The Top Semiconductor Stock That's Not Named NVIDIA

On Wednesday, 19 June 2024, semiconductor giant Nvidia caught the public eye as it became the world's most valuable company, following a staggering rally in its shares.

The rally underlined the outsized role investors expect artificial intelligence (AI) to play in the global economy over the coming years.

Nvidia shares rose about 3% on Tuesday, 18 June 2024, giving it a market value of about US$ 3.33 trillion (tn).

That pushed the semiconductor bellwether past Microsoft and Apple, which have been jostling for the top spot in recent days.

The surge in Nvidia's market value has been driven by demand for its chips, the gold standard in the AI space. The company's shares are up more than 170% this year and have risen about 1,100% since their October 2022 low.

Nvidia has gained a lot of significance so much so that, it is said, 'What Nvidia is to AI, is almost like what Intel was to PCs'.

Blockbuster earnings and broadening investor enthusiasm over AI are supercharging Nvidia's rally.

That fervour has been reflected in Nvidia's market value, which took only 96 days to go from US$ 2 tn to US$ 3 tn.

Another interesting fact... the current rally in the US chip giant was so insane... the value added in the company's marketcap was more than the marketcap of all the listed companies in Indian benchmark BSE Sensex!

What About the Semiconductor Market in India?

When it comes to delivering impact, often small hinges swing big doors. In today's world, semiconductors are the backbone of modern electronics, indispensably lodged at the intersection of various industries.

India has 20% of the world's semiconductor design workforce, a rapidly evolving technology landscape, and a thriving domestic market, all conducive to building an indigenous semiconductor ecosystem.

There has been a growing interest in the semiconductor market in India due to increased demand for electric vehicles and infrastructure development.

Investing in the best semiconductor stocks in India presents a compelling opportunity driven by their integral role in advancing technology.

As the backbone of devices spanning smartphones to high-performance computing systems, semiconductor companies in India stand at the forefront of innovation.

The sustained demand for their components, fuelled by emerging technologies like AI and 5G, underscores their enduring relevance in the market.

Moreover, the best semiconductor stocks offer diversification benefits within investment portfolios.

Their performance is intricately linked to global economic trends and specific industry advancements, making them a dynamic asset class.

Government Backing

Government initiatives, such as the National Electronics Policy or the Rs 834.1 billion (bn) Production Linked Incentive (PLI) scheme for semiconductor manufacturing, are also boosting India's chip-making aspirations.

Budget 2024 further made key announcements, an increased allocation for the semiconductor ecosystem, and the establishment of a Rs 100.9 bn innovation corpus to incentivise R&D.

The government in March 2024 approved three semiconductor plant proposals, aiming to bolster India's semiconductor manufacturing ecosystem.

The projects entail an estimated investment of Rs 1.26 tn and are expected to significantly contribute to India's electronics manufacturing sector.

On 18 January 2024, the government approved a deal between India and the European Union (EU). The goal is to work together on semiconductor research, innovation, and technology development.

This partnership aims to make the semiconductor supply chain stronger in both India and the EU. It covers cooperation in wide areas including research and innovation, talent development, partnerships, and exchange of market information.

Will India Get its Own Nvidia?

While Nvidia has been the standout performer, it is not the only stock to benefit from enthusiasm about the profit potential for AI.

Shares of Indian technology companies have gained momentum this year.

And the outlier has been none other than Tata group company Tata Elxsi.

# Tata Elxsi

Tata Elxsi was founded more than three decades ago in 1989.

The company today is among the world's leading providers of design and technology services across industries including automotive, media, communications, and healthcare.

Tata Elxsi provides integrated services from research and strategy to electronics and mechanical design, software development, validation, and deployment, and is supported by a network of design studios, global development centers, and offices worldwide.

Tata Elxsi has three key verticals: automotive, media, broadcast & communications, and healthcare. It provides a broad range of technology services including software development and allied services under these verticals.

Talking about the geographical presence, the European region contributes 40% of total revenues, in addition to the USA contributing 40 % of the revenues, followed by India and RoW (Rest of the world) contributing 15% and 5% respectively.

Tata Elxsi is leveraging AI to revolutionise automotive testing, ensuring higher accuracy and reducing time-to-market for products.

The company is also experimenting in aerospace and smart manufacturing, aiming to extend its innovative solutions to new verticals.

It's also monetising these efforts by incorporating Generative AI (GenAI) into its products.

Tata Elxsi is revolutionising the telecommunications industry with its Neuron Autonomous Network Platform. This groundbreaking solution powers the world's largest and most advanced 4G/5G and fixed networks.

The company has expertise in customer premises equipment (CPE) like set-top boxes and gateways giving it an added advantage to tap the growth of ongoing on-demand video and OTT platforms segments.

The company plans to increase its workforce by 200 employees for an innovation hub to aid with the development of research and development for green mobility.

The company has been selected as a strategic software development partner for a Software Defined Vehicle (SDV) multi-year deal from a global auto original equipment manufacturer (OEM).

It's a win-win for Tata Elxsi as there are a lot of opportunities arising from software-defined vehicles and advanced driver assistance systems (ADAS) as OEMs focus extensively on crafting in-vehicle experiences for buyers.

Revenue Contribution

During FY24, the transportation business grew strongly at 20.5% year-on-year (YoY) in constant currency terms and now accounts for almost 50% of the overall software development services (SDS) revenues.

Healthcare and life sciences business registered a growth of 7.6% YoY in constant currency terms in the financial year.

The company is investing and winning deals with Gen AI-led solutions for the healthcare industry, including the identification and elimination of toxic materials from the medical device supply chain.

The media & communications business declined 2.6% in constant currency terms during the financial year.

The system integration and support business, revenues, and growth were impacted by hardware shipment delays due to the Red Sea shipping crisis, which impacted the company revenues.

Despite this, it grew credibly by 18.6% in FY24 in constant currency terms, getting close to Rs 1 bn in business in this financial year.

Strategic Partnerships

• The company entered into a partnership with INVIDI Technologies to transform addressable advertising for Pay-Tv operators.
• Brain Chip and Tata Elxsi partnered for edge AI. It will be driving Akida technology into medical devices and industrial applications by leveraging BrainChip's first-to-market, fully digital, neuromorphic technology to provide intelligent, low-power solutions to target markets.
• Tata Elxsi Partners with ATEME to enable the fastest Launch of FAST Services. It is astrategic alliance to accelerate time-to-market for content and service providers launchingFAST channels.
• The company has a tie-up with Renesas Electronics Corporation, a premier supplier of advanced semiconductor solutions, for setting up a state-of-the-art design center in Bangalore that will develop targeted solutions for electric vehicles (EV).

Client Concentration

Revenue concentration from the top 10 clients increased from 46.5% in FY22 to 53.2% in Q2FY24. The top 5 clients' revenue contribution stood at 44.5%.

Financial Snapshot

Rs m, consolidated	FY20	FY21	FY22	FY23	FY24
Net sales	16,100	18,260	24,710	31,450	35,520
Growth(%)		13.4	35.3	27.3	12.9
Operating Profit	3,440	5,240	7,670	9,620	10,470
EBITDA(%)	21%	29.00%	31.00%	31.00%	29.00%
Net profit	2,560	3,680	5,500	7,550	7,920
ROCE(%)	35	40	48	48	43
Dividend Payout(%)	40	81	48	50	55

Data Source: www.screener.in

FY24 was a year of consistent operational performance with revenue growth of 13%.

This was despite the global macroeconomic uncertainties and volatility in the media and communication industry over the last few quarters.

The company has maintained industry-leading earnings before interest tax depreciation amortisation (EBITDA) margins at 29% for the year.

At the same time, Elxsi continues to invest in expanding its talent base through all 4 quarters with a net addition of 1,535 employees throughout the year.

In FY24, the company's revenue from operations stood at Rs 35,520 million(m), a YoY growth of 13%, EBITDA margin at 29%, PBT margin at 28.5%, and profit before tax (PBT) grew 11.9%. This is the first time their full-year PBT crossed Rs 10,000 m.

The company has no debt on its books, allowing it to reward its shareholders generously. The board of directors has recommended a final dividend of 700% which is Rs 70 per share for FY24.

How Tata Elxsi Share Price has Performed Recently

In 2024 so far, Tata Elxsi share price has fallen around 17%.

IT stocks have delivered a weak performance this year but things are starting to change.

Tata Elxsi touched its 52-week high of Rs 9,200 on 18 December 2023, and a 52-week low of Rs 6,411 on 4 June 2024.

The market capitalisation of Tata Elxsi stands at Rs 4,605 bn. The stock's 5-year compounded annual growth rate (CAGR) is 50.7%.

In the past, Tata Elxsi's stock price has skyrocketed sharply from Rs 500 to around Rs 10,500 levels. It's the only semiconductor stock that comes close to having a same share price multiplier effect like NVIDIA.

In Conclusion

To sum it up, the demand for semiconductors is only going to increase in the years to come.

The government has taken several measures, such as sanctioning funds under the PLI scheme and announcing the Semicon India Program to make India a prominent hub for the manufacturing of semiconductors.

Private companies, both domestic and international, have responded positively to this. This is a classic example of free market competition where ultimately the best companies win.

As far as Tata Elxsi is concerned, the company is now getting more done with less people or less capital. This efficiency boom in productivity could possibly result in faster growth in the coming years.

It's solving complex semiconductor problems which many other companies can't.

Tata Elxsi is already investing a lot in the semiconductor ecosystem and it's critical for the company to invest more in designing and manufacturing advanced semiconductors. This will help ensure a resilient supply chain, promote economic vitality, and maintain technology leadership in this rapidly growing industry.

Happy Investing!

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...