Tata Elxsi Ltd BUY. Outlook & Valuation

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1 Company Update Exhibit 1: Valuation Summary Technology - Software Bloomberg Code: TELX IN India Research - Stock Broking Consistent Performance Bolstered by Affluent Financials; Recently Entered Ventures to Further the Growth Story Revenue for Tata Elxsi (TELX) in Q2FY18 was recorded at Rs. 3,422 Mn registering a growth of 12.8% YoY. Increased operational efficiency helped the company report a robust performance on the EBITDA margin front which was recorded at 24.6%, marking a sequential increase of 184 bps. In September, 2017, the company came out with a Bonus issue in the ratio of 1:1. CoE to be Setup in Collaboration with Unity: TELX recently announced collaboration with Unity Technologies for launching a Centre of Excellence (CoE). Unity Technologies provides a global development platform for creating 2D, 3D, VR & AR (Virtual & Augmented Reality) games and experiences. The new CoE will establish a global innovation platform to help customers accelerate digital transformation. In future, VR/AR applications would drastically change the operational ecosystem of numerous industries. TELX is already in a leadership position in implementation of these technologies for several industries. A global partnership with Unity would significantly help TELX in the launch of innovative solutions, using the advanced platform of Unity. New Client Acquisition in the Healthcare Space: During Q2FY18, TELX was selected as the product design and engineering partner of Hemex Health for its latest Lab-in-a-Box diagnostic device. Hemex Health is an emerging bioscience incubator located in Portland, Oregon which targets disease diagnostic devices with a focus on emerging countries. Lab-in-a-Box diagnostic device is a pointof-care device meant to diagnose malaria and sickle cell disease quickly and affordably. Successful approval of the device would help TELX establish its prowess in designing affordable healthcare devices and further its reach in the global healthcare industry. Outlook & Valuation We maintain a positive outlook on TELX, given its proven capability in rapid delivery of solutions, a positive onsite-offshore contract mix and a focus on digital transformation. We expect the company s revenue to grow at a CAGR of 16.7% for the period FY17-19E. We value the company at 24.4x FY19E EPS and suggest a BUY rating for a revised target price of Rs. 1,012. Net Sales EBITDA EBITDA Margin (%) Adj. Net Profit EPS (Rs.) RoE (%) PE (x) ; *Represents multiples for FY15, FY16 & FY17 are based on historic market price 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<GO>, Thomson Publishers & Reuters Recommendation (Rs.) Nov 08, 2017 BUY CMP (as on Nov 07, 2017) 871 Target Price 1012 Previous Target Price 1016 Upside (%) 16 Stock Information Mkt Cap (Rs.mn/US$ mn) / wk High/Low (Rs.) 922 / 511 3M Avg. daily volume (mn) 0.5 Beta (x) 1.4 Sensex/Nifty / O/S Shares(mn) 62.3 Face Value (Rs.) 10.0 Shareholding Pattern (%) Promoters 44.6 FIIs 9.0 DIIs 5.9 Others 40.5 Stock Performance (%) 1M 3M 6M 12M Absolute Relative to Sensex 0 (3) 1 16 Source: Bloomberg Relative Performance* Nov-16 Dec-16 Jan-17 Source: Bloomberg; *Index 100 Analyst Contact Nakul Bindal Feb Mar-17 Apr-17 Earnings Revision (%) May-17 nakul.bindal@karvy.com Jun-17 Jul-17 Aug-17 Sep-17 Sensex Oct-17 Nov-17 YE Mar FY18E FY19E Sales (%) L L (1.8) L L (2.6) EBITDA (%) L L (3.3) L L (3.2) L L PAT (%) 0.1 L L (1.7) Source: Karvy Research 1

2 Tata Elxsi Software Development & Services (95%) Systems Integration & Support (5%) Embedded Product Design (83%) Industrial Design and Visualization (12%) Partnership with V-Nova to Enhance TELX s Presence in the Global Broadcast Industry: During Q2FY18, TELX entered in a partnership with V-Nova Ltd. V-Nova is a London-headquartered technology company that provides next generation video compression solutions. V-Nova s flagship solution, PERSEUS, is a cross-media codec format which compresses high quality videos at a rapid speed on existing user devices and infrastructure. Under this partnership, TELX will provide fast and reliable delivery of V-Nova PERSEUS based solutions for broadcasters, Pay TV operators, content owners and video service providers. Tata Elxsi has already commenced operations under this venture by integrating V-Nova s technology in the Set-Top-Box (STB) of a satellite TV operator in Europe. This venture would enable TELX to enhance its service offerings by simplifying deployment, reducing operating costs and pruning the delivery time for its existing and new broadcast & communications clients. NI & TELX Partner to Deliver Innovative Solutions for Automotive Industry: TELX has recently entered in a partnership with National Instruments (NI); under which both the companies will collaborate in the development & implementation of test & validation systems for the automotive industry. NI is an American MNC which produces automated test equipment and develops virtual instrumentation software. NI is the global leader in providing test, measurement and control solutions with application in nearly every industry. This partnership would help TELX in enhancing its automotive systems offerings for functional & diagnostic validations, automated test frameworks and network management. It would also help the company in developing solutions targeted to specific automotive industry needs in Autonomous Driving and Human Machine Interface (HMI) validation for emerging features. Exhibit 2: Q2FY18 Performance Comparison YE Mar (Rs. Mn) Q2FY18 Q1FY18 QoQ % Q2FY17 YoY % H1FY18 H1FY17 YoY % Turnover Expenditure EBITDA Depreciation (0.5) (1.8) Other Income (30) NM 168 (20) NM PBT Tax (292) (251) NM (220) NM (543) (434) NM PAT EBITDA Margin (%) bps 24.6 (2) bps (37) bps EBIT Margin (%) bps bps bps Net Profit Margin (%) bps bps bps 2

3 Key Takeaways of Management Interaction Nov 08, 2017 ytelx recently licensed its autonomous vehicle middleware platform, Autonomai, to one of the top 5 global Original Equipment Manufacturers (OEMs). Under the contract, TELX would help its client in the implementation of driverless car technology. Going forward, the company expects to garner more clients in this space. ythe latest venture of TELX in the broadcast and communications industry was with Airtel. TELX was the technology partner in the development of Airtel s Internet TV. The company was also involved in designing of the device as well as enhancement of user experience. The Internet TV is more of a hybrid setup box; with one part of it running Android, the other part being the conventional setup box. It enables live streaming of content over the internet from Netflix, YouTube, etc. The technology implementation behind this product has leveraged TELX s partnership with Google for Android TV, opening up global opportunities for a similar implementation. yestablishing its finesse in Robotics, TELX collaborated with Tata Automation Ltd for building the Make-in-India Robot. TELX was responsible for the designing of the pick-and-place robot. yrecently, Jaguar Land Rover (JLR) has awarded Tata Elxsi with the Strategic Supplier Award for TELX has been in association with JLR for 16 years now. Typically, the award is reserved for Tier I suppliers who supply materials and components to JLR. TELX is the only services company that has received such an award. This signifies the integral position that TELX holds in the strategic design and development for JLR. JLR accounted for 22.0% of the company s total revenue for FY17. ydesign is the central piece of everything that TELX does; be it automotive, broadcast, communication, FMCG or the healthcare segment. During H1FY18, TELX was commissioned by Blue Star, Mother Dairy and Anchor for packaging & experience designing of their products. ytelx expects to generate business opportunities from the ongoing modernisation of Indian Railways. TELX has already done some work for the railways on a non-compensation basis to establish its credentials. The company s work is in the area of improving passenger experience of travellers at railway stations. It might take some time for the company to generate significant revenue from the railways, given the slow-moving nature of government contracts. Exhibit 3: Change in Earnings Estimates YE Mar (Rs. Mn) FY18E FY19E Old New % Change Old New % Change Net Sales (1.8) (2.6) EBITDA (3.3) (3.2) EBITDA Margin (%) (30) bps (10) bps Adj. PAT (1.7) EPS (Rs.) (1.7) Source: Karvy Research Comments Given the uncertain nature of the industry, we have revised our estimates by employing a more conservative approach. Slower than expected growth in the Software Development & Services segment during H1FY18 would dampen the annual performance. Performance Highlights Exhibit 4: Quarterly Revenue & Revenue Growth % 27.1% 30% 20.9% % 20% 12.9% 12.8% 10.9% 9.8% % % Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Revenue (Rs. Mn) YoY Growth (%) Exhibit 5: Quarterly Margins Trend 30% 24.2% 22.8% 23.5% 24.6% 23.9% 24.6% 23.2% 25% 22.7% 20% 14.6% 15.4% 16.7% 14.0% 14.2% 14.2% 14.2% 13.6% 15% 10% Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 EBITDA Margin (%) PAT Margin (%) 3

4 Exhibit 6: Revenue Segmentation by Service Offering for H1FY18 Embedded Product Design 82.7% Industrial Design & Visualization 12.4% System Integration 4.9% Exhibit 7: Robust Return Ratios 80% 70.6% 60.1% 55.4% 60% 52.0% 48.6% 40% 46.3% 39.6% 20% 36.7% 34.4% 32.3% 0% FY15 FY16 FY17 FY18E FY19E RoE RoCE Key Risks: yforeign Exchange: Rupee appreciation can impact margins and profitability due to >85% export dependence. yadoption of protectionist measures by the developed countries may make it difficult for the company to expand its operations. 4

5 Financials Exhibit 8: Income Statement Revenues Growth (%) Operating Expenses EBITDA Growth (%) Depreciation & Amortization Other Income (48) EBIT Interest Expenses PBT Tax Adjusted PAT Growth (%) Exhibit 9: Balance Sheet Cash & Cash Equivalents Sundry Debtors Inventory Loans & Advances Gross Block Net Block CWIP Miscellaneous Total Assets Current Liabilities & Provisions Other Liabilities Total Liabilities Shareholders Equity Reserves & Surplus Total Networth Total Networth & Liabilities

6 Exhibit 10: Cash Flow Statement PBT Depreciation Tax Paid (392) (756) (962) (1116) (1314) Inc/dec in Net WC 76 (572) (349) (594) (453) Other Income (54) (85) (134) (151) (66) Other non cash items (16) Cash flow from operating activities Inc/dec in capital expenditure (329) (375) (260) (298) (356) Others Cash flow from investing activities (275) (289) (134) (147) (290) Dividend paid (280) (343) (436) (498) (560) Cash flow from financing activities (321) (411) (525) (598) (673) Net change in cash Exhibit 11: Key Ratios YE Mar FY15 FY16 FY17 FY18E FY19E EBITDA Margin (%) EBIT Margin (%) Net Profit Margin (%) Dividend Payout Ratio (%) Net Debt/Equity (x) (0.4) (0.5) (0.5) (0.5) (0.5) RoE (%) RoCE (%) Exhibit 12: Valuation Parameters YE Mar FY15 FY16 FY17 FY18E FY19E EPS (Rs.) DPS (Rs.) BVPS (Rs.) PE (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) ; *Represents multiples for FY15, FY16 & FY17 are based on historic market price 6

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