RESULT UPDATE 19 th July, 2019 Tata Elxsi Ltd.
RESULT UPDATE 19th July, 2019
Tata Elxsi Ltd.
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Tata Elxsi Ltd. CMP
INR 731 Target
INR 1,008 Potential Upside
37.8% Market Cap (INR Mn)
INR 45,468 Recommendation
Buy Sector
IT Services
Shares outs (Mn) 62.2
Equity Cap (INR Mn) 623
Mkt Cap (INR Mn) 45,468
52 Wk H/L (INR) 1,491/722
Volume Avg (3m K) 628
Face Value (INR) 10
Bloomberg Code TELX IN
MARKET DATA
SHARE PRICE PERFORMANCE
SENSEX 38,897
NIFTY 11,597
MARKET INFO
KEY FINANCIALS
Source: Company, KRChoksey Research
Result Highlights of Q1FY20
• Tata Elxsi Q1FY20 results were below our estimates on both the revenue and profitability front due to degrowth in Auto vertical
• Tata Elxsi reported revenue degrowth of 5.3% YoY (down 10.7% QoQ) to INR 3,617 mn against our estimates of INR 4,202mn.
• Overall, EBITDA margin contracted by 857 bps YoY to 19.3% (down 500 bps QoQ) indicating significant margin pressures.
• On a segmental basis, Software Development & Services (SDS) revenue declined by 4.7% YoY to INR 3,519.2 mn, while the segmental PBT for SDS declined by 32% YoY to INR 783.7mn.
• Net Profit declined by 30.8% YoY to INR 488 mn (down 31.6% QoQ) with NPM of 13.5% (down 496 bps YoY).
SHARE HOLDING PATTERN (%)
Revenue CAGR between FY19 and FY21E
11.9%
PAT CAGR between FY19 and FY21E
4.6%
Weak performance in Auto vertical impacted Q1FY20 results
TELX’s Q1FY20 revenue degrowth was majorly led by Software Development & Services (SDS) segment (97.3% of the revenue) which declined by 4.7% YoY to INR 3,519 mn, while the segmental PBT for SDS declined by 32% YoY to INR 784 mn. The degrowth in the revenue was experienced due to the overall slowdown in the auto segment, especially JLR (TELX’s largest client) and delays in new project initiations. In Q1FY20 operating margin at 16.4% was down 623 bps QoQ (down 986 bps YoY) primarily impacted by higher costs due to low employee utilization levels.
Technology adoption trends and Auto sector revival can swing back TELX
TELX is positioned into the emerging growth verticals (Automotive, Broadcast & Media, Communications and Healthcare) which are witnessing a trend of increased technology adoption. Going forward, JLR, which is a major client of TELX is also on its revival trajectory as evident from recent monthly sales figures. While challenging conditions continue to impact other regions, it was relieving to see that JLR’s UK sales growth (+4.6% YoY) returned on track, on the back of higher sales of the new Range Rover Evoque, Land Rover Discovery, Jaguar I-PACE and the new Jaguar XE for the month of June 2019. According to the management, the slowdown in JLR for other regions and slowdown in decision making is only temporary and doesn’t see any further loss of business from its major client going forward. Recently, JLR and its larger rival BMW has announced a collaborative approach for developing EV platforms; and IT spending can bounce back in the coming quarters.
Strong balance sheet to support opportunities in new verticals
Tata Elxsi plans to expand into newer and upcoming verticals and reduce its dependence on the Auto segment. In fact management indicated that during Q1FY20, TELX’s Broadcasting and communications (B&C) and Healthcare verticals recorded higher growth than recent two quarters. Furthermore, with the huge free cash in the books (debt free balance sheet with >INR 500 Cr. Cash/liquid assets as of March 2019), the company plans to chase inorganic expansion through mergers or collaboration.
Weak performance in Auto vertical and margin pressure
India Equity Institutional Research II Result Update – Q1FY20 II 19th July, 2019
Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 www.krchoksey.com
KRChoksey Research is also available on Bloomberg KRCS<GO>
Thomson Reuters, Factset and Capital IQ
ANALYST Parvati Rai, [email protected], +91-22-6696 5413
Particulars Mar-19 Dec-18 Sep-18
Promoters 44.53 44.57 44.57
FIIs 9.56 8.02 10.51
DIIs 2.72 4.03 4.8
Others 40.64 41.01 38.29
Total 100 100 100
50
100
150
200
Jul-1
6
Jan
-17
Jul-1
7
Jan
-18
Jul-1
8
Jan
-19
Jul-1
9
Tata Elxsi Nifty
Particulars (INR Mn) FY17 FY18 FY19 FY20E FY21E
Net Sales 12,330 13,863 15,969 17,262 19,980
EBIT 2,663 3,207 3,899 3,297 4,493
PAT 1,733 2,400 2,900 2,472 3,268
EPS 27.83 38.55 46.56 39.69 52.48
EBIT Margin 21.6% 23.1% 24.4% 19.1% 22.5%
NPM 14.1% 17.3% 18.2% 14.3% 16.4%
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Tata Elxsi Ltd.
India Equity Institutional Research II Result Update – Q1FY20 II 19th July, 2019
Key Concall Highlights: (i) Q1FY20 was a tough quarter for the company. Revenue was down due to the overall slowdown in the auto segment and the loss of business from JLR (ii) Due to the late decision making, multiple projects are still in pipeline waiting for its start of operations but management stated that Q1 new order booking was significantly higher than previous quarter (iii) Employee wage hike is yet to be taken and is expected in the coming months. Hence its effect will be seen in Q2FY20 (iv) Segmental wise, Auto segment contributed to ~50% of the revenue, while Broadcasting and Communications contributed to ~40% of the revenue and Medical/Healthcare/Others contributed ~10% (v) JLR contributed 14%-15% to the topline in Q1FY20 (compared to ~21% in Q4FY19) (vi) One-off revenue declined drastically to around INR 2 Cr. in Q1FY20 from ~INR 25-30 Cr. in previous quarter (vii) Management stated that weakness in JLR contribution in Q1FY20 was entirely volume driven and that there were no change in pricing; there was no shifting of JLR works from TELX to any other competitor (viii) Utilization rate slipped to 65% in Q1FY20 from 82% in Q4FY19 (ix) Management indicated that if it foresees a viable opportunity then it will use its free cash for inorganic growth. Valuation and view: While the Q1FY20 numbers were disappointing, we see prospects of turnaround at TELX and do not see the results as a structural change to its growth or margin profile. Despite tight R&D budget for global auto players and delays in decision making, we continue to remain positive over the technology adoption trends and believe that TELX has the right set of products/services to address the market opportunity through its collaborative approach with global OEMs including the recent entry into the China market. With a major shift towards Electric vehicles, Autonomous cars and OEM, Internet TV, Cloud and SDN Technology, we feel that TELX is ideally placed to provide its services to these faster changing technologies and enjoys a competitive advantage over its peers. However, based on poor Q1FY20 financial performance, we have revised our estimates downwards and now expect the company to generate a topline growth of average 11.9% in FY20E/FY21E while we take a conservative stance on margin outlook (EBIT to stay below 23% in forecast period compared to >24% in the recent past). Tata Elxsi is currently trading at a P/E multiple of 18.4x/13.9x on FY20E/FY21E earnings. We apply a P/E multiple of 19.2x to the FY21 estimated EPS of INR 52.5 to arrive at a target price of INR 1,008 per share, an upside of 38% over the CMP. Accordingly, we reiterate our “BUY” rating to the stock.
Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 www.krchoksey.com
KRChoksey Research is also available on Bloomberg KRCS<GO>
Thomson Reuters, Factset and Capital IQ
ANALYST Parvati Rai, [email protected], +91-22-6696 5413
88%
9% 3%
Revenue composition (Q1FY20)
EmbeddedProduct Design
Industrial Design& Visualization
SystemIntegration
42% 41% 41% 41% 44%
58% 59% 59% 59% 56%
Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20
Revenue Mix (%) – Increasing onsite presence
Onsite Offshore
3,692
3,915 3,935 3,889
3,519
128
113 135 162
98
Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20
Segmental Revenue (INR mn)
System Integration & Support Services
Software Development & Services
Source: Company, KRChoksey Research
75% 75% 79%
82%
65%
FY16 FY17 FY18 FY19 Q1FY20
Employee utilization rate (%) – Decline in Q1FY20
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Tata Elxsi Ltd.
India Equity Institutional Research II Result Update – Q1FY20 II 19th July, 2019
Exhibit 1: Profit & Loss Statement
Source: Company, KRChoksey Research
KEY FINANCIALS
Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 www.krchoksey.com
KRChoksey Research is also available on Bloomberg KRCS<GO>
Thomson Reuters, Factset and Capital IQ
ANALYST Parvati Rai, [email protected], +91-22-6696 5413
Particulars (INR Mn) FY 17 FY 18 FY 19 FY 20E FY 21E
Revenues 12,330 13,863 15,969 17,262 19,980
Cost of sales 747 773 989 1,001 1,159
Gross profit 11,583 13,090 14,980 16,261 18,821
Employee cost 6,693 7,487 8,426 9,713 10,630
Other expenditure 1,957 2,143 2,404 2,848 3,297
Opex 8,651 9,630 10,830 12,561 13,927
Operating profit 2,663 3,207 3,899 3,297 4,493
D&A 269 254 251 403 401
EBITDA 2,932 3,460 4,150 3,700 4,894
Finance costs - - - 53 58
Other income, net (48) 432 435 450 450
Pretax Income 2,615 3,639 4,334 3,695 4,885
Income tax expense 882 1,239 1,434 1,223 1,617
Net profit 1,733 2,400 2,900 2,472 3,268
Diluted EPS (INR) 27.83 38.55 46.56 39.69 52.48
No. of Shares (mn) - Diluted 62.28 62.27 62.28 62.28 62.28
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Tata Elxsi Ltd.
India Equity Institutional Research II Result Update – Q1FY20 II 19th July, 2019
Source: Company, KRChoksey Research
Exhibit 2: Balance Sheet
Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 www.krchoksey.com
KRChoksey Research is also available on Bloomberg KRCS<GO>
Thomson Reuters, Factset and Capital IQ
ANALYST Parvati Rai, [email protected], +91-22-6696 5413
Particulars (INR Mn) FY17 FY18 FY19 FY20E FY21E
Assets
Cash and equivalents 1,909 832 537 1,997 3,820
Other bank balance 606 3,111 4,621 4,621 4,621
Sundry debtors 2,448 3,067 3,565 3,854 4,461
Loans and advances 8 8 8 8 8
Other Financial Assets 492 749 640 640 640
Other Assets 202 283 693 693 693
Total current assets 5,665 8,051 10,080 11,829 14,258
Property, plant and equipment 923 817 872 943 1,035
Intangible assets 155 126 139 139 139
Capital work in progress 10 21 4 4 4
Non-current Investments 107 142 151 151 151
Long-term loans and advances 261 251 126 126 126
Right of use Assets - - - 396 297
Deferred Tax Assets 32 41 60 60 60
Total non-current assets 1,489 1,398 1,354 1,820 1,814
Total Assets 7,154 9,449 11,434 13,649 16,072
Liabilities and equity
Trade payables 465 450 555 562 650
Provisions 66 69 84 84 84
Other financial liabilities 368 572 454 454 454
Other CL 321 585 615 615 615
Deferred tax liability 98 201 162 162 162
Lease liabilities - - - 577 577
Total current liabilities 1,318 1,877 1,869 2,453 2,541
Long Term Provisions 159 97 124 124 124
Deferred tax liability 101 91 14 14 14
Total liabilities 1,577 2,065 2,006 2,013 2,102
Share capital 311 623 623 623 623
Reserves and surplus 5,265 6,761 8,805 10,436 12,770
Total Equity holders of the company 5,577 7,384 9,428 11,059 13,393
Total liabilities and equity 7,154 9,449 11,434 13,649 16,072
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Tata Elxsi Ltd.
India Equity Institutional Research II Result Update – Q1FY20 II 19th July, 2019
Exhibit 3: Free Cash Flow analysis
Source: Company, KRChoksey Research
Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 www.krchoksey.com
KRChoksey Research is also available on Bloomberg KRCS<GO>
Thomson Reuters, Factset and Capital IQ
ANALYST Parvati Rai, [email protected], +91-22-6696 5413
Exhibit 4: Ratio analysis
Source: Company, KRChoksey Research
Particulars (INR Mn) FY17 FY18 FY19 FY20E FY21E
Net Cash Generated From Operations 1,443 1,971 2,149 2,593 3,151
Net Cash Flow from/(used in) Investing Activities 376 (2,472) (1,587) (341) (394)
Net Cash Flow from Financing Activities (525) (600) (826) (841) (934)
Net Inc/Dec in cash equivalents 1,294 (1,100) (264) 1,411 1,823
Opening Balance 713 1,909 832 537 1,997
Closing Balance Cash and Cash Equivalents 1,909 832 537 1,997 3,820
Key Ratio FY17 FY18 FY19 FY20E FY21E
EBIT Margin (%) 21.6% 23.1% 24.4% 19.1% 22.5%
Tax rate (%) 33.7% 34.0% 33.1% 33.1% 33.1%
Net Profit Margin (%) 14.1% 17.3% 18.2% 14.3% 16.4%
RoE (%) 31.1% 32.5% 30.8% 22.4% 24.4%
RoCE (%) 45.6% 42.3% 40.8% 29.5% 33.2%
Current Ratio (x) 4.30x 4.29x 5.39x 4.82x 5.61x
EPS (INR per share) 27.83 38.55 46.56 39.69 52.48
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Tata Elxsi Ltd.
Rating Legend (Expected over a 12-month period)
Our Rating Upside
Buy More than 15%
Accumulate 5% – 15%
Hold 0 – 5%
Reduce -5% – 0
Sell Less than – 5%
India Equity Institutional Research II Result Update – Q1FY20 II 19th July, 2019
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ANALYST Parvati Rai, [email protected], +91-22-6696 5413
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Tata Elxsi Ltd.
Date CMP (INR) TP (INR) Recommendation
26-June-19 858 1200 BUY