Financial Daily from THE HINDU group of publications
Sunday, Jan 09, 2005

Investment World
Features
Stocks
Port Info
Archives

Group Sites

Investment World - Stocks
Markets - Recommendation
Info-Tech - Stocks


Tata Elxsi: Buy

Krishnan Thiagarajan

INVESTORS with a medium-term perspective can consider taking exposures in the Tata Elxsi stock. Any weakness in the broad markets can also be used to step up exposures in small lots.

At Rs 158, the stock trades at a price-earnings multiple of 23 times its annualised 2004-05 per share earnings.

The investment horizon has to be necessarily longer as Tata Elxsi is focussing on the animation and visual effects segment, both in the Indian and overseas markets, which may take some time to pay off.

But the inroads that the company has made into special effects in the Indian movie markets, especially the latest Hindi films at Bollywood, are encouraging.

That apart, the reduction in revenues from systems integration is also a positive, as the margins in software development business (consisting of product and engineering design services and visual effects) is higher.

Finally, being a part of the Tata group will continue to be a key source of strength and support in the long run.

A strategic switch

The source of revenues for Tata Elxsi is slowly undergoing a significant change.

Based on the available segmental information, software development services accounted for 79 per cent of the revenues in the first half of 2004-05, compared to 61 per cent for 2003-04.

The contribution of the other segment — systems integration — came down to 21 per cent from 39 per cent over this period.

This shift in focus has offered a pep to the operating margins, which rose by 2.6 per cent to 17.5 per cent in the first half of 2004-05 vis-a-vis 2003-04.

This trend is also evident in the performance of the first two quarters of 2004-05, with operating margins in the second quarter increasing to 18.2 per cent from 16.9 per cent in the first quarter.

Even the sequential (quarter-on-quarter) growth in revenues and post tax earnings over this period has been promising.

In software development services, the company has three focus areas: Product R&D services, which caters to the wireless, consumer electronics and other intellectual property-related applications; Engineering Design services, which focusses on CAD/CAM-related solutions for automotive and scientific research solutions; Visual Computing Labs, a division which has a huge potential animation and computer graphics market in the US and India.

While product and engineering design service outsourcing will provide stability to revenues and margins, its growth engine may turn out to be animation services.

Given the huge cost-advantages and design expertise that Tata Elxsi enjoys, it should be able to leverage this for growth.

As Tata Elxsi already has experience in handling animation and digital effects for leading Hollywood studios, it should be able to successfully handle competition from the flurry of domestic players offering services in this segment.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Mutual Funds in 2004 — Winners across the equity board


Reliance: Will the battle be resolved on home turf?
Is CNX Mid-Cap 200 unbeatable?
Debt funds inch towards positive returns
Equity bias helps balanced funds
Franklin India Bluechip Fund: Invest in phases
Sundaram Select Midcap: Hold
Dividend or growth?
Tata Balanced Fund fetches 30 pc dividend
Shanthi Gears: Buy
Tata Finance: Sell
Tata Elxsi: Buy
Balaji Telefilms: Buy
MRF: Buy
The Dhampur Sugar Mills: Book profits partially
Short-term weakness to persist
Positive outlook for ITC, Ranbaxy
Focus of the week
Query corner
Better resale value for Esteem
New Bajaj Pulsars: `Re-loaded' at all right places
SBI Life Horizon
Economics of happiness
Volatile condition may prevail
Using Futures/Options
Futures guide
Options guide
Sundaram Finance — Park here for safety
Taxman's clarification on perquisite valuation
Capital gains on sale of demerged company shares
Short-term debt can become a long-term habit


The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | The Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |

Copyright 2005, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line