TATA ELXSI LTD

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