Investment Case:
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.
Risk
Net sales grew by 24% yoy and 0.5% qoq to Rs. 1.5 bn; the growth was led by 37.8% yoy growth in
SDS. System Integration was down by 32% yoy to Rs. 158.3 mn. Segment margin in SDS improved
by 1060 bps to 17.8%; SDS EBIT has grown by 243% yoy to Rs. 232.4 mn. As VCL is loss making for
the company, the EPD segment margin should be higher than 17.8% for SDS segment. SI EBIT
margin stood at -7.9% vs. 11.2% in Q1 FY12.
Despite of 160 bps reduction in operating margin, EBIDTA grew by 5.2% yoy and stood at Rs. 132.7
mn. PBT for the quarter grew by 71% yoy to Rs. 125.4 mn on account of higher other income, other
income for the quarter stood at Rs. 54.5 mn vs. Rs. 3.2 mn in Q1 FY12. Exceptional item of Rs. 84.5
mn (Rs. 73.8 mn towards provision for probable losses in business arrangement and Rs. 10.7 mn
for its share of losses in A Squared Elxsi Entertainment LLC JV.) led to 49% yoy de growth in PAT. PAT
for the quarter stood at Rs. 26.1 mn, EPS for the quarter stood at Rs. 0.8.
. Product obsolescence / slower than expected off take in a particular technology
. High currency fluctuation
. Captive outsourced units would limit the potential outsourced R&D work
. Delays in policy implementation. (Like in India, delays in digitization and LTE plans from
operators)
Tata Elxsi Ltd.
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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