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Initiating Coverage @ Dalal & Broacha
Tata Elxsi Ltd.
September 12, 2012
multiple triggers ahead ....
BUY Current Pri ce Target Price Upside 52 Week Range
KEY SHARE DATA Market Cap EV / Sales EV / EBIDTA Volume (BSE + NSE) No of o/s share mn Face Value Book Value BSE / NSE Reuters Bloomberg Shareholding (%) Period Promote rs MF / Ba nks / FI FII Publ i c & Others Total 130 120 110 100 90 80 70 60 50
Apurva Shah (Research Analyst) (022) 6714 1449 Milind Karmarkar (Head Research) (022) 6630 8667 Nilay Dalal (Equity Sales) (022) 6714 1443
Rs 233 Rs 283 21% Rs 167 / Rs 254
Rs 7.3 BN/$0.1BN 1.4 9.9 48737 31.1 10 61.7 500408 / TATAELXSI TTEX.BO TELX IN Equity Jun‐12 45.1 7.9 1.8 45.2 100.0 Mar‐12 45.1 8.8 2.2 43.9 100.0
Coming out of a bad patch between 2008-2011 due to ramp down of one of its clients in Japan, we expect Tata Elxsi (TELX) to grow at greater than 20% yoy in top line over next few years. Though the overall growth in the company looks muted for the above reason, other geographies have delivered a robust growth during the same period. Japan now contributes only 10% to the total revenues from the previous 35-40%.
Besides the above, growth during above period was muted because of Disappointment in Visual computing business both in revenue and profitability Slower than expected rollout of key technologies and slowdown in global economy
Going forward the main growth driver for the company will be the embedded product design and the industrial design businesses. We believe that with the growth in R&D spend in automotive segment and the multibillion dollar opportunity in ICT as well as roll out of LTE would be the key growth drivers for TELX going forward. We also expect the VCL to breakeven by next year. We expect both the ROCE & ROE to be above 30% by FY14 (18.5% ROE and 23.3% ROCE in FY12) due to low capex requirements and improvement in margins. We expect the company to maintain dividend payout in the range of 40-50%. At the CMP of Rs. 233 with a dividend yield of 3.0% and possibility of good growth going forward, we like the stock. Outlook We believe that the company is not comparable to any other IT midcap companies because of its business model. We expect that as the global economy revives, the company will directly benefit from increasing spend in R&D and product launches. We expect top line to grow by 22.6% yoy for FY13-FY15 mainly because of higher growth in Product business, we expect the bottom line to grow by 35% yoy on account of margin improvement due to higher non linear revenues. At CMP of Rs. 233 stock trades at 15.5x FY13E earnings of Rs. 15 and 10.4x FY14E earnings of Rs. 22.3. We recommend a ‘BUY’ on the stock at current level with a price target of Rs. 283.
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Tata Elxsi Ltd.
Tata Elxsi is a design company that blends technology, creativity and engineering to help customers. It has a unique mix of licensable IPs, design frameworks and embedded design services which helps product companies and OEMs to launch their products and solutions with reduction in cost and time to market. It was started in 1989 to undertake product R&D outsourcing business. Software Development & Services (~84% of revenue) and system integration (~16% of revenue) are the main segments for the company. The software development & services segment can be further divided in three segments 1) Embedded product design (EPD) 2) Industrial design and 3) Visual Computing Lab. EPD, the largest segment contributes 65-70% to the top line where as System integration contributes 10-15%, followed by Industrial design (10%) and VCL (5-6%). Most of the bottom line is contributed by EPD segment where as VCL is loss making. In terms of geography Europe & US are the...