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 8494 10752 12330 14267 16800 EBITDA 1766 2471 2932 3420 4126 EBITDA Margin (%) 20.8 23.0 23.8 24.0 24.6 Adj. Net Profit 1029 1548 1733 2181 2587 EPS (Rs.) 16.5 24.9 27.8 35.0 41.5 RoE (%) 39.6 46.3 36.7 34.4 32.3 PE (x) 35.0 37.8 26.3 24.9 21.0 ; *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) 54271 / 835 52-wk High/Low (Rs.) 922 / 511 3M Avg. daily volume (mn) 0.5 Beta (x) 1.4 Sensex/Nifty 33371 / 10350 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 5 1 13 42 Relative to Sensex 0 (3) 1 16 Source: Bloomberg Relative Performance* 145 125 105 85 65 Nov-16 Dec-16 Jan-17 Source: Bloomberg; *Index 100 Analyst Contact Nakul Bindal Feb-17 040-3321 6277 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
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 3422 3232 5.9 3033 12.8 6654 5976 11.3 Expenditure 2581 2498 3.3 2288 12.8 5080 4540 11.9 EBITDA 840 734 14.4 745 12.7 1574 1436 9.6 Depreciation 64 65 (0.5) 64 0.4 129 132 (1.8) Other Income 89 79 12.0 (30) NM 168 (20) NM PBT 864 749 15.5 651 32.9 1613 1284 25.6 Tax (292) (251) NM (220) NM (543) (434) NM PAT 572 497 15.1 431 32.9 1070 850 25.9 EBITDA Margin (%) 24.6 22.7 184 bps 24.6 (2) bps 23.7 24.0 (37) bps EBIT Margin (%) 25.3 23.2 210 bps 21.5 381 bps 24.2 21.5 275 bps Net Profit Margin (%) 16.7 15.4 134 bps 14.2 253 bps 16.1 14.2 185 bps 2
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 2017. 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 14525 14267 (1.8) 17256 16800 (2.6) EBITDA 3535 3420 (3.3) 4261 4126 (3.2) EBITDA Margin (%) 24.3 24.0 (30) bps 24.7 24.6 (10) bps Adj. PAT 2179 2181 0.1 2632 2587 (1.7) EPS (Rs.) 35.0 35.0 0.0 42.3 41.5 (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 3600 23.7% 27.1% 30% 20.9% 2400 15.0% 20% 12.9% 12.8% 10.9% 9.8% 1200 10% 2741 2940 2943 3033 3094 3260 3232 3422 0 0% 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
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
Financials Exhibit 8: Income Statement Revenues 8494 10752 12330 14267 16800 Growth (%) 9.6 26.6 14.7 15.7 17.8 Operating Expenses 6728 8281 9398 10847 12674 EBITDA 1766 2471 2932 3420 4126 Growth (%) 29.4 39.9 18.7 16.6 20.7 Depreciation & Amortization 247 226 269 275 291 Other Income 41 119 (48) 151 66 EBIT 1560 2363 2615 3296 3901 Interest Expenses 0 0 0 0 0 PBT 1560 2363 2615 3296 3901 Tax 531 815 882 1116 1314 Adjusted PAT 1029 1548 1733 2181 2587 Growth (%) 42.4 50.5 11.9 25.8 18.6 Exhibit 9: Balance Sheet Cash & Cash Equivalents 1333 1825 2515 3412 4741 Sundry Debtors 1541 2152 2448 2932 3452 Inventory 3 0 0 0 0 Loans & Advances 504 585 568 583 691 Gross Block 1610 2603 2836 2977 3126 Net Block 985 1070 1078 1103 1168 CWIP 26 19 10 9 9 Miscellaneous 264 346 527 773 905 Total Assets 4655 5997 7147 8812 10967 Current Liabilities & Provisions 1713 1957 1366 1495 1776 Other Liabilities 108 182 191 220 253 Total Liabilities 1821 2140 1557 1714 2029 Shareholders Equity 311 311 311 623 623 Reserves & Surplus 2523 3546 5278 6475 8315 Total Networth 2834 3857 5590 7098 8937 Total Networth & Liabilities 4655 5997 7147 8812 10967 5
Exhibit 10: Cash Flow Statement PBT 1560 2363 2615 3296 3901 Depreciation 247 226 269 275 291 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) 34 4 0 0 Cash flow from operating activities 1422 1211 1443 1710 2360 Inc/dec in capital expenditure (329) (375) (260) (298) (356) Others 54 86 126 151 66 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 825 511 784 965 1397 Exhibit 11: Key Ratios YE Mar FY15 FY16 FY17 FY18E FY19E EBITDA Margin (%) 20.8 23.0 23.8 24.0 24.6 EBIT Margin (%) 18.4 22.0 21.2 23.1 23.2 Net Profit Margin (%) 12.1 14.4 14.1 15.3 15.4 Dividend Payout Ratio (%) 33.3 28.2 28.7 25.7 24.1 Net Debt/Equity (x) (0.4) (0.5) (0.5) (0.5) (0.5) RoE (%) 39.6 46.3 36.7 34.4 32.3 RoCE (%) 60.1 70.6 55.4 52.0 48.6 Exhibit 12: Valuation Parameters YE Mar FY15 FY16 FY17 FY18E FY19E EPS (Rs.) 16.5 24.9 27.8 35.0 41.5 DPS (Rs.) 5.5 7.0 8.0 9.0 10.0 BVPS (Rs.) 45.5 61.9 89.8 114.0 143.5 PE (x) 35.0 37.8 26.3 24.9 21.0 P/BV (x) 12.7 15.2 8.2 7.6 6.1 EV/EBITDA (x) 19.7 23.0 14.7 14.9 12.0 EV/Sales (x) 4.1 5.3 3.5 3.6 2.9 ; *Represents multiples for FY15, FY16 & FY17 are based on historic market price 6
Stock Ratings Absolute Returns Buy : > 15% Hold : 5-15% Sell : <5% Connect & Discuss More at 1800 419 8283 (Toll Free) research@karvy.com Live Chat f in You Tube Disclaimer y 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. y 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. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of KSBL. While we would endeavor to update the information herein on a reasonable basis, KSBL is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent KSBL from doing so. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. KSBL will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither KSBL nor any associate companies of KSBL accepts any liability arising from the use of information and views mentioned in this report. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Past performance is not necessarily a guide to future performance. Forward-looking statements are not predictions and may be subject to change without notice. Actual results may differ materially from those set forth in projections. y 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. y 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. y KSBL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. y Compensation of KSBL s Research Analyst(s) is not based on any specific merchant banking, investment banking or brokerage service transactions. y 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. y 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. y 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. y Accordingly, neither KSBL nor Research Analysts have any material conflict of interest at the time of publication of this report. y 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. y It is confirmed that Nakul Bindal, Research Analyst did not serve as an officer, director or employee of the companies mentioned in the report. y KSBL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. y Neither the Research Analysts nor KSBL have been engaged in market making activity for the companies mentioned in the report. y We submit that no material disciplinary action has been taken on KSBL by any Regulatory Authority impacting Equity Research Analyst activities. Karvy Stock Broking Limited Plot No.31, 6th Floor, Karvy Millennium Towers, Financial District, Nanakramguda, Hyderabad, 500 032, India Tel: 91-40-2331 2454; Fax: 91-40-2331 1968 For More updates & Stock Research, visit www.karvyonline.com 7