TATA ELXSI "Engineering Creativity" - Annual Report Synopsis
Tata Elxsi Limited (“the
Company”) is a public limited company incorporated in India in the year 1989
and domiciled in India. The Company has its registered office in Bengaluru,
Karnataka, India. It has its listings on the Bombay Stock exchange and National
Stock Exchange in India.
It is head quartered in
Bengaluru, and operates through delivery centers in Bengaluru, Chennai, Pune,
Mumbai and Thiruvananthapuram.
The Company’s operations are
located in multiple cities in India, and in multiple international locations
including USA, UK, France, Germany, Japan, Ireland, Netherlands, South Africa,
Portugal, Canada, and Spain.
It has spent the last few years
building relevant capabilities and strategies in industry verticals with low
overlap, such as Transportation, Media, Broadcast and Communications, and
Healthcare.
Also provides product design and
engineering services to the consumer electronics, communications &
transportation industries and systems integration and support services for
enterprise customers. It also provides digital content creation for media and
entertainment industry.
It earns revenue primarily from
providing information technology, engineering design, systems integration and
support services, sale of licenses and maintenance of equipment.
Industry Outlook:
The year 2020
was disrupted by pandemic-related sharp declines in growth across industries.
When the global economy shrank by 3.3% YoY in 2020 (IMF), India’s IT & ITeS
sector shone brightly, growing by 2.3% YoY (Nasscom) thanks to faster digital
technology adoption. According to Nasscom’s Strategic Review 2021, India’s
technology sector contributed 8% of national GDP and 52% of services exports.
The rate of
digital technology adoption has increased across industries, resulting in rapid
revenue growth for technology service providers. Enterprises are diverting
their CAPEX budgets to technology and prioritizing digitization in the face of
a pandemic.
According to
Zinnov, the global ER&D was USD 1.4 Trillion and is expected to grow by a
CAGR of 11% to 1.9 Trillion by 2023.
The rapid
adoption of intelligent, connected and smart initiatives such as Tele X,
intelligent workplaces, contactless commerce, leveraging new age technologies
such as Artificial intelligence, AR/VR, IoT is set to further fuel ER&D
spend across verticals and make enterprises anti-fragile.
With a surge
in data & telecom services due to global lockdowns, the Media &
Communications sector is expected to grow by a CAGR of 4% between 2020-2023.
Furthermore, investments are expected to increase in OTT, 5G, SDN/NFV and AI.
The pandemic acted as a trigger, accelerating several developments that were
already in motion. With movie theatres closing, OTT (direct-to-consumer through
streaming platforms) saw a healthy increase in streaming content consumption,
subscription services, and ad-supported models. With the increased adoption of
remote working teams and the availability of successful digital collaborative
tools, demand for services such as in-home access, home broadband, and
over-the-top (OTT) services is increasing. Consumer and enterprise adoption of
innovative wireless technology like 5G has increased due to the COVID-19
pandemic, as has customers’ desire to try new content options.
COVID has
served as an inflection point for digital transformation across the healthcare
ecosystem. Transforming the patient experience value chain is top priority for
providers. The uberization of patient care is the biggest COVID led disruption.
Healthcare payers are accelerating digital investments to automate the trifecta
of sales, operations, and services. Medical devices firms are unlikely to
witness a significant change in their R&D roadmaps; their focus on
connected devices will receive an impetus. The global health spending is
expected to rise at a 3.9% CAGR during 2020-2024, led by Asia and Australia
(5.3%) and the economies of Central and Eastern Europe (5.2%).
Business performance –
Company has been diligently working to reduce client concentration which is evident from FY21 results. The contribution of the top client in operating revenues has declined from 16.1% in FY 2020 to 11.8% in FY 2021. The top 5 clients and top 10 clients in operating revenues have also reduced by 320 bps and 370 bps respectively in FY2021.
Geographical
revenue contribution has also further diversified, with US contributing to
36.8%, Europe 36.1% and India 13.3%.
Company’s
operations are classified into 2 business segments, I.e. 1. Software
development and services 2. System integration and support.
Software
development and Support
This segment
witnessed healthy growth in FY 2020-21, supported by all key segments. The
transportation business has been showing a sustained recovery while the media
& communications business and healthcare business are growing at a steady
pace.
Efforts are
being made to diversify revenues by redeploying the available resources and
capabilities into other adjacencies, i.e., off-road and rail, accelerating new
customer acquisition, and diversification strategies to de-risk revenue
dependency from customer/ segment/ region are yielding results.
Embedded Product design
This segment provides technology consulting, new
product design, development, and testing services for the Transportation,
Media, Broadcast & Communication and Healthcare. With three decades of
experience in providing product design, technology development, testing, and
systems integration services, Tata Elxsi has an unparalleled depth of industry
expertise in each of these segments and also recognized as well established
niche player in advanced technologies such as Digital Engineering, Artificial
Intelligence, and the Internet of Things.
Different Vertical and corresponding services offered
1. Design Digital - Tata Elxsi’s Design Digital brings together a global and diverse team of strategic thinkers, consumer insights experts, award-winning designers, technologists, and digital experts.
Digital technologies like Mobility, Internet of Things, Artificial Intelligence, and Cloud-based applications are being integrated into consumer contexts, services, and products thereby helping enterprises re-imagine their products and services - from strategy, insights, service design, interaction design to technology implementation and integration.
2. Industrial design and visualization – It offers fully integrated global design consultancy, creating innovative products, services, and experiences to build brands and help businesses grow.
Company’s
services span across consumer research and strategy, branding and graphics,
product design, service design, user experience design, transportation design,
3D-prototyping, visualization, and manufacturing support.
Selected by DishTV to develop ‘Orbit,’ the new user interface for both its brands Dish TV & D2H, enabling subscribers with a seamless TV and online viewing experience. The new
interface will leverage artificial intelligence and machine learning to make it
easier to find content on TV where users are restricted to traditional remotes.
Company has won
its second iF Design Award this year after the first one in 2017. Tata Elxsi
won this world renowned award for design excellence for its innovative and
exceptional design concept for a Mixed Reality (MR) Based Smart Assistive
Wearable Device. These devices have been designed to help people with special
needs such as Autism or Alzheimer’s to deal with social situations, which they
might otherwise find difficult.
Company also won
two ‘India’s Best Design Awards (IBDA) for Packaging Design for Sunny Sun-lite
oil and Product Design for Orient Ultimo tower cooler.
Rolled out an industry-first outcome-based risk assurance business model for large regulatory transition programs for existing and new customers
assisting with integration, process automation, and new service rollouts.
As per the Zinnov
report, global automotive ER&D spending reached US$157 bn in 2019,
registering a growth of 5% y-o-y, led by investments in Digital Engineering
fueled by increasing focus on new-age technologies.
During FY2020-21,
Company announced the opening of the Global Engineering Center (GEC) with
Schaeffler Technologies AG & Co. KG, a world leader in providing
mechatronics solutions for the Transportation industry. Tata Elxsi is the
global engineering services partner for Schaeffler, and the GEC is part of a
strategic multi-year engineering services engagement. This relationship
strengthens Company’s automotive presence in Europe and reinforces the strategic
investments as a design-led engineering solutions provider over the years.
They are investing in building capabilities in the rail industry, working with leading operators, metro and rail authorities, rolling stock and systems suppliers to deliver design and technology services that enhance safety, convenience, quality, and overall customer experience, while accelerating product and service development and deployment.
Company is investing in strengthening electric vehicles’ development capabilities, including control software development, battery management systems, and validation. continue to invest in developing IP in select areas, creating new monetization opportunities, and demonstrating expertise in specific areas of future growth.
The Company’s exposure to customers is diversified and except one customer, no single customer contributes to more than 10% and 10% of outstanding accounts receivable and unbilled revenue as at March 31, 2021.
Income tax
The tax rate used for 2020-21
reconciliation above is the corporate tax rate of 34.944% (PY 34.944%) payable
by corporate entities in India on taxable profits under Indian tax law.
The Company benefits from the tax
holiday available for units set up under the Special Economic Zone Act, 2005.
These tax holidays are available for a period of fifteen years from the date of
commencement of operations. Under the SEZ scheme, the units which begins
providing services on or after April 1, 2005 will be eligible for deductions of
100% of profits or gains derived from export of services for the first five
years, 50% of such profit or gains for a further period of five years and 50%
of such profits or gains for the balance period of five years’ subject to
fulfilment of certain conditions. Pune unit 1, Thiruvananthapuram, Chennai unit
and Pune Unit 2, will be eligible for deductions of 100% of profits or gains
derived from export of services for the first five years, 50% of such profit or
gains for a further period of five years and 50% of such profits or gains for
the balance period of five years’ subject to fulfilment of certain conditions.
Human resource
About 35% of total workforce
comprises of female employees, underscoring the emphasis that Tata Elxsi places
on providing equal opportunities for its workforce. Total headcount was 7362 as
of March 31, 2021.
Remuneration
Percentage increase/(decrease) in the managerial remuneration for the year was (2.01%).
The ratings are withdrawn at the
request of the company and on the basis of the receipt of no objection
certificates from the bankers, in accordance with ICRA’s policy on withdrawal
and suspension of rating of bank facilities.
The reaffirmation of the ratings
considers the long-standing presence of Tata Elxsi Limited (TEL/the company) in
the designing and development of systems and software for varied end-user
industries, its strong business profile supported by a diversified geographical
presence, its reputed clientele, and experienced and professional management
team. The ratings remain underpinned by TEL’s strong financial risk profile
marked by stable revenues, healthy profit margins, sizeable net worth, strong
cashflows and debt-free status.
The ratings also consider the
moderate customer concentration with the top five clients accounting for 35.4%
of the revenues in Q3 FY2021 and the vulnerability of the company’s earnings to
end-user demand and protectionist policies in some of the regions where it
operates. The ratings have also taken into account the exchange rate
fluctuations and intense competition in the industry, characterized by the
presence of large players that offer managed services.
Credit strengths
1. Long-standing presence in designing and development of systems and software for varied end-user industries – As TEL is a specialist vendor for the top OEMs and Tier-I suppliers, the recent reallocation of R&D budgets towards electronics and software, which is a large addressable market, and its differentiated product offerings increase the growth opportunities for the company.
2. Strong business profile supported by diversified geographical presence, reputed clientele and professional management team – The company’s business profile is strong, aided by a diversified geographical presence across Europe, the US, India, Japan, the Far East, etc., its reputed clientele, and professional management team. TEL is uniquely positioned among its peers and offers relatively complex services supported by its expertise, execution capabilities and long-standing relationships with its clients. This not only strengthens its value proposition; it also helps in generating higher margins.
3. Robust financial profile with stable earnings, debt-free status and strong cash reserves – The company’s liquidity position is strong with a cash balance of Rs. 739.4 crore as on September 30, 2020. TEL’s debt indicators are expected to remain comfortable going forward, in the absence of any large debt-funded capital expenditure.
Credit challenges
1. Increasing competition leads to pricing pressure – The industry is characterized by intense competition from players enjoying the benefits of scale and higher bargaining power. Nevertheless, TEL is well placed in terms of niche service offerings, multidisciplinary designing capabilities and an established presence. Given the Covid-19 pandemic, ICRA expects a contraction in the OEMs’ spend towards R&D, which would increase the competitive intensity in the business and lead to pricing pressure.
2. Moderate customer concentration – In FY2020, the share of the top five customers was 38.5% of the overall revenues (35.4% in Q3 FY2021), reflecting moderate customer concentration. This apart, the transportation vertical, which has been the major contributor to TEL’s revenues, witnessed a de-growth owing to the ongoing slowdown in the global automotive sector coupled with the impact of the pandemic. However, the company’s other segments like broadcast & communication and healthcare & medical devices have been growing at a healthy rate with the former supported by the increased usage of over-the-top (OTT) platforms and telecom services (given the work-from-home situation across the globe).
3. Vulnerability of earnings to demand in end-user industries and foreign exchange fluctuations – With exports contributing 87% to its revenues, TEL is susceptible to exchange rate fluctuations. Nevertheless, the same is mitigated to some extent by an active hedging mechanism. The earnings are also susceptible to protectionist policies in a few key geographies and wage inflation.
Liquidity position: Strong
TEL’s liquidity position is strong with a cash balance of Rs. 739.4 crore as on September 30, 2020. Despite regular dividend payouts, the company’s liquidity position has remained strong on the back of healthy operating cashflows, which are expected to continue in future as well. TEL remains debt free and has relatively low capex costs, mostly for maintenance.
Financials
Management Details
Source
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