constant innovation and meet global tech regulations.

Next A stands - Adaptability ...particularly to Regulatory norms

Tata Elxsi did see some of its vendors slow down their decision making when the automotive industry started going through massive regulatory changes, not just in India but globally. However, the company showed a fair degree of adaptability to the situation.

Tejas Networks too can face several growth bottlenecks both in domestic and international markets as and when the telecom regulations undergo significant changes. However, the company is yet to demonstrate the ability to take on such challenges.

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F stands for - Financial rigour across Cycles

Here I sought some proof in the financial numbers - like Tata Elxsi's profitability and return ratios versus that of Tejs Networks.

As you can see in the numbers here, Tejas Networks is not only in losses, but the high growth nature of the business combined with negative bottomline can be extremely detrimental to shareholder interests.

  Tejas Networks Tata Elxsi
P/E (x) N.A 60.9
Price to Book value (x) 4.4 23.2
Dividend Yield 0 0.8
RoE -1.6 41.1
RoCE -1.2 47.7
Profit growth over 3 years 22.7 42.7
Sales growth over 3 years 33 25

Both Tata Elxsi and Tejas Networks must keep funding R&D on platforms that are futuristic in nature. This is to highlight their capabilities to reputed and demanding customers.

But unlike Tata Elxsi, Tejas Networks does not seem to have the financial muscle to sustain such investment.

Last is E which stands for - Economic viability of its Offerings

A focus on R&D services-related business has helped Tata Elxsi 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. In fact, it increases the switching costs for the customers. So, the stickiness of the customers results in high margin repeat business for Tata Elxsi.

Tejas Networks' customers include various telecom operators, internet service providers, critical infrastructure, web-scale companies, government agencies, etc. The company had order book of nearly Rs 100 bn at the end if 2023.

Moreover, in December 2023, a licence for the indigenous 5G RAN technology developed by IIT Madras and IIT Kanpur, was offered to Tejas Networks for Rs 120 m, marking one of the largest technology transfers from academia in India.

Therefore, both Tata Elxsi and Tejas Networks do seem to have reasonably sustainable business models and technology moats.

Can the valuations sustain?

The verdict is clear in the financial metrics of the two new age technology-oriented stocks from the Tata group.

Tejas Networks may have a promising business model, strong order book, marquee clientele and visible growth upside. However, without profitable operations and financial muscle to continue its R&D initiative, the company hardly inspires confidence.

Hence while the stock may have exceeded Tata Elxsi in terms of stock market gains over past four years, the stock of Tejas Networks lacks the fundamental strength to retain valuations.

Check the detailed financials of other Tata group stocks on Equitymaster Screener.

Warm regards,

Tanushree Banerjee
Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)

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2 Responses to "Yet Another Little-Known Tata Stock the Next Tata Elxsi?"

A. John DSouza

Feb 8, 2024

Commendeble insigt,

Like 

V.KASI

Feb 8, 2024

We appreciate your efforts to create equity master IE.various segments in share market analysis, to enable the a moderate INDIAN MEAGRE INVESTORS, CREATE AWARENESS,IMPORTANCE OF SHARE INVESTMENT STRATEGY.

THANK YOU

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