Sample  write-ups  
 Tata Elxsi   
Vol. No. : 26    Issue No. : 29                             Friday, May 29, 2020

On track

While short-term growth will be driven by media, communication and healthcare segments, automotive segment should also recover

Related Tables
4Tata Elxsi: Financials
4Tata Elxsi: Results

Idea Tata Elxsi
BSE Code 500408
BSE Group A
NSE Code TATAELXSI
ISIN Demat INE670A01012
Bloomberg TELX@IN
Reuters TTEX.NS
Par Value Rs 10
52-week High/Low Rs 1099 / Rs 500
Current Price Rs 765 on BSE and Rs 765 on NSE
(as on 29 May 2020)

Tata Elxsi, a part of Tata Group is one of the leading providers of design and technology services across industries including Automotive, Broadcast, Communications and Healthcare. Tata Sons and Tata Investment Corporation together owns about 44.57% stake of the company.

Broadly the operations of the company is divided into two business segments, i.e., Software Development & Services (SDS) and Systems Integration & Support (SIS). The SDS segment comprise technology services and product engineering [or EPD (embedded product design)] as well as industrial design and visualisation (IDV).

In FY2020, the SIS segment accounted for 3% of the revenue and the balance 97% from SDS [embedded product design accounting with 87.3% and IDV 9.7%]. In Q4FY20 about 87.3% came from EPD, 10.1% from IDV and 2.6% from SIS.

Total head count of the company as end of March 2020 stood at 6577 employees up from 6060 employees as end of March 2019.

In Q4FY20 about 39.9% of revenue came from Europe, 35.5% from USA, 11.4% from India and 13.2% from rest of the world.

Niche player in embedded product design services

In Embedded Product Design or technology services and product engineering space the company provides technology consulting, new product design, development, and testing services for the broadcast, consumer electronics, healthcare, telecom and transportation industries.

In automotive and transportation space the company works with leading OEMs and suppliers for R&D, design and product engineering services, right from architecture to launch and beyond. It brings together technologies that accelerate development & testing of connected, autonomous and electric cars & off-highway vehicles. Jaguar Land Rover (JLR) is the single largest client of the company accounting for about 15.7% of revenue in Q4FY20. Within automotive vertical, roughly about 60% of revenue comes from Europe, 30% from US, 10% from Japan, and Korea.

In Broadcasting/media and communication (B&C) vertical within embedded product design, it works with leading broadcasters & operators to create solutions for smarter living, engaged entertainment and a digital future driven by IoT, analytics, and artificial intelligence, thereby enabling new revenue streams and enhanced customer experience.

Tata Elxsi also works with independent software & technology vendors, addressing complex challenges & opportunities in the healthcare industry. As a technology partner the company brings domain experience, technology leadership and a portfolio of solution accelerators to help the customers to quickly build and deploy solutions based on emerging technologies.

In industrial design and visualisation, it helps customers create innovative products, services, and experiences to build brands and help businesses grow. By intersecting design and technology, the company helps clients globally to bring new ideas and products to market. Its services span across consumer research and strategy, branding and graphics, product design, service design, user experience design, transportation design, 3D-prototyping, visualization and manufacturing support. The company brings together emerging technologies including digital, innovative design, and content to create new products and experiences for customers that drive business success. Together with its clients, the company simplifies and enhance service value by analysing problems, identifying opportunities, improving processes and creating unified solutions, meaningful interactions, spaces, and products.

The Systems Integration & Support division implements and integrates complete systems and solutions for High-Performance Computing, CAD/CAM/ CAE/PLM, Broadcast, Virtual Reality, Storage, and Disaster Recovery; and Professional Services for maintenance and support of IT infrastructure in India and overseas.

Non-auto segments are growing strongly

The company for some time is striving to reduce its reliance on transportation vertical. As a result, the contribution of transportation vertical to overall EPD revenue in FY20 has come down to about 47.7% from about 53.9% in FY19 and about 60% in FY18. Even within the transportation vertical the company diversified its revenue stream into railways and aviation. While the contribution of transportation is on decline the share of Broadcasting/media and communication (B&C) and healthcare and medical devise (H&MD) to EPD revenue increased. In FY20 the contribution of B&C to EPD revenue increased to 40.5% from about 36% in FY19. Similarly that of healthcare and medical devise (H&MD) increased to 7.6% in FY20 from about 4.2% in FY19.

The revenue of B&C segment reported a growth of 10.4%, 11.2%, 12.7% and 25.5% growth in Q1FY20, Q2FY20, Q3FY20 and Q4FY20 compared to corresponding previous period. Even on sequential basis B&C reported steady growth in each of the quarters in FY20. Fibre to Home (FTH) and 5G have opened up new opportunities for service providers like Tata Elxsi across both communications and media space and the company is expected to benefit from increased investment in this space.

Similarly, the Healthcare & Medical Devices (H&MD) reported growth in excess of over 55% in each of the quarters in FY20 thus increasing its share to 7.6% from about 4.2% in FY19.

Thus reduced reliance on automotive industry which is under stress in immediate term and increasing share of B&C and H&MD segment which are less impacted due to current global pandemic will augur well for the company.

Since R&D projects are long term in nature the company is not expected to see major cancellations even though there may be some renegotiations especially in automotive sector putting pressure on price. The management of the company in their Q4FY20 conference call commented that ‘B&C and H&MD will be the saviour for the company in FY21’ and may help the company to offset the revenue setback in other verticals.

Automobile segment should also recover gradually due to low base of last year

The automotive industry is on a slow lane for a while and that was accentuated further by Covid 19 as most of the automotive plants across Europe, North America and India are shutdown. Even in China the return of normalcy is not full yet. The transportation vertical of the company that was severely impacted by stress in Jaguar, the single largest customer of the company in Q1FY20 has managed to report sequential growth in rest of the quarters of FY20. Similarly the current pandemic though may impact the performance of transportation vertical in Q1FY21, the company is hopeful of recovery in rest of the quarters. With the increasing share of electronics in automobiles, auto companies are focusing on software even more and allocating bigger part of R&D spend towards electronics which will be key trigger for driving the growth for Tata Elxsi.

Covid-19 to accelerate offshoring

Client delivery and service is not hampered in any way on account of current pandemic situation as about 98% of the workforce of the company is working from Home.

Expect offshore and onshore mix to change going forward with clients accustomed to remote working. Even the onshore engineers are currently working from home. So onshore work can be easily handled from India. The company is also speaking to customers for more offshore work and they will accept. The company expects onsite share to reduce to 30% in medium to long term from about 42.1%in Q4FY20, which will boost the margin.

 Automotive segment spoiled FY20

Revenues for the fiscal ended March 2020 was up by 1%yoy to Rs 1609.86 crore driven largely by strong 15% and 82% growth in revenue of B&C and H&MD segment which more than compensated for the fall in other business verticals of the company. However the operating profit witnessed sharp fall of 17%yoy to Rs 343.00 crore as OPM crashed by 470 bps to 21.3% from 26.0% in corresponding previous period. Sharp contraction in OPM is largely as the company accounted for a charge of Rs 21.63 crore of expense towards special retiral benefit payable to managing director during Q2FY20 under the head employee benefit expenses. Excluding this expense from staff cost, the OPM would have stood at 22.7% (a fall of 330 bps from 26% in FY19) and operating profit at Rs 364.63 crore, fall of 12%yoy. With other income standing higher by 34% to Rs 58.41 crore, the fall at PBIDT has moderated to stand at 12% to Rs 401.42 crore. The PBT was down by 19% to Rs 352.44 crore hit further by higher interest (up at Rs 5.56 crore against nil) and higher depreciation (up 73% to Rs 43.41 crore). After accounting for taxation (down 33% to Rs 96.34 crore), the fall at PAT was restricted at 12% to Rs 256.10 crore.

Revenues for the quarter ended Mar 2020 was up by 8%yoy to Rs 438.89 crore. But with OPM expanding by 40 bps to 24.7% (from 24.3% in corresponding previous quarter), the operating profit was up by 10% to Rs 108.60 crore. But the PBIDT was up by 8% to Rs 121.99 crore hit by lower other income. Other income was down by 11% to Rs 13.39 crore despite 356% jump in exchange gain to Rs 2.77 crore (compared to Rs 0.61 crore in the corresponding previous period). Hit further by higher interest and higher depreciation, the growth at PBT was restricted at 3% to Rs 109.76 crore. Eventually the PAT was up by 15% to Rs 82.08 crore with taxation standing lower by 22%yoy to Rs 27.68 crore.

The company as end of March 2020 has a cash and bank balance of Rs 664.22 crore (up from Rs 515.81 crore) and is a zero net debt company.

Valuation

Management is focused on growing in each quarter in FY21 on y-o-y basis in spite of the pandemic scenario. However we conservatively expect the company to report fall in revenues as well as profits and register EPS of Rs 40.1 for FY21 and Rs 46.3 for FY22.

The scrip is trading around Rs 765, which discounts the projected FY22 EPS by around 16.5 times.

Top

Tata Elxsi: Financials
 
  1903 (12) 2003 (12) 2103 (12P) 2203 (12P)
Sales 1596.93 1609.86 1561.56 1717.72
OPM (%) 26.0 21.3 21.0 22.0
OP 415.03 343.00 327.93 377.90
Other Inc. 43.46 58.41 67.17 73.89
PBIDT 458.5 401.42 395.10 451.79
Int. 0 5.56 5.84 6.13
PBDT 458.5 395.85 389.26 445.66
Dep. 25.1 43.41 44.72 47.85
PBT before EO 433.4 352.44 344.55 397.81
EO 0 0.00 0.00 0.00
PBT 433.4 352.44 344.55 397.81
Tax 143.43 96.34 94.75 109.40
PAT 289.97 256.10 249.80 288.41
EPS * (Rs) 46.6 41.1 40.1 46.3
* Paid up equity capital is Rs 62.28 crore, Face value Rs 10
Figures in crore (P): Projections
Source: Capitaline Databases

Top

Tata Elxsi: Results
 
  2003 (3) 1912 (3) Var. (%) 1903 (3) Var. (%) 2003 (12) 1903 (12) Var. (%)
Sales 438.89 423.44 4 405.10 8 1609.86 1596.93 1
OPM (%) 24.7 22.2   24.3   21.3 26.0  
OP 108.60 94.19 15 98.47 10 343.00 415.03 -17
Other Inc. 13.39 20.52 -35 14.99 -11 58.41 43.46 34
PBIDT 121.99 114.72 6 113.46 8 401.42 458.50 -12
Interest 1.44 1.44 0 0.00   5.56 0.00  
PBDT 120.55 113.27 6 113.46 6 395.85 458.50 -14
Dep. 10.79 11.22 -4 6.69 61 43.41 25.10 73
PBT before EO 109.76 102.06 8 106.76 3 352.44 433.40 -19
EO 0.00 0.00   0.00   0.00 0.00  
PBT 109.76 102.06 8 106.76 3 352.44 433.40 -19
Tax 27.68 26.64 4 35.47 -22 96.34 143.43 -33
PAT 82.08 75.42 9 71.29 15 256.10 289.97 -12
EPS * (Rs) 52.7 48.4   45.8   41.1 46.6  
* Paid up equity capital is Rs 62.2764 crore, Face value Rs 10
Figures in crore (P): Projections PL: Profit to Loss
Source: Capitaline Databases

Top