Institutional Equity Research

CMP* (Rs) 896

Tata Elxsi Upside/ (Downside) (%) (2)
HOLD
IT | India Bloomberg Ticker TELX IN
Market Cap. (Rs bn) 56 Target Price: Rs875
Free Float (%) 55
4QFY19 Result Update | May 02, 2019 Shares O/S (mn) 62

Another Poor Show; Top Client Continues to Drag Revenue

Tata Elxsi (TEL) continued to deliver poor performance in 4QFY19 with revenue declining by 0.5% Share price (%) 1 mth 3 mth 12 mth
QoQ (both in INR & CC terms) to Rs4.05bn. Revenue from the key SDS segment declined by 1.2%
Absolute performance (4.5) 4.7 (24.0)
QoQ, marking the first sequential decline since 1QFY15. On the other hand, revenue from SIS
Relative to Nifty (5.4) (3.1) (34.0)
segment rose by a strong 19.8% QoQ on seasonality. On YoY basis, total revenue rose by 7.9%
(5% in CC terms) with the SDS segment clocking just 8% growth, which is the slowest since the
company started disclosing these numbers. On the other hand, the SIS segment clocked 5.4% Shareholding Pattern (%) Dec'18 Mar'19
YoY growth. Revenue share of the SDS business remained high at 96.9%. EBITDA margin was Promoter 44.6 44.5
a major disappointment (down 108bps QoQ to 24.3% on higher revenue share of SIS); over the
Public 55.4 55.5
past 3 quarters, margin is down by 358bps. YoY EBITDA saw pedestrian growth of just 3.5%,
marking the slowest growth in nearly 6 years since 1QFY14. Nonetheless, higher other income on
forex gains of Rs6mn (vs. Rs118mn loss in 3QFY19) led to 8% QoQ growth in net profit to Rs713mn. Key Financials
From service-line perspective, within the SDS business, Embedded Product Design (EPD) revenue (Rs mn) FY19 FY20E FY21E
declined by 1.6% QoQ to Rs3.47bn, while YoY growth came in at just 10.5%, which is the lowest Net Sales 15,969 17,539 19,633
ever since the company started disclosing these numbers. On the other hand, Industrial Design EBITDA 4,150 4,490 5,034
and Validation (IDV) segment revenue rose by 2.7% QoQ. RPAT 2,900 3,074 3,407
JLR, Margin Pressure to Remain Overhang; New CMD Appointment to be Watched Diluted EPS (Rs) 46.6 49.4 54.7
Going forward, while substantial growth is being seen in areas like connected cars, autonomous P/E (x) 19.2 18.2 16.4
vehicles, AR/VR experience and electronics, issues with the UK car industry and problems at its EV / EBITDA (x) 12.2 11.0 9.5
largest client, JLR are likely to lead to the stock’s underwhelming performance in the medium- RoE (%) 34.5 29.5 27.3
term. Margin is also expected to witness pressure owing to investments to be made in tapping
new areas i.e. Railways, Aerospace and CVs. Focus on newer areas is necessary in light of issues
like move away from fuels like diesel, which is impacting JLR’s performance. The appointment of Change of Estimates
new CMD, Mr. Manoj Raghavan (currently Executive Vice President, EPD Business) w.e.f. October FY20E FY21E
2, 2019 post retirement of the current CMD Mr. Madhukar Dev, will be keenly watched. Particulars % chg % chg

Outlook & Valuation Revenue 6.5 3.1

TEL’s poor performance in 4QFY19, along with near-term issues at JLR and margin pressure is EBITDA 0.7 (2.6)
unlikely to cushion the stock price. With problems at its top client, apart from investments to EBITDA Margin (bps) (148) (149)
be made for tapping new areas, concerns over growth and margin seem to be valid. Come EPS (1.0) (4.8)
Oct’19, we would rather watch out for the strategy of new CMD. Downwardly revising our EPS
estimates for forward years, we maintain our HOLD recommendation on the stock with a
revised Target Price of Rs875 (from Rs1,050 earlier). 1 Year Stock Price Performance
1,500
Quarterly Performance (Rs mn)
1,400
Particulars 4QFY19 3QFY19 QoQ (%) 4QFY18 YoY (%)
1,300
Net Revenues 4,051 4,070 (0.5) 3,754 7.9
1,200
Purchase of Traded Goods 303 232 30.9 219 38.3
1,100
Employee Costs 2,140 2,181 (1.9) 2,019 6.0 1,000
SG&A and Other Operating Expenses 623 625 (0.2) 564 10.5 900

EBITDA 985 1,033 (4.7) 951 3.5 800

Nov-18
May-18

Oct-18
Aug-18

Sep-18

Mar-19
Jul-18

Jul-18
Jun-18

Dec-18

Jan-19

Feb-19

Apr-19

Depreciation 67 62 7.6 61 9.0

EBIT 918 971 (5.5) 890 3.2
Note: * CMP as on May 02, 2019
Other Income 150 (27) (656.6) 196 (23.6)
PBT 1,068 944 13.1 1,086 (1.7)
Tax 355 284 24.8 383 (7.4)
APAT 713 660 8.0 703 1.4 Research Analyst: Harit Shah
E/o (adj for tax) 0 0 - 0 - Contact: 022 3303 4627
RPAT 713 660 8.0 703 1.4 Email: harit.shah@relianceada.com
Source: Company, RSec Research
1
Institutional Equity Research

Tata Elxsi
CMP* (Rs)
Upside/ (Downside) (%)
896
(2)
HOLD
IT | India Bloomberg Ticker TELX IN Target Price: Rs875

Conference Call – Key Highlights

ff Revenue contribution of its top client, JLR declined to 18% in 4QFY19 from 21% in 3QFY19.

ff Owing to lack of major margin levers, along with investments required in the near-
term in order to address new segments, Tata Elxsi’s margin profile could remain under
pressure over the next 2 quarters.

ff While the Automotive vertical is seeing pressure owing to client-specific issues, the
Broadcast & Media vertical is growing at a good pace, aided by the move to OTT
applications.

ff Tata Elxsi’s headcount remained sequentially unchanged at 6,100 as of FY19-end.

ff Utilisation rate reduced to 72% in 4QFY19 from 76% in 3QFY19.

ff Offshore-onsite ratio stood at 60:40, similar to the previous quarter.

Risks to the View

ff Upside Risks: Faster-than-expected recovery in the UK car industry in general and JLR
in particular; and improved disclosure quality.

ff Downside Risks: Possibility of a hard Brexit; Decline in ER&D spend followed by fall in
global trade; and currency risk.

Exhibit 1: Margin Break Up

Particulars 4QFY19 3QFY19 QoQ (bps) 4QFY18 YoY (bps)
Employee Expenses % Net Revenues 52.8 53.6 (76) 53.8 (97)
SG&A and Other Expenses % Net Revenues 15.4 15.3 4 15.0 36
EBITDA Margin (%) 24.3 25.4 (108) 25.3 (103)
EBIT Margin (%) 22.7 23.9 (120) 23.7 (104)
Tax Rate (%) 33.2 30.1 312 35.3 (204)
APAT Margin (%) 17.6 16.2 138 18.7 (113)
Source: Company, RSec Research

Exhibit 2: Earlier, revised estimates

Particulars Earlier estimates Revised estimates % change Earlier estimates Revised estimates % change
FY20E FY21E
Revenue (Rs mn) 16,465 17,539 6.5 19,043 19,633 3.1
EBITDA (Rs mn) 4,458 4,490 0.7 5,167 5,034 (2.6)
EBITDA margin (%) 27.1 25.6 (148 bps 27.1 25.6 (149 bps)
EPS (Rs) 49.8 49.4 (1.0) 57.5 54.7 (4.8)
Source: RSec Research

Exhibit 3: Key Assumptions

Particulars FY18 FY19 FY20E FY21E
SDS revenue growth (%) 13.6 16.1 10.0 12.0
SIS revenue growth (%) (14.5) (5.5) 5.0 10.0
Total revenue growth (%) 12.0 15.2 9.8 11.9
EBITDA margin (%) 25.0 26.0 25.6 25.6
Source: Company, RSec Research

2
Institutional Equity Research

Tata Elxsi
CMP* (Rs)
Upside/ (Downside) (%)
896
(2)
HOLD
IT | India Bloomberg Ticker TELX IN Target Price: Rs875

Exhibit 4: Segmental break-up

(% of revenue) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19
SDS 94.8 97.3 95.9 96.6 97.2 96.7 96.0
SIS 5.2 2.7 4.1 3.4 2.8 3.3 4.0
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source: Company, RSec Research

Exhibit 5: Segmental growth

(QoQ, %) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19
SDS 5.1 3.7 7.0 2.5 6.0 0.5 (1.2)
SIS 22.0 (48.5) 67.2 (16.4) (11.6) 19.1 19.8
Total 5.9 1.0 8.6 1.8 5.4 1.0 (0.5)
Source: Company, RSec Research

Exhibit 6: Segmental EBIT margin

(%) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19
SDS 29.0 29.6 33.8 31.2 33.1 25.7 28.2
SIS 15.7 13.3 17.5 11.0 17.4 17.6 21.5
Total 22.7 25.2 23.7 26.3 25.0 23.9 22.7
Source: Company, RSec Research

Exhibit 7: Segmental Gross EBIT contribution

(% of gross EBIT) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19
SDS 97.1 98.8 97.8 98.8 98.5 97.7 96.9
SIS 2.9 1.2 2.2 1.2 1.5 2.3 3.1
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source: Company, RSec Research

Exhibit 8: Segmental EBIT growth

(QoQ, %) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19
SDS 16.2 6.1 22.1 (5.3) 12.3 (21.9) 8.6
SIS 60.5 (56.4) 120.2 (47.4) 40.1 20.3 46.6
Total 17.2 4.3 23.3 (6.2) 12.7 (21.2) 9.5
Source: Company, RSec Research

Exhibit 9: Service break-up

(% of revenue) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19
Embedded Product Design 83.3 85.6 83.6 85.9 86.7 86.6 85.6
Industrial Design & Visualisation 11.5 11.7 12.3 10.7 10.5 10.1 10.4
Systems Integration 5.2 2.7 4.1 3.4 2.8 3.3 4.0
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source: Company, RSec Research

Exhibit 10: Service growth

(QoQ, %) 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19
Embedded Product Design 7.3 3.8 6.1 4.6 6.4 0.9 (1.6)
Industrial Design & Visualisation (8.4) 3.2 13.9 (11.2) 2.9 (2.8) 2.7
Systems Integration 22.0 (48.5) 67.2 (16.4) (11.6) 19.1 19.8
Total 5.9 1.0 8.6 1.8 5.4 1.0 (0.5)
Source: Company, RSec Research

3
Institutional Equity Research

Tata Elxsi
CMP* (Rs)
Upside/ (Downside) (%)
896
(2)
HOLD
IT | India Bloomberg Ticker TELX IN Target Price: Rs875

Profit & Loss Statement

Y/E Mar (Rs mn) FY18 FY19 FY20E FY21E
Total Revenue 13,863 15,969 17,539 19,633
Growth (%) 12.0 15.2 9.8 11.9
Total Operating Expenses 10,403 11,819 13,050 14,599
EBITDA 3,460 4,150 4,490 5,034
EBITDA (%) 25.0 26.0 25.6 25.6
EBITDA Growth (%) 16.7 19.9 8.2 12.1
Depreciation 254 251 278 308
EBIT 3,207 3,899 4,212 4,726
EBIT (%) 23.1 24.4 24.0 24.1
EBIT Growth (%) 18.9 21.6 8.0 12.2
Other Income 432 435 444 435
PBT 3,639 4,334 4,656 5,161
PBT (%) 26.3 27.1 26.5 26.3
PBT Growth (%) 37.7 19.1 7.4 10.8
Tax (incl deferred) 1,239 1,434 1,583 1,754
PAT 2,400 2,900 3,074 3,407
PAT (%) 17.3 18.2 17.5 17.4
PAT Growth (%) 37.3 20.8 6.0 10.8
EPS (Rs) 38.5 46.6 49.4 54.7
EPS Growth (%) 37.3 20.8 6.0 10.8

Balance Sheet
Y/E Mar (Rs mn) FY18 FY19 FY20E FY21E
SOURCES OF FUNDS
Share Capital - Equity 623 623 623 623
Reserves 6,761 8,805 10,772 12,952
Total Shareholders' Funds 7,384 9,428 11,395 13,575
Creditors 450 555 570 598
Other Current Liabilities & Provns 1,427 1,314 1,322 1,333
Total Current Liabilities 1,877 1,869 1,893 1,932
Long Term Liab. and Provisions 97 124 124 124
Deferred Tax Liability (Net) 91 14 14 14
TOTAL SOURCES OF FUNDS 9,449 11,434 13,425 15,644
APPLICATION OF FUNDS
Net Block 817 872 902 889
Capital Work In Progress 21 4 4 4
Intangible Assets 126 139 139 139
Deferred Tax Asset (Net) 41 60 60 60
LT Loans & Advances, Others 393 278 278 278
Total Non Current Assets 1,398 1,354 1,383 1,370
Debtors and Unbilled Revenue 3,771 4,385 4,949 5,648
Cash & Bank 3,943 5,158 6,555 8,090
Short Term Loans & Advances 8 8 8 8
Other Current Assets 327 530 530 530
Total Current Assets 8,051 10,080 12,042 14,274
TOTAL APPLICATION OF FUNDS 9,449 11,434 13,425 15,644

4
Institutional Equity Research

Tata Elxsi
CMP* (Rs)
Upside/ (Downside) (%)
896
(2)
HOLD
IT | India Bloomberg Ticker TELX IN Target Price: Rs875

Cash Flow Statement

Y/E Mar (Rs mn) FY18 FY19 FY20E FY21E
PAT 2,400 2,900 3,074 3,407
Depreciation 254 251 278 308
Working Capital Change (398) (823) (540) (660)
Cash Flow from Operations (a) 2,256 2,328 2,811 3,055
Capex (158) (290) (307) (294)
Cash Flow from Investing (b) (158) (290) (307) (294)
Share capital Issuance 311 - - -
Dividend (600) (1,009) (1,106) (1,226)
Cash Flow from Financing (c) (288) (1,009) (1,106) (1,226)
NET CASH FLOW (a+b+c) 1,809 1,029 1,397 1,534
EO items, others (70) 186 0 0
Closing Cash Balance 3,943 5,158 6,555 8,090
Free Cash Flow 2,098 2,038 2,504 2,761

Key Ratios
Y/E Mar FY18 FY19 FY20E FY21E
Profitability (%)
EBITDA Margin 25.0 26.0 25.6 25.6
APAT Margin 17.3 18.2 17.5 17.4
RoE 37.0 34.5 29.5 27.3
RoIC or Core RoCE 41.7 44.3 42.3 43.3
RoCE 32.6 31.0 26.7 25.0
Efficiency
Tax Rate (%) 34.0 33.1 34.0 34.0
Fixed Asset Turnover (x) 6.0 6.1 6.0 6.1
Debtors (days) 99 100 103 105
Payables (days) 16 17 16 15
Cash Conversion Cycle (days) 84 83 87 90
Net Debt/EBITDA (x) (1.1) (1.2) (1.5) (1.6)
Net Debt/Equity (x) (0.5) (0.5) (0.6) (0.6)
Interest Coverage (x) N.A. N.A. N.A. N.A.
Per Share Data (Rs)
EPS 38.5 46.6 49.4 54.7
CEPS 42.6 50.6 53.8 59.6
DPS 8.0 13.5 14.8 16.4
BV 118.6 151.4 183.0 218.0
Valuation
P/E (x) 23.2 19.2 18.2 16.4
P/BV (x) 7.6 5.9 4.9 4.1
EV/EBITDA (x) 15.0 12.2 11.0 9.5
OCF/EV (%) 4.3 4.6 5.7 6.4
FCF/EV (%) 4.0 4.0 5.1 5.8
FCFE/mkt cap (%) 3.8 3.7 4.5 4.9
Dividend Yield (%) 0.9 1.5 1.7 1.8

5
Institutional Equity Research

Tata Elxsi
CMP* (Rs)
Upside/ (Downside) (%)
896
(2)
HOLD
IT | India Bloomberg Ticker TELX IN Target Price: Rs875

Rating History
Date Reco CMP TP
15-Jan-19 HOLD 980 1050
09-Oct-18 BUY 971 1,440
PLEASE CLICK HERE FOR DETAILED REPORTS
25-July-18 BUY 1,464 1,610
27-Apr-18 BUY 1,199 1,340
22-Jan-18 BUY 1,078 1,265
3-Jan-18 BUY 996 1,180

Rating Guides
Rating Expected absolute returns (%) over 12 months Digitally signed by NAVEEN KULKARNI
DN: c=IN, o=Personal,

BUY >10% NAVEEN 2.5.4.20=0c1ff234f79bd813e0368a6dc

03b4ca15b14b3b5a481882c186a1ef7
b6330566, postalCode=400072,

KULKARNI
st=MAHARASHTRA,
HOLD -5% to 10% serialNumber=97c18031b020ff979ee6
07a3efa48cfba8b1455defbde1b85bee

REDUCE >-5% cbfbf99bbde3, cn=NAVEEN KULKARNI

Date: 2019.05.02 16:57:08 +05'30'

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6