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Tata Elxsi Ltd.

Q1FY21 Result Update 24th July, 2020

2 Page India Equity Institutional Research II Result Update – Q1FY21 II 24th July, 2020

KRChoksey Research is also available on Bloomberg KRCS<GO>

Thomson Reuters, Factset and Capital IQ

Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 www.krchoksey.com

Tata Elxsi Ltd.

ANALYST Parvati Rai, [email protected], +91-22-6696 5413

CMP

INR 914 Target

INR 1,064 Potential Upside

16.5% Market Cap (INR Mn)

INR 56,921 Recommendation

BUY Sector

Internet Software & Services

Broadcasting business seeing traction; Europe mostly bottomed out

MARKET DATA KEY FINANCIALS

Result highlights

• For Q1FY21, Tata Elxsi reported revenue growth of 10.7% YoY (-8.7% QoQ) to INR 4,005 mn against our estimates of INR 3,843 mn.

• Overall, for the quarter, EBITDA margin expanded by 384 bps YoY to 23.1% (down 160 bps QoQ).

• Net Profit increased by 41.2% YoY to INR 689 mn (-16.1% QoQ) with NPM of 17.2% (up 371 bps YoY) mainly on account of lower tax.

• Employee attrition reduced significantly from 13.7% in Q1FY20 to 5.4% in Q1FY21.

• The company is trying to diversify its customer base with Top 5 and Top 10 client concentration at 36.2% and 48.6% respectively in Q1FY21 compared to 38.9% and 50.6% respectively in Q4FY20.

Shares O/S (Mn) 62.3

Equity Cap (INR Mn) 10,900

Mkt Cap (INR Mn) 56,921

52 Wk H/L (INR) 1,098/500

Volume Avg (3m K) 609

Face Value (INR) 10

Bloomberg Code TELX IN

SHARE PRICE PERFORMANCE

SENSEX 38,140

NIFTY 11,215

MARKET INFO

Source: Company, KRChoksey Research

SHARE HOLDING PATTERN (%)

EPD led growth, weak performance of IDV segment: Tata Elxsi reported revenues of INR 4,005 mn in Q1FY21; 10.7% yoy growth. In this, the Embedded Product Design (EPD) contributed the highest share of ~90% (87% in Q4FY20). Healthcare & Medical devices vertical grew highest at 23.7% YoY (+1.9% QoQ, 8.6% of revenue), followed by Broadcast & Communication vertical which grew at 20.6% YoY (+0.4% QoQ, 45% of revenue). The growth of Transportation vertical was flat YoY (-18.4% QoQ). In the automotive vertical, the company saw stagnation in growth on a YoY basis (-18.4% QoQ, 42% of revenue), unlike a four consecutive quarters of YoY degrowth. Industrial Design & Visualization (IDV) contributed 7.5% to the revenue (10% in Q4FY20) and de-grew at 9.7% YoY (-32.2% QoQ), while System Integration & Support (SIS) contributed 2.6% (same as in previous quarter) to the topline with a YoY/QoQ growth of 2.8%/-8.7%. SIS was impacted in the previous quarter (with YoY decline of 29.6%) as the company was not able to ship any hardware to the customers in the COVID-19 lockdown. Company continued to diversify away from automotive vertical; Europe bottomed out Company’s diversification & de-risking initiatives are paying out and Automotive vertical now contributes less than half the revenues (~42% in Q1FY21 vs. 47% in Q1FY20). The general slowdown in European automotive sector and on top of that slowing of economic activity with COVID-19 lockdown, was a drag on European business. Europe business which contributes ~36% to the topline degrow 7.0% YoY (-18.1% QoQ). Though the company thinks the sector is bottomed out and that European countries are managing the pandemic better with reopening of many borders across the Europe. The US market continues to do well and posted growth of 15.9% YoY (-7.5% QoQ, 36% of revenue) while India business grew at 28.4% YoY (+4.9% QoQ, 13% of revenue). Lower operating expenses supported the margins for the quarter

For the quarter, EBITDA margin expanded by 384 bps YoY to 23.1% (down 160 bps qoq). Expansion in EBITDA margin was on account of lower operating expenses at 75.7% of revenue (vs 79.4% in 1QFY20) which was due to lower other expenditure at 10.4% of revenue (vs 16.3% in 1QFY20) and declined 30% YoY. D&A grew 3.6% YoY, Finance cost grew 4.9% YoY while other income grew 11.1% YoY. Lower effective tax rate of 26.7% (vs 30.5% in 1QFY20) boosted Net profit by 41.2% YoY (-16.1% QoQ).

Revenue CAGR between FY20 and FY22E

6.6%

PAT CAGR between FY20 and FY22E

11% Particulars Jun-20 Mar-20 Dec-19

Promoters 44.5 44.53 44.53

FIIs 10.5 10.71 9.05

DIIs 4.1 3.67 2.52

Others 40.9 41.09 43.9

Total 100 100 100

Particulars (INR Mn) FY17 FY18 FY19 FY20 FY21E FY22E

Net Sales 12,330 13,863 15,969 16,099 17,377 18,291

EBIT 2,663 3,207 3,899 2,996 3,352 3,794

PAT 1,733 2,400 2,900 2,561 2,876 3,157

EPS 27.83 38.55 46.56 41.12 46.18 50.69

EBIT Margin 21.6% 23.1% 24.4% 18.6% 19.3% 20.7%

NPM 14.1% 17.3% 18.2% 15.9% 16.6% 17.3%

50

70

90

110

130

150

170

Jul-1

7

No

v-17

Mar

-18

Jul-1

8

No

v-18

Mar

-19

Jul-1

9

No

v-19

Mar

-20

Jul-2

0

Tata Elxsi Nifty





Tata Elxsi Ltd.


Key Concall Highlights: (i) Onsite/Offshore for the quarter was 36.5%/63.5% (ii) With lockdown in place in many parts of the world, focusing on more offshore business (iii) 95% of employees are working from home, but 100% WFH facility not possible (iv) Company has stopped adding new facilities & deferred hikes & bonuses to minimize the costs. Big ticket expenses like travelling will also be muted (v) Growth trend in medical devices to continue as company is investing in serviceability & seeing demand (vi) Continuously evaluating inorganic opportunities (vii) Margin guidance remain in the range of 22-24% (viii) JLR bottomed out, with change in management, expect better quarters. Valuation and view Considering the slowing economic activity and travelling restrictions, Tata Elxsi is focussing more on offshore business. It is also benefiting from higher business from broadcast & communication vertical with increasing traction seen in sub-segments of Broadcast & communication vertical like operators (focussing in the US, Europe, SA, & ME), OTT players & devices (like set-top boxes etc). This is also in alignment with company’s objective of de-risking & diversifying away from transportation business (42% in Q1FY21). We see the sustainability of Tata Elxsi compared to its peers, as it has decreased its dependence of automotive vertical and is more focused on expanding the communication and healthcare verticals. We continue to remain positive over the technology adoption trends and believe that Tata Elxsi has the right set of products/services (Electric vehicles, Autonomous cars and OEM, Internet TV, Cloud and SDN Technology) to address the market opportunity through its collaborative approaches. With the rapid development in the healthcare vertical, we see a breather for the company in this vertical . After rallying ~27% from our last update on the stock (at INR 718/share), Tata Elxsi is currently trading at a P/E multiple of 19.8x/18.1x on FY21E/FY22E earnings. Company posted mixed set of numbers in this quarter but showed resilient performance despite lockdown. The increasing share of Broadcast & Healthcare verticals augur well for future growth. Hence, we are applying a higher P/E multiple of 21x (earlier 18x) and rollover target EPS to FY22 (earlier FY21) to arrive at a revised target price of INR 1,064/share (previously INR 831/per share), an upside potential of 16.5% over the CMP. Accordingly, we reiterate “BUY” rating on the shares of Tata Elxsi.

Source: Company, KRChoksey Research Source: Company, KRChoksey Research

Source: Company, KRChoksey Research Source: Company, KRChoksey Research

5,981 5,947

6,389

6,577 6,618

14%

12%

9%

7%

5%

0%

5%

10%

15%

5,500

5,700

5,900

6,100

6,3 00

6,5 00

6,700

Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21

Lowest attrition rate in the industry

Total employees Attrition (%)

44.7% 42.6% 40.3% 42.1% 36.5%

55.3% 57.4% 59.7% 57.9% 63.5%


Revenue Mix (%) - Onsite share to reduce going forward

Onsite Offshore

3,183 3,353 3,680 3,831 3,600

333 374

411 443

300 101

131 144

114 104


Segmental Revenue (INR mn) – Growth in EPD was driven communications vertical

System Integration & Support (SIS)Industrial Design & Visualization (IDV)Embedded Product Design (EPD)

1,686 1,864 2,058 2,067 1,686

1,494 1,578

1,660 1,795 1,802

279 251

351 338 344

159 166

165 189 172


Vertical wise revenue (INR mn) – Diversifying to lessen the dependency on

Transportation

Others Healthcare & Medical Devices

Broadcast & Communications Transportation





Tata Elxsi Ltd.



Exhibit 1: Balance Sheet

KEY FINANCIALS


Assets

Cash and equivalents 1,909 832 537 2,284 3,649 5,698

Other bank balance 606 3,111 4,621 4,358 4,358 4,358

Sundry debtors 2,448 3,067 3,565 3,924 4,285 4,209

Loans and advances 8 8 8 9 9 9

Other Financial Assets 492 749 640 844 844 844

Other Assets 202 283 693 576 576 576

Total current assets 5,665 8,051 10,080 12,012 13,738 15,711

Property, plant and equipment 923 817 872 823 815 790

Intangible assets 155 126 139 129 129 129

Capital work in progress 10 21 4 9 9 9

Non-current Investments 107 142 151 168 168 168

Long-term loans and advances 261 251 126 142 142 142

Right of use Assets - - - 518 638 783

Deferred Tax Assets 32 41 60 88 88 88

Total non-current assets 1,489 1,398 1,354 1,878 1,990 2,109

Total Assets 7,154 9,449 11,434 13,890 15,727 17,820

Liabilities and equity

Trade payables 465 450 555 471 491 517

Provisions 66 69 84 101 101 101

Other financial liabilities 368 572 454 467 467 467

Other CL 321 585 615 765 765 765

Deferred tax liability 98 201 162 237 237 237

Lease liabilities 0 0 0 133 133 133

Total current liabilities 1,318 1,877 1,869 2,174 2,194 2,220

Long Term Provisions 159 97 124 366 366 366

Deferred tax liability 101 91 14 0 0 0

Lease liability 0 0 0 450 450 450

Total liabilities 1,577 2,065 2,006 2,539 2,559 2,585

Share capital 311 623 623 623 623 623

Reserves and surplus 5,265 6,761 8,805 10,278 12,095 14,162

Total Equity holders of the company 5,577 7,384 9,428 10,900 12,718 14,785

Total liabilities and equity 7,154 9,449 11,434 13,890 15,727 17,820





Tata Elxsi Ltd.


Exhibit 2: Profit & Loss Statement


KEY FINANCIALS

Exhibit 4: Ratio Analysis

Exhibit 3: Free Cash Flow Analysis



Particulars (INR Mn) FY 17 FY 18 FY 19 FY20 FY 21E FY22E

Revenues 12,330 13,863 15,969 16,099 17,377 18,291

Cost of sales 747 773 989 811 876 922

Gross profit 11,583 13,090 14,980 15,288 16,501 17,369

Employee cost 6,693 7,487 8,426 9,509 10,267 10,551

Other expenditure 1,957 2,143 2,404 2,349 2,346 2,378

Opex 8,651 9,630 10,830 11,858 12,613 13,575

Operating profit 2,663 3,207 3,899 2,996 3,352 3,794

D&A 269 254 251 434 537 646

EBITDA 2,932 3,460 4,150 3,430 3,889 4,441

Finance costs - - - 56 67 80

Other income, net (48) 432 435 584 550 495

Pre-tax Income 2,615 3,639 4,334 3,524 3,835 4,209

Income tax expense 882 1,239 1,434 963 959 1,052

Net profit 1,733 2,400 2,900 2,561 2,876 3,157

Diluted EPS (INR) 27.83 38.55 46.56 41.12 46.18 50.69

No. of Shares (mn) - Diluted 62.28 62.27 62.28 62.28 62.28 62.28


Net Cash Generated From Operations 1,443 1,971 2,149 2,565 3,072 3,904

Net Cash Flow from/(used in) Investing Activities 376 (2,472) (1,587) 390 (249) (366)

Net Cash Flow from Financing Activities (525) (600) (826) (1,021) (1,059) (1,090)

Net Inc/Dec in cash equivalents 1,294 (1,100) (264) 1,934 1,764 2,449

Opening Balance 713 1,909 832 537 2,285 3,649

Closing Balance Cash and Cash Equivalents 1,909 832 537 2,285 3,649 5,698

Key Ratio FY17 FY18 FY19 FY20 FY21E FY22E

EBIT Margin (%) 21.6% 23.1% 24.4% 18.6% 19.3% 20.7%

Tax rate (%) 33.7% 34.0% 33.1% 27.3% 25.0% 25.0%

Net Profit Margin (%) 14.1% 17.3% 18.2% 15.9% 16.6% 17.3%

RoE (%) 31.1% 32.5% 30.8% 23.5% 22.6% 21.4%

RoCE (%) 45.6% 42.3% 40.8% 25.6% 24.8% 24.3%

Current Ratio (x) 4.30x 4.29x 5.39x 5.53x 6.26x 7.08x

EPS (INR per share) 27.83 38.55 46.56 41.12 46.18 50.69





Tata Elxsi Ltd.


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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%

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Tata Elxsi Ltd.

Date CMP (INR) TP(INR) Recommendation

23-Jul-20 914 1,064 BUY

22-Apr-20 718 831 BUY

15-Jan-20 908 1,058 BUY

22-Oct-19 702 1,008 BUY

19-Jul-19 731 1,008 BUY

26-Jun-19 858 1,200 BUY

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