tata elxsi ltd. -...

RESULT UPDATE 19th July, 2019

Tata Elxsi Ltd.

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Tata Elxsi Ltd. CMP

INR 731 Target

INR 1,008 Potential Upside

37.8% Market Cap (INR Mn)

INR 45,468 Recommendation

Buy Sector

IT Services

Shares outs (Mn) 62.2

Equity Cap (INR Mn) 623

Mkt Cap (INR Mn) 45,468

52 Wk H/L (INR) 1,491/722

Volume Avg (3m K) 628

Face Value (INR) 10

Bloomberg Code TELX IN

MARKET DATA

SHARE PRICE PERFORMANCE

SENSEX 38,897

NIFTY 11,597

MARKET INFO

KEY FINANCIALS

Source: Company, KRChoksey Research

Result Highlights of Q1FY20

• Tata Elxsi Q1FY20 results were below our estimates on both the revenue and profitability front due to degrowth in Auto vertical

• Tata Elxsi reported revenue degrowth of 5.3% YoY (down 10.7% QoQ) to INR 3,617 mn against our estimates of INR 4,202mn.

• Overall, EBITDA margin contracted by 857 bps YoY to 19.3% (down 500 bps QoQ) indicating significant margin pressures.

• On a segmental basis, Software Development & Services (SDS) revenue declined by 4.7% YoY to INR 3,519.2 mn, while the segmental PBT for SDS declined by 32% YoY to INR 783.7mn.

• Net Profit declined by 30.8% YoY to INR 488 mn (down 31.6% QoQ) with NPM of 13.5% (down 496 bps YoY).

SHARE HOLDING PATTERN (%)

Revenue CAGR between FY19 and FY21E

11.9%

PAT CAGR between FY19 and FY21E

4.6%

Weak performance in Auto vertical impacted Q1FY20 results

TELX’s Q1FY20 revenue degrowth was majorly led by Software Development & Services (SDS) segment (97.3% of the revenue) which declined by 4.7% YoY to INR 3,519 mn, while the segmental PBT for SDS declined by 32% YoY to INR 784 mn. The degrowth in the revenue was experienced due to the overall slowdown in the auto segment, especially JLR (TELX’s largest client) and delays in new project initiations. In Q1FY20 operating margin at 16.4% was down 623 bps QoQ (down 986 bps YoY) primarily impacted by higher costs due to low employee utilization levels.

Technology adoption trends and Auto sector revival can swing back TELX

TELX is positioned into the emerging growth verticals (Automotive, Broadcast & Media, Communications and Healthcare) which are witnessing a trend of increased technology adoption. Going forward, JLR, which is a major client of TELX is also on its revival trajectory as evident from recent monthly sales figures. While challenging conditions continue to impact other regions, it was relieving to see that JLR’s UK sales growth (+4.6% YoY) returned on track, on the back of higher sales of the new Range Rover Evoque, Land Rover Discovery, Jaguar I-PACE and the new Jaguar XE for the month of June 2019. According to the management, the slowdown in JLR for other regions and slowdown in decision making is only temporary and doesn’t see any further loss of business from its major client going forward. Recently, JLR and its larger rival BMW has announced a collaborative approach for developing EV platforms; and IT spending can bounce back in the coming quarters.

Strong balance sheet to support opportunities in new verticals

Tata Elxsi plans to expand into newer and upcoming verticals and reduce its dependence on the Auto segment. In fact management indicated that during Q1FY20, TELX’s Broadcasting and communications (B&C) and Healthcare verticals recorded higher growth than recent two quarters. Furthermore, with the huge free cash in the books (debt free balance sheet with >INR 500 Cr. Cash/liquid assets as of March 2019), the company plans to chase inorganic expansion through mergers or collaboration.

Weak performance in Auto vertical and margin pressure

India Equity Institutional Research II Result Update – Q1FY20 II 19th July, 2019

Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 www.krchoksey.com

KRChoksey Research is also available on Bloomberg KRCS<GO>

Thomson Reuters, Factset and Capital IQ

ANALYST Parvati Rai, [email protected], +91-22-6696 5413

Particulars Mar-19 Dec-18 Sep-18

Promoters 44.53 44.57 44.57

FIIs 9.56 8.02 10.51

DIIs 2.72 4.03 4.8

Others 40.64 41.01 38.29

Total 100 100 100

50

100

150

200

Jul-1

6

Jan

-17

Jul-1

7

Jan

-18

Jul-1

8

Jan

-19

Jul-1

9

Tata Elxsi Nifty

Particulars (INR Mn) FY17 FY18 FY19 FY20E FY21E

Net Sales 12,330 13,863 15,969 17,262 19,980

EBIT 2,663 3,207 3,899 3,297 4,493

PAT 1,733 2,400 2,900 2,472 3,268

EPS 27.83 38.55 46.56 39.69 52.48

EBIT Margin 21.6% 23.1% 24.4% 19.1% 22.5%

NPM 14.1% 17.3% 18.2% 14.3% 16.4%

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Tata Elxsi Ltd.


Key Concall Highlights: (i) Q1FY20 was a tough quarter for the company. Revenue was down due to the overall slowdown in the auto segment and the loss of business from JLR (ii) Due to the late decision making, multiple projects are still in pipeline waiting for its start of operations but management stated that Q1 new order booking was significantly higher than previous quarter (iii) Employee wage hike is yet to be taken and is expected in the coming months. Hence its effect will be seen in Q2FY20 (iv) Segmental wise, Auto segment contributed to ~50% of the revenue, while Broadcasting and Communications contributed to ~40% of the revenue and Medical/Healthcare/Others contributed ~10% (v) JLR contributed 14%-15% to the topline in Q1FY20 (compared to ~21% in Q4FY19) (vi) One-off revenue declined drastically to around INR 2 Cr. in Q1FY20 from ~INR 25-30 Cr. in previous quarter (vii) Management stated that weakness in JLR contribution in Q1FY20 was entirely volume driven and that there were no change in pricing; there was no shifting of JLR works from TELX to any other competitor (viii) Utilization rate slipped to 65% in Q1FY20 from 82% in Q4FY19 (ix) Management indicated that if it foresees a viable opportunity then it will use its free cash for inorganic growth. Valuation and view: While the Q1FY20 numbers were disappointing, we see prospects of turnaround at TELX and do not see the results as a structural change to its growth or margin profile. Despite tight R&D budget for global auto players and delays in decision making, we continue to remain positive over the technology adoption trends and believe that TELX has the right set of products/services to address the market opportunity through its collaborative approach with global OEMs including the recent entry into the China market. With a major shift towards Electric vehicles, Autonomous cars and OEM, Internet TV, Cloud and SDN Technology, we feel that TELX is ideally placed to provide its services to these faster changing technologies and enjoys a competitive advantage over its peers. However, based on poor Q1FY20 financial performance, we have revised our estimates downwards and now expect the company to generate a topline growth of average 11.9% in FY20E/FY21E while we take a conservative stance on margin outlook (EBIT to stay below 23% in forecast period compared to >24% in the recent past). Tata Elxsi is currently trading at a P/E multiple of 18.4x/13.9x on FY20E/FY21E earnings. We apply a P/E multiple of 19.2x to the FY21 estimated EPS of INR 52.5 to arrive at a target price of INR 1,008 per share, an upside of 38% over the CMP. Accordingly, we reiterate our “BUY” rating to the stock.





88%

9% 3%

Revenue composition (Q1FY20)

EmbeddedProduct Design

Industrial Design& Visualization

SystemIntegration

42% 41% 41% 41% 44%

58% 59% 59% 59% 56%

Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20

Revenue Mix (%) – Increasing onsite presence

Onsite Offshore

3,692

3,915 3,935 3,889

3,519

128

113 135 162

98

Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20

Segmental Revenue (INR mn)

System Integration & Support Services

Software Development & Services


75% 75% 79%

82%

65%

FY16 FY17 FY18 FY19 Q1FY20

Employee utilization rate (%) – Decline in Q1FY20

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Tata Elxsi Ltd.


Exhibit 1: Profit & Loss Statement


KEY FINANCIALS





Particulars (INR Mn) FY 17 FY 18 FY 19 FY 20E FY 21E

Revenues 12,330 13,863 15,969 17,262 19,980

Cost of sales 747 773 989 1,001 1,159

Gross profit 11,583 13,090 14,980 16,261 18,821

Employee cost 6,693 7,487 8,426 9,713 10,630

Other expenditure 1,957 2,143 2,404 2,848 3,297

Opex 8,651 9,630 10,830 12,561 13,927

Operating profit 2,663 3,207 3,899 3,297 4,493

D&A 269 254 251 403 401

EBITDA 2,932 3,460 4,150 3,700 4,894

Finance costs - - - 53 58

Other income, net (48) 432 435 450 450

Pretax Income 2,615 3,639 4,334 3,695 4,885

Income tax expense 882 1,239 1,434 1,223 1,617

Net profit 1,733 2,400 2,900 2,472 3,268

Diluted EPS (INR) 27.83 38.55 46.56 39.69 52.48

No. of Shares (mn) - Diluted 62.28 62.27 62.28 62.28 62.28

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Tata Elxsi Ltd.



Exhibit 2: Balance Sheet






Assets

Cash and equivalents 1,909 832 537 1,997 3,820

Other bank balance 606 3,111 4,621 4,621 4,621

Sundry debtors 2,448 3,067 3,565 3,854 4,461

Loans and advances 8 8 8 8 8

Other Financial Assets 492 749 640 640 640

Other Assets 202 283 693 693 693

Total current assets 5,665 8,051 10,080 11,829 14,258

Property, plant and equipment 923 817 872 943 1,035

Intangible assets 155 126 139 139 139

Capital work in progress 10 21 4 4 4

Non-current Investments 107 142 151 151 151

Long-term loans and advances 261 251 126 126 126

Right of use Assets - - - 396 297

Deferred Tax Assets 32 41 60 60 60

Total non-current assets 1,489 1,398 1,354 1,820 1,814

Total Assets 7,154 9,449 11,434 13,649 16,072

Liabilities and equity

Trade payables 465 450 555 562 650

Provisions 66 69 84 84 84

Other financial liabilities 368 572 454 454 454

Other CL 321 585 615 615 615

Deferred tax liability 98 201 162 162 162

Lease liabilities - - - 577 577

Total current liabilities 1,318 1,877 1,869 2,453 2,541

Long Term Provisions 159 97 124 124 124

Deferred tax liability 101 91 14 14 14

Total liabilities 1,577 2,065 2,006 2,013 2,102

Share capital 311 623 623 623 623

Reserves and surplus 5,265 6,761 8,805 10,436 12,770

Total Equity holders of the company 5,577 7,384 9,428 11,059 13,393

Total liabilities and equity 7,154 9,449 11,434 13,649 16,072

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Tata Elxsi Ltd.


Exhibit 3: Free Cash Flow analysis






Exhibit 4: Ratio analysis



Net Cash Generated From Operations 1,443 1,971 2,149 2,593 3,151

Net Cash Flow from/(used in) Investing Activities 376 (2,472) (1,587) (341) (394)

Net Cash Flow from Financing Activities (525) (600) (826) (841) (934)

Net Inc/Dec in cash equivalents 1,294 (1,100) (264) 1,411 1,823

Opening Balance 713 1,909 832 537 1,997

Closing Balance Cash and Cash Equivalents 1,909 832 537 1,997 3,820

Key Ratio FY17 FY18 FY19 FY20E FY21E

EBIT Margin (%) 21.6% 23.1% 24.4% 19.1% 22.5%

Tax rate (%) 33.7% 34.0% 33.1% 33.1% 33.1%

Net Profit Margin (%) 14.1% 17.3% 18.2% 14.3% 16.4%

RoE (%) 31.1% 32.5% 30.8% 22.4% 24.4%

RoCE (%) 45.6% 42.3% 40.8% 29.5% 33.2%

Current Ratio (x) 4.30x 4.29x 5.39x 4.82x 5.61x

EPS (INR per share) 27.83 38.55 46.56 39.69 52.48

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Tata Elxsi Ltd.

Rating Legend (Expected over a 12-month period)

Our Rating Upside

Buy More than 15%

Accumulate 5% – 15%

Hold 0 – 5%

Reduce -5% – 0

Sell Less than – 5%


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Phone: +91-22-6696 5555; Fax: +91-22-6691 9576.





ANALYST CERTIFICATION:

I, Parvati Rai (MBA-Finance, M.com), Head Research, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

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Tata Elxsi Ltd.

Date CMP (INR) TP (INR) Recommendation

26-June-19 858 1200 BUY

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