CMP: INR1,327 TP: INR1,607(+21%) Buy

Transcription

1 24 May 217 4QFY17 Results Update Sector: Technology Tata Elxsi BSE SENSEX S&P CNX 3,32 9,361 Bloomberg TELX IN Equity Shares (m) 31 M.Cap.(INRb)/(USDb) 45.8 /.7 52-Week Range (INR) 1863 / 122 1, 6, 12 Rel. Per (%) -17/-2/-45 Avg Val, INRm 596 Free float (%) 55.4 Financials & Valuations (INR b) Y/E Mar E 219E Net Sales EBITDA PAT EPS (INR) Gr. (%) BV/Sh (INR) RoE (%) RoCE (%) P/E (x) P/BV (x) Estimate change TP change Rating change CMP: INR1,327 TP: INR1,67(+21%) Buy Transportation and Broadcast to frame the growth story PAT grows 8% despite lower other income: TELX s overall revenues grew 11% to INR3,26m (est. of INR3,38m) in 4QFY17 from INR2,94m in 4QFY16. EBITDA rose 13% to INR758m (est. of INR794m) from INR672m in 4QFY16, with the margin expanding 4bp YoY from 22.8% to 23.2% (est. of 23.5%) led by lower other expenses (-14bp, as % of sales). Thus, PAT grew from INR411m in 4QFY16 to INR445m (est. of INR51m), implying YoY growth of 8%. For FY17, revenue grew 15%, EBITDA margin expanded slightly by 5bp to 23.8% and adj. PAT rose 12.6% to INR1,753m. Pressure on margins to ease: The company s employee strength stands at ~5,5, similar to that in the previous quarter. Thus, employee cost was flattish, and a similar trend is expected going forward. TELX has also hinted at a hiring only against specific requirements. Further, it will restructure deals on part payment for effort and part payment for success method, which should subsequently boost margins by 1-2bp. Key segments continue growing: Transportation (+35%) continues to be the fastest growing segment for TELX. Growth in Broadcast (25% of total revenues and 4% of EPD) has also been steady, led by OTT. Apart from the US and Europe, TELX has developed a strong pipeline of customers in Japan, the realizations from which are expected in coming quarters. Valuation view: JLR s contribution to revenues remains steady at 22%. We are cutting PAT for FY18E/FY19E by 5%/9%, and expect CAGR of 15.5% in revenue and 19.5% in PAT over FY16-19E. Given its robust capabilities in Technology, Engineering and Design, and its standing as a strong play on IoT, we maintain Buy with a TP of INR1,67 2x FY19E EPS of INR8.4. Niket Shah (Niket.Shah@MotilalOswal.com); Chintan Modi (Chintan.Modi@MotilalOswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 EBITDA and PAT below estimates TELX reported overall revenue of INR3,26m (est INR3,38m) in 4QFY17 vs INR2,94m marking a YoY growth of 11%. It was impacted by unfavorable movement of GBP during the quarter. EBITDA margins improved by 4bp from 22.8% in 4QFY16 to 23.2% (est 23.5%) in 4QFY17 led by a decrease in other expenses. EBITDA during the quarter stood at INR758m (est INR794m) as against INR672m in 4QFY16, up 13% YoY. Thus, PAT grew from INR411m in 4QFY16 to INR445m (est. INR51m) in 4QFY17, a growth of 8% YoY. Exhibit 1: Revenue trend (INR m) 1% 8% Revenue from Operations(INR m) Growth % 28% 28% 27% 24% 21% 15% 11% 9% 13% 11% 1,98 2,59 2,215 2,313 2,435 2,637 2,741 2,94 2,943 3,33 3,94 3,26 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 Source: MOSL, Company Exhibit 2: EBIDTA trend EBITDA (INR m) EBITDA Margins (%) 2% 2% 23% 2% 23% 23% 24% 23% 23% 25% 24% 23% Exhibit 3: PAT trend PAT (INR mn) PAT Margins (%) 11% 11% 13% 13% 15% 14% 15% 14% 14% 15% 15% 14% QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 Source: MOSL, Company Source: MOSL, Company New revenue sharing model, flat employee cost to boost margins: TELX is looking at models where revenues are linked to success of products as well as the efforts New deals are to be tried on part payment for effort and part for success of product with an objective to improve margins above 25% over next 2-3 years At present, offshore constitute 6% of revenues and is much higher in terms of efforts. Thus, a revenue sharing model linked to efforts as well as success is set to boost margins by 1-2bp Steady growth rates across key segments: 6% of revenue of EPD comes from Automotive and remaining 4% from Broadcast, the growth rates of both of which have been steady with OTT being the major driver in broadcast segment. 24 May 217 2

3 TELX completely handled Tata Motor s VR part in Geneva motor show and going on from here it is set to be selective about projects in entertainment space, diverting large part of capacity and capability in higher yielding areas. TELX doubled its business with one of their major broadcast customers and a total of 36 new customers were added, majorly in transportation and broadcast segment. Conference Call Takeaways TELX to try part payment for effort and part payment on success revenue sharing model. A strong pipeline of customers is maintained in Japan along with the addition of 36 new customers, majorly in Transportation and Broadcast. Awarded a contract by AAI 1 airports to start with. Employee strength stands at 55. Hiring will only be done against specific requirements. Industrial design was merged with VFX for better synergies. The company has been selective about projects purely in the entertainment space, diverting large part of capacity and capability in higher yielding areas. Broadcast segment growth has not been consistent whereas Automotive has been a lot more predictable. Valuation and view TELX reported a YoY growth of 11% in overall revenue as well as a growth of 8% YoY in PAT despite a decline in other income. Transportation, the fastest growing segment grew at 35% and the growth in Broadcast has also been steady, led by OTT. TELX also has also developed a strong pipeline of customers in Japan, the realizations from which are expected in the coming quarters We are cutting PAT for FY18E/FY19E by 5%/9%, and expect CAGR of 15.5% in revenue and 19.5% in PAT over FY16-19E. We value the stock at 2x FY19E EPS of INR8, arriving at target of INR1,67. Exhibit 4: 1-year forward PE (x) 48 P/E (x) 15 Yrs Avg(x) 5 Yrs Avg(x) 1 Yrs Avg(x) 33 Exhibit 5: 1-year forward PB (x) 18.5 P/B (x) 15 Yrs Avg(x) 5 Yrs Avg(x) 1 Yrs Avg(x) May-2 Jul-3 Sep-4 Nov-5 Jan-7 Feb-8 Apr-9 Jun-1 Aug-11 Oct-12 Nov-13 Jan-15 Mar-16 May-17.5 May-2 Jul-3 Sep-4 Nov-5 Jan-7 Feb-8 Apr-9 Jun-1 Aug-11 Oct-12 Nov-13 Jan-15 Mar-16 May-17 Source: MOSL Source: MOSL 24 May 217 3

4 Financials and Valuations Tata Elxsi Exhibit 6: Key assumptions Segments FY13 FY14 FY15 FY16 FY17E FY18E FY19E Income Software Statement Development 5,53 6,827 7,817 1,75 11,665 13,553 (INR Million) 15,779 Systems Y/E Mar Integration E E 667 Total Total Income Revenues from (INR Operations m) 5,387 6,217 6,217 7,748 7,748 8,4938,494 1,741 1,752 12,332 12,33 14,22 14,22 16,446 16,446 Software Change Development (%) % % % % % % % EBITDA Systems Integration 74-19% % 1,365-27% 1,766-1% 2,471 2,932 % 3,441 % 4,46 % Total Revenue Growth (%) 15% 25% 1% 26% 15% 15% 16% Margin (%) Software Development 89% 88% 92% 94% 95% 95% 96% Depreciation Systems Integration 11% 12% 8% 6% 5% 5% 4% EBIT ,15 1,518 2,245 2,663 3,144 3,719 Total Revenue Mix (%) 1% 1% 1% 1% 1% 1% 1% Software Development 624 1,379 1,763 2,597 2,998 3,578 4,324 Interest Systems Integration Other Income Total EBITDA (INR m) 721 1,364 1,766 2,471 3,74 3,537 4,249 Extraordinary items Software Development 11% 159 2% 23% 26% 26% 26% 27% PBT Systems Integration 554 2% 334 9% 1,122 9% 1,56 1% 2,363 1% 2,615 3,194 1% 3,776 1% Current Total Tax EBITDA Margin (%) 14412% 12 18% % % % 882 1,77 25% 1,274 26% Deferred Software Tax Development 2297% 8 94% 24 97% -4 97% 98% -2 98% 98% Systems Tax Rate Integration (%) 3.1 3% % % 34. 3% % % % Min. Total Int. EBITDA & Assoc. Mix Share (%) 41 1% 11 1% 1% 1% 1% 1% 1% Reported PAT ,29 1,548 1,753 Source: 2,116 Company, 2,52 MOSL Adjusted PAT ,29 1,548 1,753 2,116 2,52 Change (%) Balance Sheet (INR Million) Y/E Mar E 219E Equity Share Capital Total Reserves 1,68 1,64 2,46 2,523 3,546 5,278 6,648 8,217 Net Worth 1,92 1,952 2,357 2,834 3,857 5,59 6,959 8,528 Deferred Liabilities Total Loans Capital Employed 2,392 2,729 2,485 2,834 3,857 5,59 6,959 8,528 Gross Block 1,963 2,19 1,821 2,293 2,63 2,881 3,181 3,481 Less: Accum. Deprn , ,38 1,534 1,83 2,11 2,428 Net Fixed Assets ,7 1,78 1,8 1,53 Capital WIP Investments Curr. Assets, Loans&Adv. 2,243 2,449 2,789 3,64 4,895 6,26 8,435 1,511 Inventory 3 3 Account Receivables 1,369 1,567 1,748 1,791 2,152 2,448 2,653 3,68 Cash and Bank Balance ,333 1,825 2,515 4,666 6,215 Loans and Advances ,63 1,116 1,227 Curr. Liability & Prov. 1,48 1,71 1,458 1,821 2,14 1,557 2,588 3,68 Account Payables ,139 1,25 1,22 1,414 1,636 Provisions ,174 1,433 Net Current Assets 1,195 1,378 1,331 1,819 2,756 4,469 5,847 7,443 Deferred Tax assets Total Assets 2,392 2,729 2,485 2,834 3,857 5,59 6,959 8, May 217 4

5 Financials and Valuations Ratios Y/E Mar E 219E Basic (INR) EPS Cash EPS Book Value DPS Payout (incl. Div. Tax.) Valuation(x) P/E Cash P/E Price / Book Value EV/Sales EV/EBITDA Profitability Ratios (%) RoE RoCE RoIC Turnover Ratios (%) Asset Turnover (x) Debtors (No. of Days) Leverage Ratios (%) Net Debt/Equity (x) Cash Flow Statement (INR Million) Y/E Mar E 219E OP/(Loss) before Tax ,122 1,551 2,363 2,615 3,194 3,776 Depreciation Interest & Finance Charges Direct Taxes Paid ,77-1,274 (Inc)/Dec in WC , CF from Operations ,215 1,434 1, ,188 2,782 Others CF from Operating incl EO ,288 1,43 1,329 1,557 3,188 2,782 (inc)/dec in FA Free Cash Flow ,289 1,11 1,26 1,288 2,898 2,482 (Pur)/Sale of Investments Others CF from Investments Issue of Shares (Inc)/Dec in Debt Interest Paid Dividend Paid Others CF from Fin. Activity Inc/Dec of Cash ,151 1,549 Opening Balance ,333 1,825 2,515 4,666 Closing Balance ,333 1,825 2,515 4,666 6, May 217 5

6 Corporate profile Company description Incorporated in 1989, Tata Elxsi (TELX) operates in two core segments software, which contributes 88% to revenues, and systems integration, which contributes 12% to revenues. In the software vertical, 77% of revenues are derived from embedded product development (EPD), followed by industrial design, which contributes 9% to revenues, and the balance 2% is derived from visual computing labs (VCL). Within EPD, TELX caters to three core industries automotive (4% of EPD revenues), broadcast (35% of EPD revenues) and communications (25% of EPD revenues). TELX employs 4,2 people and derives approximately equal revenues from US, Europe and Asia. Exhibit 1: Sensex rebased Source: MOSL/Bloomberg Exhibit 2: Shareholding pattern (%) Mar-17 Dec-16 Mar-16 Promoter DII FII Others Note: FII Includes depository receipts Source: Capitaline Exhibit 3: Top holders Holder Name % Holding JP MORGAN 2.4 Motilal Oswal Most Focused Midcap 3 Fund 1.9 MORGAN STANELY MAURITIUS COMPANY LIMITED 1.8 LIFE INSURANCE CORPORATION 1.2 NA. Source: Capitaline Exhibit 4: Top management Name Designation Exhibit 5: Directors Name Name N G Subramaniam Madhukar Dev G Vaidyanathan Chairman Managing Director & CEO Company Secretary Gopichand Katragadda P McGoldrick Sudhakar Rao M S Ananth Shyamala Gopinath Source: Capitaline *Independent Exhibit 6: Auditors Name Deloitte Haskins & Sells Type Statutory Exhibit 7: MOSL forecast v/s consensus EPS MOSL Consensus (INR) forecast forecast Variation (%) FY FY Source: Bloomberg Source: Capitaline 24 May 217 6

7 N O T E S 24 May 217 7

8 24 May 217 8