Tata Elxsi Ltd - Karvy Online

Jan 31, 2018 Tata Elxsi Ltd

Technology - Software Company Update

Tata Elxsi Ltd Bloomberg Code: TELX IN

HOLD

India Research - Stock Broking

Industry Leading Margins Supplement Growth Prospects; Efficient Execution of the Long Term Strategy to be a Key Better geographical & service mix during Q3FY18 led to a significant improvement in EBITDA margin of 317 bps, coming in at 27.1%. We expect the long term sustainable EBITDA margin rate to be ~25%, going forward. We expect that the company will achieve its medium term growth target of 20.0%, given its industry leading return ratios, positive onsite-offshore contract mix and a debt free balance sheet. However, because valuations are starting to reflect signs of restrain, we revise our rating to “HOLD” for a target price of Rs. 1,178.

Healthy revenue growth coupled with affluent margins propelled the bottom-line performance. PAT for Q3FY18 grew by 43.3% YoY and was recorded at Rs. 628 Mn. PAT margin is expected to further improve to 16.9% by FY20E, a surge of 288 bps from 14.1% reported in FY17.

The Future Business Strategy: The company’s long term strategy is to transform

itself from being a capability driven service organisation to an organisation with a portfolio of Intellectual Properties (IPs) that derives revenue from licensing its patents and from entering service engagements around the IPs.

To this effect, TELX had recently developed ‘Autonomai’ & ‘Falcon’, its flagship IPs. Both the platforms are at a nascent stage and have gained momentum in the last few quarters. TELX had licensed ‘Autonomai’ to one of the top 5 global automobile OEMs in Q2FY18. During Q3FY18, TELX licensed ‘Falcon’ to a large operator in the broadcast industry in Europe. Together, ‘Autonomai’ & ‘Falcon’ contributed 5.0% of the total revenue at the end of Q3FY18. Going forward, we expect the company to develop more IPs in automotive, broadcast and emerging technologies space. A suitable mix of traditional and IP business will ensure the company delivers performance in the evolving technology environment.

Exhibit 1: Valuation Summary

EBITDA

EBITDA Margin (%)

FY16

FY17

FY18E

FY19E

FY20E

10752

12330

13792

16093

19208

23.0

23.8

24.5

24.8

25.1

2471

2932

3373

3994

4823

Adj. Net Profit

1548

1733

2260

2688

3253

RoE (%)

46.3

36.7

35.4

33.0

31.5

EPS (Rs.) PE (x)

1060

Previous Target Price

1012

Target Price

1178

Upside (%)

11

Stock Information Mkt Cap (Rs.mn/US$ mn)

66511 / 1045

3M Avg. daily volume (mn)

0.7

52-wk High/Low (Rs.)

1123 / 641

Beta (x)

1.3

Sensex/Nifty

35965 / 11028

O/S Shares(mn)

62.3

Face Value (Rs.)

10.0

Shareholding Pattern (%) Promoters

44.6

FIIs

9.6

DIIs

6.0

Others

39.9

Stock Performance (%) 1M

3M

6M

12M

11

29

24

48

Absolute

Relative to Sensex

5

20

11

15

Source: Bloomberg

Relative Performance* 160

24.9 37.8

27.8 26.3

36.3 29.2

43.2 24.6

52.2

120 100

Jan-18

Dec-17

Oct-17

Nov-17

Sep-17

Aug-17

Jul-17

Tata Elxsi Ltd

Sensex

Source: Bloomberg; *Index 100

Earnings Revision (%) YE Mar Sales (%)

EBITDA (%) PAT (%)

FY18E

FY19E

LL (3.3)

LL (4.2)

LL (1.4) LL 3.6

LL (3.2) LL 3.9

Source: Karvy Research

20.3

Analyst Contact

For private circulation only. For important information about Karvy’s rating system and other disclosures refer to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY, Thomson Publishers & Reuters

040 - 3321 6277

Source: Company, Karvy Research; *Represents multiples for FY16 & FY17 are based on historic market price

Jun-17

Apr-17

May-17

Jan-17

80

Mar-17

TELX is currently trading at 24.6x FY19E EPS & we value the company at 27.3x FY19E EPS for a target price of Rs. 1,178 which implies an upside potential of 11%. The PE multiple assigned is at a premium relative to the industry because of the niche capabilities that TELX offers and the strong brand influence it commands. Factors like adverse fluctuation of INR or execution risk regarding the long term strategy may pose risk to the call.

Net Sales

CMP (as on Jan 31, 2018)

140

Valuation & Risks

YE Mar (Rs. Mn)

Recommendation (Rs.)

Nakul Bindal

[email protected]

1


Industrial Design Division Present a Promising Outlook: The industrial design division can be subdivided into product & packaging design and service design engagements. The latter deals are generally considered to be the meaty ones. In the past few quarters, the balance of new client acquisitions has swayed towards the product & packaging design. Going forward, the company intends to strengthen the service design division and is currently working to cement the pipeline of such engagements. The company offers product and packaging designing services in sectors like consumer electronics, consumer appliances, FMCG, etc. During Q3FY18, products such as Fun Foods chocolate spread, Panasonic ceiling fan, etc. availed design services from TELX. The company also derives synergies by offering design services along with the technology component in the automotive and broadcast space. Elements like HMI (Human Machine Interface), User Experience and OTT (Over the top) have widened the scope of designing services.

EPS to grow at a CAGR of 23.4% by FY20E: Revenue in Q3FY18 was recorded at Rs. 3,455 Mn, registering a growth of 11.7% YoY. Revenue for TELX is expected to grow at a CAGR of 15.9% for the period FY17-20E, given its proven capability in rapid delivery of solutions and a focus on digital transformation. EPS is expected to grow at a CAGR of 23.4% for the same period to reach Rs. 52 in FY20E. Exhibit 2: Q3FY18 Performance Comparison YE Mar (Rs. Mn)

Q3FY18

Q2FY18

QoQ %

Q3FY17

YoY %

9MFY18

9MFY17

YoY %

Turnover

3455

3422

1.0

3094

11.7

10109

9070

11.5

EBITDA

935

840

11.3

739

26.5

2509

2175

15.4

Expenditure Depreciation

Other Income

2520

63

(2.4)

64

(2.5)

2355

(9.3)

662

42.0

438

43.3

(23.3)

(313)

(292)

7.0

(224)

EBITDA Margin (%)

27.1

24.6

250 bps

Net Profit Margin (%)

18.2

16.7

144 bps

Tax

PAT

EBIT Margin (%)

940 628

27.2

864 572

25.3

8.8 9.7

194 bps

7.0

69

89

PBT

68

2581

(8)

NM

7600 192 236

2553

6895 201

(4.4)

1946

31.2

1288

31.8

(27)

39.4

(856)

(658)

23.9

317 bps

24.8

24.0

14.2

401 bps

21.4

581 bps

1697

25.3 16.8

10.2

21.5 14.2

NM

30.0 84 bps

380 bps 259 bps

Source: Company, Karvy Research

Key Takeaways of Management Interaction yyRevenue from fixed price contracts increased from 35.0% in FY17 to 40.0% in Q3FY18. The positive impact on the margins is visible in the numbers reported for the quarter.

yyIn Q2FY18, TELX was selected as the product design and engineering partner of Hemex Health for its Lab-in-a-Box diagnostic device which diagnoses malaria and sickle cell disease quickly and affordably. The company is working towards the said project and expects that the device will be launched by Hemex Health in early FY19E. Successful acceptance of the device would help TELX establish its prowess in designing affordable healthcare devices and further its reach in the global healthcare industry. yyTELX is bullish on the growth prospects of services and solutions it offers in relation to SDN (Software Defined Networking) in the telecom sector. We expect the company to garner new clients in the telecom space as the company has widened its service offerings in the telecom space to cater telecom operators as well as OEMs. The company is currently servicing two telecom operators in the US. This also aligns with the company’s strategy to diversify clientele. yyIn the broadcast space, the company is witnessing good traction in OTT & new media opportunities. The company is currently servicing couple of OTT deals which are expected to be launched in Q4FY18E. OTT and new media together account for ~10.0% of the total broadcast revenue. We expect that the growth of emerging technologies such as OTT & new media will outpace the traditional broadcast business. TELX stands to reap significant benefits from such a transition.

yyThe company’s operational efficiency during Q3FY18 was fuelled by a high employee utilisation rate which was recorded at 82.0%. The rate is expected to hover around the same range in the medium term. 2

Jan 31, 2018 Tata Elxsi Ltd Exhibit 3: Change in Earnings Estimates FY18E

YE Mar (Rs. Mn)

Old

Net Sales

New

FY19E % Change

14267

13792

EBITDA

3420

3373

24.5

45 bps

Adj. PAT

2181

EPS (Rs.)

35.0

EBITDA Margin (%)

24.0

Old

New

Comments

% Change

Given the uncertain nature of the industry, we (4.2) have revised our estimates by employing a more conservative approach.

(3.3)

16800

16093

(1.4)

4126

3994

24.8

22 bps

2260

3.6

2587

2688

3.9

36.3

3.7

41.5

43.2

4.0

24.6

(3.2)

Led by the exceptional performance on the margin front.

Source: Karvy Research

Key Risks: yyAdverse fluctuation of INR relative to US$ or GBP rate could impact the company’s financials since 74% of the company’s total revenue are generated in the U.S and Europe.

yyAdoption of protectionist measures by the developed countries may make it difficult for the company to expand its operations.

Performance Highlights Exhibit 4: Revenue Segmentation by Geography for Q3FY18

Exhibit 5: Robust Return Ratios 80% 60%

Asia 26.0% Europe 44.0%

67.1% 58.5%

40% 39.6%

56.4%

45.7%

44.0%

36.7%

35.4%

33.0%

31.5%

FY17

FY18E

FY19E

FY20E

46.3%

20% U.S.A 30.0%

48.7%

0% FY15

FY16 RoE




YoY Growth (%)

15%

14.0% 14.2% 14.2% 14.2% 13.6%

15.4%

16.7%

27.1%

18.2%

EBITDA Margin (%)

Q3FY18

Q4FY17

Q3FY17

10%

Q2FY17

10%

Q1FY17

Q3FY18

Q2FY18

Q1FY18

Q4FY17

Q3FY17

Q2FY17

Q1FY17

Revenue (Rs. Mn)

25%

24.6% 23.9% 24.6% 23.2% 22.7%

20%

0%

Q4FY16

0

20%

22.8% 23.5%

Q4FY16

12.8% 11.7%

3455

10.9% 9.8%

3422

12.9%

3232

3033

2943

2940

1200

15.0%

3260

2400

30%

Q2FY18

20.9%

3094

27.1%

Exhibit 7: Quarterly Margins Trend 30%

Q1FY18

Exhibit 6: Quarterly Revenue & Revenue Growth 3600

RoCE

PAT Margin (%)


3


Financials Exhibit 8: Income Statement YE Mar (Rs. Mn)

FY16

FY17

FY18E

FY19E

FY20E

10752

12330

13792

16093

19208

Operating Expenses

8281

9398

10420

12099

14385

Growth (%)

39.9

18.7

15.0

18.4

20.8

Revenues

Growth (%) EBITDA

Depreciation & Amortization EBIT

Other Income

Interest Expenses

26.6

2471

226

14.7

2932

269

11.9

3373

266

16.7

3994

271

19.4

4823

279

2245

2663

3107

3722

4544

0

0

0

0

0

119

(48)

323

355

391

PBT

2363

2615

3430

4078

4934

Adjusted PAT

1548

1733

2260

2688

3253

YE Mar (Rs. Mn)

FY16

FY17

FY18E

FY19E

FY20E

Cash & Cash Equivalents

1825

2515

3600

5109

7029

0

0

0

0

0

Tax

Growth (%)


815

50.5

882

11.9

1170 30.4

1389 19.0

1681 21.0

Exhibit 9: Balance Sheet

Sundry Debtors Inventory

Loans & Advances Gross Block Net Block CWIP

Miscellaneous Total Assets

Current Liabilities & Provisions Other Liabilities

2152

585

2603 1070

19

346

5997

1957

182

2448

568

2836 1078

10

527

7147

1366

191

2834

583

2977 1066

9

773

8866

1469

220

3307

691

3126 1089

9

905

11110

1739

253

3947

820

3283 1119

9

997

13921

2081

291

Total Liabilities

2140

1557

1689

1992

2372

Reserves & Surplus

3546

5278

6554

8495

10926

Shareholders Equity Total Networth

Total Networth & Liabilities Source: Company, Karvy Research

311

3857 5997

311

5590 7147

623

7177 8866

623

9118

11110

623

11549 13921

4

Jan 31, 2018 Tata Elxsi Ltd Exhibit 10: Cash Flow Statement YE Mar (Rs. Mn)

FY16

FY17

FY18E

FY19E

FY20E

PBT

2363

2615

3430

4078

4934

Tax Paid

(756)

(962)

(1170)

(1389)

(1681)

(85)

(134)

(323)

(355)

(391)

Depreciation Inc/dec in Net WC Other Income

Other non cash items

Cash flow from operating activities

226

(572)

34

1211

269

(349) 4

1443

266

(522) 0

1681

271

(417) 0

2187

279

(477) 0

2665

Inc/dec in capital expenditure

(375)

(260)

(252)

(294)

(309)

Cash flow from investing activities

(289)

(134)

71

61

82

Cash flow from financing activities

(411)

(525)

(598)

(673)

(747)

YE Mar

FY16

FY17

FY18E

FY19E

FY20E

EBITDA Margin (%)

23.0

23.8

24.5

24.8

25.1

Net Profit Margin (%)

14.4

14.1

16.4

16.7

16.9

Others

Dividend paid

Net change in cash


86

(343)

511

126

(436)

784

323

(498) 1153

355

(560) 1576

391

(623) 1999

Exhibit 11: Key Ratios

EBIT Margin (%)

Dividend Payout Ratio (%)

20.9 28.2

21.6 28.7

22.5 24.8

23.1 23.2

23.7 19.1

Net Debt/Equity (x)

(0.5)

(0.5)

(0.5)

(0.5)

(0.6)

RoCE (%)

67.1

56.4

48.7

45.7

44.0

RoE (%)


46.3

36.7

35.4

33.0

31.5

Exhibit 12: Valuation Parameters YE Mar

FY16

FY17

FY18E

FY19E

FY20E

EPS (Rs.)

24.9

27.8

36.3

43.2

52.2

BVPS (Rs.)

61.9

89.8

115.2

146.4

185.5

P/BV (x)

15.2

DPS (Rs.) PE (x)

EV/EBITDA (x) EV/Sales (x)

7.0

37.8 23.0

5.3

8.0

26.3

8.2

14.7

3.5

9.0

29.2

9.2

18.5

4.5

Source: Company, Karvy Research; *Represents multiples for FY16 & FY17 are based on historic market price

10.0 24.6

7.2

15.2

3.8

10.0 20.3

5.7

12.2

3.1

5

Jan 31, 2018 Tata Elxsi Ltd Stock Ratings Buy

:

Sell

:

Hold

:

Absolute Returns > 15%

5-15% < 5%

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yy Analyst certification: The following analyst(s), Nakul Bindal, who is (are) primarily responsible for this report and whose name(s) is/are mentioned therein, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. yy Disclaimer: Karvy Stock Broking Limited [KSBL] is registered as a research analyst with SEBI (Registration No INH200003265). KSBL is also a SEBI registered Stock Broker, Depository Participant, Portfolio Manager and also distributes financial products. The subsidiaries and group companies including associates of KSBL provide services as Registrars and Share Transfer Agents, Commodity Broker, Currency and forex broker, merchant banker and underwriter, Investment Advisory services, insurance repository services, financial consultancy and advisory services, realty services, data management, data analytics, market research, solar power, film distribution and production, profiling and related services. Therefore associates of KSBL are likely to have business relations with most of the companies whose securities are traded on the exchange platform. The information and views presented in this report are prepared by Karvy Stock Broking Limited and are subject to change without any notice. This report is based on information obtained from public sources , the respective corporate under coverage and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. 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Actual results may differ materially from those set forth in projections. yy Associates of KSBL might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. yy Associates of KSBL might have received compensation from the subject company mentioned in the report during the period preceding twelve months from the date of this report for investment banking or merchant banking or brokerage services from the subject company in the past twelve months or for services rendered as Registrar and Share Transfer Agent, Commodity Broker, Currency and forex broker, merchant banker and underwriter, Investment Advisory services, insurance repository services, consultancy and advisory services, realty services, data processing, profiling and related services or in any other capacity. yy KSBL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. yy Compensation of KSBL’s Research Analyst(s) is not based on any specific merchant banking, investment banking or brokerage service transactions. yy KSBL generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. yy KSBL or its associates collectively or Research Analysts do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. yy KSBL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report and have no financial interest in the subject company mentioned in this report. yy Accordingly, neither KSBL nor Research Analysts have any material conflict of interest at the time of publication of this report. yy It is confirmed that KSBL and Research Analysts, primarily responsible for this report and whose name(s) is/ are mentioned therein of this report have not received any compensation from the subject company mentioned in the report in the preceding twelve months. yy It is confirmed that Nakul Bindal, Research Analyst did not serve as an officer, director or employee of the companies mentioned in the report. yy KSBL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. yy Neither the Research Analysts nor KSBL have been engaged in market making activity for the companies mentioned in the report. yy We submit that no material disciplinary action has been taken on KSBL by any Regulatory Authority impacting Equity Research Analyst activities.

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