Innovation In Action

If innovation is the key to value creation, Asian Paints (APIL) offers
a good example....

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Designing Success
Tata Elxsi is into embedded product design services, industrial design
& engineering, animation and systems integration. Its clients are in automotive, consumer electronics, entertainment, multimedia, medical instrumentation, semiconductors, networking and telecom. It delivers
its services through partnerships with leading companies in the field, from its seven centres and labs across in India and studios in Mumbai. Recently, the company announced the setting up of two new development centres in Coimbatore and Hyderabad and the expansion
of its facility in Thiruvananthapuram. During the year, it set up a 100% subsidiary in Singapore for software development and trading in computer hardware and software.

What makes this software stock different is that it has stayed away from the plain-vanilla IT services or other business application-related outsourcing. Its focus is on product design services which contributes around 75% of its revenues. It calls itself a company focused on embedded engineering. The services include software, hardware & systems design and development programs for technology products. In automotive design products alone, the company has been able to get large orders from global entities, including the Fortune-100 companies. The latest is its tie-up with the European specifications consortium AUTOSAR. Some of the high-end automotive design products in the pipeline are night vision system, headlights that adapt to the light intensity on roads at night, sensor system that studies and automatically adjusts to each traveller’s mood in seating position, lighting and air-conditioner settings, etc. A big opportunity for this company is the takeover of Jaguar Land Rover (JLR) by the Tatas. Tata Elxsi was already supplying auto-move design services to JLR and this can increase now.

A second division, innovation design engineering, provides end-to-end brand and product development services across various industries. It claims to deploy a unique i3 (I-cube) integrated design process for the company that has been able to ‘help global players bring products to life through compelling designs.’ The visual computing labs is the most high-profile division. It does fully animated television commercials in 2D and 3D, animation and integration with live characters for feature films, animation for TV series, Internet and visual special effects. This division’s partnership with the likes of Disney and Yash Raj Films (YRF) has enabled the company to enhance its credibility in delivering qualitative animation and special effects. During the year, the company got the National Award for ‘Best Special Effects’ for the Tamil film Anniyan at the 53rd National Film Awards.

With Bollywood relying more and more on special effects, Tata Elxsi expects revenues from this division to grow much faster. Most firms have the capability to do either animation or special effects. Tata Elxsi is one of the few players that can do both. This division currently contributes about 5% to the Rs40 crore revenues but is expected to contribute 20% by 2010. The division is already working on a major project involving an investment of around $10 million and is in line to do two more projects with YRF and Disney. UTV Motion Pictures has decided to work with Tata Elxsi for a major project.

The fourth division is systems integration which provides a range of hardware, networking products and storage solutions including services in CAD/CAM/CAE market. In the media and entertainment sector, it offers broadcast solutions to cater to setting up of TV channels, data archival solutions and weather forecasting software. The division also has expertise in setting up virtual reality centres for manufacturing, defence and automotive industries. The division can deal with high performance computing technologies which bridge the gap between the computational power of traditional supercomputers and that of business units.

Revenues and profits are expected to rise by 30% in 2008-09. Turnover rose 30% last year but the operating profit was up only 8%. At Rs202.30, the market-cap is 1.71 times its sales and 8.73 times operating profit. It is worth buying for the medium term.

No Wilting Flower
Tulip Telecom is the leader in connecting business networks

If companies need to get their computers to connect seamlessly across India and around the world, Tulip Telecom is the preferred choice to provide that service. From a plain-vanilla software company, Tulip has diversified well into network integration, corporate data connectivity within and outside India and infrastructure management services. According to independent researcher Frost & Sullivan, Tulip is the largest data connectivity provider, which reaches more than 1,200 cities serving over 700 customers with 110,000 connects. It is the market leader in the Indian virtual private network with a 28% market share. Tulip’s closest competitors are Sify and Reliance and much lower down, Bharti. It has been working with big banking customers like HDFC, ICICI and PNB who need fail-safe connectivity, which testifies to the quality of its services. Tulip’s advantage lies in its integrated approach in providing data management services. It has bigger competition in network integration from the likes of Wipro or HCL and in bandwidth from Reliance or Bharti as also in remote infrastructure management from HCL Infosystems; but its strength lies in providing all three services simultaneously. The company has changed its corporate identity from Tulip IT Services to Tulip Telecom which reflects its sharp focus on the fast-growing telecom segment.

A very interesting part of Tulip’s growth strategy is its ambitious plan of being present in every village to ensure data connectivity by the end of 2009. We don’t know of any other company that believes so passionately in the telecom potential of the rural sector. The new business opportunities it sees are deployment of e-government services, financial inclusion, retail, telemedicine and demand from social organisations.

For instance, Tulip can design, deploy, operate, manage and maintain a network that connects all state headquarters, district headquarters, block/tehsil headquarters and also all respective horizontal offices. Tulip can further extend the network to every panchayat, citizen service centres or kiosks that may be set up across the state. It can provide connectivity using wireless technology for access in the rural areas, in the licensed and unlicensed bands. Unlike other solutions that deliver limited bandwidth and are designed primarily for voice, Tulip claims that its solutions can deliver the highest quality of voice, data and video. In an interesting experiment in rural connectivity and e-literacy called Akshaya in Malappuram district of Kerala, Tulip set up an ‘always-on’ connectivity and e-kiosks that enabled rural online banking, healthcare, Internet telephony and video conferences.

Tulip has an interesting leader. It is headed by Lt Col HS Bedi, who comes from the third generation of a family that has worked for the Indian army. Lt Col Bedi learned computers when he was posted at the army’s faculty of computer technology and was later asked to develop technology solutions for the then chief of the army staff, General K Sundarji, and various army headquarters. After this, he was posted to the army headquarters to coordinate the army’s automation plan. He was awarded the Vishisht Seva Medal for his role in the computerisation of the Indian army. After 22 years with the army, Lt Col Bedi took over the business of Tulip as its director, gave it the right focus and took it to a leadership position in critical business segments.

Tulip’s revenues have been rising by an average 53% over the past five quarters while its operating profit was up by a solid 107% over the same period. Its average operating margin is 19%. The stock, currently trading at Rs1,102, discounts its five-quarter average sales (annualised) by 3.02 times and its operating profit by 15.90 times. It is not cheap but, given its scorching growth and price strength in a declining market, it is worth buying.

Street Beat stocks are selected based on 3-month rolling returns from Mega-cap, Large-cap, Mid-cap, Small-cap & Micro-cap segments of MoneyLIFE database. Disclaimer: None of the stock information, data and company information presented herein constitutes a recommendation or a solicitation of any offer to buy or sell any securities. Information presented is general information that does not take into account your individual circumstances, financial situation or needs nor does it present a personalised recommendation to you. Individual stocks presented may not be suitable for you. Although information has been obtained from and is based upon sources, we believe to be reliable, we do not guarantee its accuracy and the information may be incomplete or condensed. All opinions and estimates constitute our judgement as of the date of the report and are subject to change without notice. This report is for informational purpose only and is not intended as an offer or solicitation for the purchase or sale of a security. Past performance is no indication of future results. Investors must do their own research before acting on them and maintain a stop loss of 20% at any time

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