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.