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
Jan 31, 2018 Tata Elxsi Ltd
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
Source: Company, Karvy Research
Source: Company, Karvy Research
Source: Company, Karvy Research
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 (%)
Source: Company, Karvy Research
3
Jan 31, 2018 Tata Elxsi Ltd
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 (%)
Source: Company, Karvy Research
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
Source: Company, Karvy Research
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 (%)
Source: Company, Karvy Research
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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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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