TATA ELXSI LTD
The company
is a software company with two main verticals..
Software
development and services ---SDS---84% of revenues
System
integration ----16% of revenues.
SDS consists
of three main businesses… embedded
product design, industrial design and visual computing.
A. Embedded product design….EPD….It is the largest segment and contributes around 60-65% to
the topline.
It again
consists of three main verticals..
1. Broadcast and consumer electronics..It engages with leading product companies to develop and
deploy products with different standards and service provider requirements.. It
has developed products such as set top boxes and digital television in
broadcast space and cameras, smartphones and tablets in consumer electronics.
2. Transportation…It
offers custom full life cycle product R&D services to automobile
manufacturers and component suppliers and aerospace companies.. In automotive
space the focus areas include power train, body electronics, safety, driver
assistance, and in vehicle infotainment.
3. Communications….It
works with wireline and wireless communication product companies .. It is among
the leading third party software IP providers for 3G mobile and WIMAX standards.
B. Industrial design….It provides end to end brand and product design services to clients
across FMCG, transportation, consumer electronics, appliances and healthcare
appliances.
C. Visual Computing Labs..It provides services in the area of animation, visual/special effects
(VFX), content creation for advertising, television and motion pictures. It
also leverages its expertise in mobile, online and consol gaming. It hosts
world class studios in Los Angeles and India.
System
Integration and support is a low margin business and is involved in value added
re selling of software and hardware.
PROBLEMS OF THE PAST.
Despite
being a leading company in the EPD segment, well admired product development
team and scope of opportunity in respective segments, Tata Elxsi showed muted
growth in top line and bottomline during FY 08-FY 11. The reasons for that are as follows:
Revenue
decline in Japan.. Till fy 08, Japan used to be a key market for the company.
But rampdown of a key client (20% of total sales) followed by economic turmoil
and tsunami led to revenue from Japan coming down to around 10% in FY 12.
VCL
disappointed in terms of revenue and profitability growth. The company had taken a number of steps to
improve the situation but could not improve things and since past couple of
quarters the losses of this division have been curtailed.
Slower than
expected rollout of key technologies.. The global economic slowdown in fy 08-09
led to lowered spend on R&D particularly in automobiles and other
engineering companies . Slower than expected WIMAX rollout with policy issues
and fast emergence of LTE impacted the company.
GOING FORWARD THE COMPANY COULD BE
HELPED BY MULTIPLE TAILWINDS…
Addressable
embedded system market is expected to grow to around USD 89 Billion by fy 15. Tata Elxsi has strong presence and customer
relationship in this segment and can utilize this opportunity to grow strongly.
Outsourced
R&D in automotive space is also likely to grow strongly.
CONVERGENCE
is a multibillion dollar opportunity for companies in the sector. This could change the structure and dynamics
of the sector.. Tata Elxsi is poised to benefit from this opportunity.
Rollout of
LTE.. Long term evolution a next generation wireless technology is expected to
provide a good opportunity to Tata Elxsi.
THE COMPANY
HAS DEVELOPED SEVERAL IPR AND THEREFORE EXPECTED TO HAVE NON LINEAR INCOME
GROWTH.
FINANCIALS
Equity is
31.13 crores with 3.113 shares of Rs 10 each outstanding. Promoter holding is
45% and there is no pledging.
Market cap
is 711 crores.
As on Sep
2013, company has short term debt of 44
crores.. Cash and equivalents is 26 crores.. Effectively net debt is
negligible.
A look at
last few quarterly results shows improving trend since past two quarters.
| Qtr |
Sales |
Ebidt |
NP |
| Jun 11 |
118 |
13 |
5.1 |
| Sep 11 |
137 |
22 |
11 |
| Dec 11 |
138 |
21 |
10 |
| Mar 12 |
145 |
20 |
8 |
| Jun 12 |
146 |
18 |
2.6 |
| Sep 12 |
155 |
18 |
1.81 |
| Dec 12 |
157 |
20 |
9 |
| Mar 13 |
163 |
20 |
8.14 |
| Jun 13 |
173 |
20 |
9 |
| Sep 13 |
190 |
39 |
20 |
Half yearly
figures for fy 14 are as under
Period h1 fy 14 h1 fy 13
Sales 295 361
NP 5.2 30
Half yearly
eps (not annualized) is 9.62 per share.
Company is
likely to post eps in excess of Rs 20 per share for fy 14 and dividend payout
is likely to be minimum Rs 8 per share which provides a decent yield. In the
past also dividend payout ratio has been very healthy at 40-70% payout.
ROE for fy
14 is likely to be more than 25% .
INVESTMENT THEME
The basic
premise of investment is based on a sort of turnaround in the fortunes of the
company after having disappointed investors for a long time inspite of being considered
as a promising company. It seems that when actual turnaround is about to materialize, people are skeptical about the
prospects of the company. If the company can continue the growth momentum shown
in past two quarters and improved profitability shown therein, the company can provide strong growth in
terms of topline and bottomline.
source:
Hitesh Patel
