Raghav Behani Tata Elxsi 23 August 2017

INH200004471 Long Term Digital Opportunities

Company Overview: Details:

Tata Elxsi is a medium size IT company providing design and Company Tata Elxsi
technology services for Automotive, Broadcast and Sector IT
Communications industries. The company is based out of Rating BUY
Bangalore and was established in 1989. Reco. Price 815
Market Cap 5,140 Crores
Face Value Rs. 10
Business Overview: *Adjusted for Bonus 1:1

The company has three major segments of business: Valuations:

- Embedded Product Design (~ 80% Share) Particulars

- Industrial Design (~ 14% Share) P/E 28
- System Integration (~ 6% Share) Div. Yield 0.95%
Price to book value 8.15
Of EPD revenues, nearly 60% come from the Automobile
EV/EBIDTA 15
industry with Jaguar-Landrover alone contributing roughly 22%
of the company’s overall revenues. Broadcast and
Communications is another area of business for the company in Shareholding Pattern:
which they provide product development services.
(Key Shareholders)
Industrial Design primarily deals with brand development using
design and technology. The company helped Kochi metro for Category 30-Jun-17
Promoters 44.57%
their passenger experience requirements and has recently
Mutual Funds 6.48%
bagged an order from Airports Authority of India for signage and
F.P.I/FII 10.05%
logos.

Systems Integration is a small area of revenue which primarily Share Price Performance:
deals with maintenance and support of IT infrastructure apart
from other computing requirements. 1m 6m 1y
TE -2.18% 13.4% 1.66%

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Raghav Behani Tata Elxsi 23 August 2017
INH200004471 Long Term Digital Opportunities

Business Highlights:

- For FY17, the contribution of top 10 customers was ~ 60%

- The company has around 200 active customers with 36 being added in FY17
- Transportation contributes ~ 48% of the revenues, Broadcast contributes ~ 32%
- Growth rate for transportation is ~ 35% and for broadcast ~ < 20%
- 62% of the revenues come from offshore work and 3% comes from onsite
- 44% of the revenues are from Europe, 40% from the US and the remaining are from India
and other Asian countries

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Raghav Behani Tata Elxsi 23 August 2017
INH200004471 Long Term Digital Opportunities

Transport:

- Automotive is the fastest growing and highest contributing segment

- JLR alone contributes ~ 22% of the revenues
- The company is working on areas like infotainment, safety, connected cars, etc
- Autonomai, the company’s autonomous vehicle middleware platform was recently licensed
by a major automotive OEM for its driverless car R&D
- Safety and driverless cars are the primary focus areas for the company

Broadcast:

- TELX’s OTT (Over-the-top content) services work in the content analytics, discovery, ad
integration and monitoring areas and help broadcasters launch multiplatform OTT services
- OTT is an area where content (audio, video, etc) is delivered over the internet
- Clients include content providers such as Airtel Internet TV; the company is an implementer
for OTT and not a host of OTT
- The company is expecting significant growth in business from Japan in this segment of the
business

Particulars FY13 % FY14 % FY15 % FY16 % FY17 %

SD 553 89 682.7 88 781.7 92 1,007.5 94 1,166.5 95
SI 68.7 11 92.1 12 67.6 8 66.7 6 66.7 5
Revenues 621.7 100 774.8 100 849.3 100 1,074.1 100 1,233.2 100
SD 62.4 11 137.9 20 176.3 23 259.7 26 299.8 26
SI 1.7 2 8.4 9 5.9 9 6.7 10 6.7 10
EBITDA 72.1 12 136.4 18 176.6 21 247.1 23 307.4 25
SD: Software Development; SI: System Integration

Past Performance:

- OTT started emerging as a key area of business from FY13 as consumers started accessing
media content on devices other than Televisions. The company has strongly positioned itself
to keep capitalizing on this growing trend.
- The growth in the transport segment is being led by many factors such as increased
regulatory requirements in the western countries, growing demand of in-vehicle
entertainment and next generation of “intelligent cars”.

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Raghav Behani Tata Elxsi 23 August 2017
INH200004471 Long Term Digital Opportunities

Growth Levers:

We expect Tata Elxsi to grow revenues at 15% p.a. over the next five years. The levers for growth lie
in both consumer and corporate space.

i) Broadcast: OTT and other value-added applications are well poised for a rapidly
increasing userbase as data penetration improves and more content providers enter this
space (Netflix, Hotstar, Airtel TV, Amazon Prime, etc.). The company provides
applications and other support services to content providers.

ii) Transportation: Apart from the existing levers (Regulatory, entertainment, etc.) there
are new levers which the company is looking to capitalize. These include Artificial
Intelligence and hybrid vehicles. While many ideas today seem farfetched (Driverless
cars and their acceptability), the company has made strides into this segment with
increased visibility across the globe (Exhibitions, shows, trade fairs, etc). The company
has even developed “autonomAI” which is a proprietary autonomous vehicle
middleware platform with deep learning and AI capabilities.

iii) Healthcare: Healthcare has negligible contribution the company’s revenues but per
management commentary they are looking at significant development in this space in
the near future. The company is already working with some clients in this space and is
expecting revenues to multiply in this space.

On constant currency terms, the company has grown upwards of 19% p.a. but the strengthening of
the rupee has subdued growth in INR terms.

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Raghav Behani Tata Elxsi 23 August 2017
INH200004471 Long Term Digital Opportunities

Margin Stability:

Many IT companies today are facing immense margin pressure majorly due to rising employee costs
coupled with H1B Visa issues. While IT companies are asset-light, their employees are the most
important asset and source of revenues.

Tata Elxsi has been able to maintain the revenue generated per rupee spent on employees.

The company is hiring only on a need basis and has no major hiring plans in the immediate future.
The growth in revenues will majorly have to come from higher revenue generation from existing
employees.

Employee cost has remained stable at 54% of revenues.

The company has also improved margins over the last few years and expects to further improve it by
100-150 bps.

The management is tuning the revenue models for achieving a 25% - 26% EBIDTA margin within the
next 3 years.

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Raghav Behani Tata Elxsi 23 August 2017
INH200004471 Long Term Digital Opportunities

Peer Analysis:

Revenue Growth

EBIDTA Margin Movement

- Of the selected major IT company peerset, TELX is the only company which has given > 15%
CAGR over the last 3 years
- While most IT companies have seen erosion of margins over the last 4 years, TELX has seen
margins trending upwards
- The company’s differentiated offerings have enables it to keep growth at the 15% mark in
such a tough external environment. This is without compromising on margins.

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Raghav Behani Tata Elxsi 23 August 2017
INH200004471 Long Term Digital Opportunities

Strengths:

Diversified Sectors
• The operations are diversivfied acorss different industries
• The company has established a strong presence in emerging segments over
the last 3-4 years

Tata Group
• The company is getting revenues from ther Tata group companies
• The company has access to experienced and professional management

Financial Profile
• The company is generating healthy cash from operations
• The company has been able to grow at 15% p.a and higher in a tough
industry environment
• The company is debt-free
• The company has a strong long term association with it's clients and thus
enjoys revenue stability

Weakness:

Protectionist Policies
• Protectionist policies in key geographies can lead to both loss of
revenue and erosion of margins

Pricing Pressure
• Protectionist policies, industry wide competition, rising employee
costs can impact margins as they have already impacted other IT
companies

Growth Visibility
• The company has seen its EDP division grow at a CAGR of 23% p.a.
over the last 5 years but the continuity of this rate of growth cannot
be predicted because the revenues are project based

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Raghav Behani Tata Elxsi 23 August 2017
INH200004471 Long Term Digital Opportunities

Valuations:

Particulars Particulars
P/E Ratio 27.41
P/BV Ratio 8.83
EV/EBIDTA 15.75
Cash/M.Cap 5%

Return Ratios:

Particulars FY17 FY16 FY15 FY14 FY13

ROCE 53.41% 67.9% 58.66% 47.48% 21.52%
ROE 36.69% 46.28% 39.72% 35.21% 16.32%

Growth:

Particulars FY17 FY16 FY15 FY14 FY13 FY12

Revenues 14.68% 26.58% 10.01% 27.69% 17.54% 25.17%
PAT 11.94% 50.45% 37.00% 257.84% -38.17% 7.00%
Book Value 44.93% 36.12% 20.67% 22.40% 1.47% 4.77%

Cash Flow Analysis:

Particulars FY17 FY16 FY15 FY14 FY13

PAT 173.29 154.81 102.90 75.11 20.99
OCF 144.33 121.06 143.39 126.14 36.85
5 Year PAT 527.1
5 Year OCF 571.77

Peer Analysis:

Company PE Ratio P/BV Ratio EV/EBIDTA Return on Equity

WIPRO 15.39 2.70 10.74 18.56%
Infosys 15.43 3.16 9.53 21.41%
eClerx 16.49 5.10 12.05 32.03%
HCL Tech 17.76 4.56 12.87 30.85%
Mindtree 18.03 3.22 11.16 18.73%
Hexaware Tech 18.08 5.24 12.98 29.27%
TCS 18.44 5.84 13.88 33.21%
Persistent 18.75 2.99 11.64 17.40%
Cyient 20.05 3.04 13.28 13.31%
Tata Elxsi 27.41 8.83 15.75 36.69%

- Tata Elxsi commands a premium over its industry peers

- Tata Elxsi’s premium valuations reflect the higher growth rate, margin stability and higher
ROCE that the company is able to generate

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Raghav Behani Tata Elxsi 23 August 2017
INH200004471 Long Term Digital Opportunities

Target estimate:

Particulars FY16 FY17 FY18E FY19E FY20E

Revenue 1,075.21 1,233.04 1,417 1,630 1,876
PAT 154.81 173.29 198 237 281
Assumed - - 16% 17% 18%
Growth YoY
Assumed - - 14% 14.5% 15%
NPM%

Particulars Figure
PAT 2020(E) 281 Crores
Assigned PE 28
Current M. Cap 5,140 Crores
Target M. Cap 8,293 Crores
Potential CAGR 17% p.a.

- We assign a P/E of 28 as we expect the premium over peers to continue due to

differentiated product offerings
- We have assumed a moderate growth rate over the next 3 years
- Investors can expect a 17% p.a. CAGR from this stock over the next 3 years

Portfolio Action:

- We advise investing 7% of your portfolio in Tata Elxsi

- We can consider raising the allocation to 10% in the future if we get the stock at lower
valuations coupled with the improving business fundamentals
- Avoid double digit allocation due to client concentration
- This is a growth based investment and no re-rating is expected in PE and PB ratio
- The company is an export oriented business and operates in B2B segment

Particulars Outlook
Growth Fair
Profitability Good
Cash Generation Good
Wealth Creation Good
Valuation Fair

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Raghav Behani Tata Elxsi 23 August 2017
INH200004471 Long Term Digital Opportunities

Disclaimer:

This report has been prepared, approved and distributed by Raghav Behani. Raghav Behani is a SEBI registered Research
Analyst bearing certificate number: INH200004471.

The report has been prepared for the registered subscribers of Raghav Behani. This report should not be reproduced or
redistributed to any other person in any form without Raghav Behani’s prior permission. The report is purely for
information purposes and is not to be interpreted as an investment recommendation/advice. The opinions expressed in
the report are current opinions and may change time to time without any notice. Raghav Behani does not accept any
liability from the use of this document. The reader is supposed to conduct his own research before investing.

The report has been prepared based on publicly available information filed by the company to the respective stock
exchanges. While reasonable steps have been taken to present reliable data in the report so far as it relates to current and
historical information, Raghav Behani does not guarantee the accuracy or completeness of the data in the report. The
report has been prepared after carrying out research on this data and the documentary evidence of the same is available
at the place of business of Raghav Behani as per regulatory requirements.

Rating System:

Rating Expected Return Time Frame

BUY 10% + 1 Year
HOLD 0 – 10% 1 Year
SELL Negative 1 Year

Disclosures:

Disclosure
a) Whether the research analyst or research entity or his associate or his relative has any financial NO
interest in the subject company
b) whether the research analyst or relatives, have actual/beneficial ownership of one per cent. or more NO
securities of the subject company
c) whether the research analyst or his associate or his relative, has any other material conflict of NO
interest at the time of publication of the research report
d) whether it or its associates have received any compensation from the subject company in the past NO
twelve months
e) whether it or its associates have managed or co-managed public offering of securities for the subject NO
company in the past twelve months
f) whether it or its associates have received any compensation for investment banking or merchant NO
banking or brokerage services from the subject company in the past twelve months
g) whether it or its associates have received any compensation for products or services other than NO
investment banking or merchant banking or brokerage services from the subject company in the
past twelve months
h) whether it or its associates have received any compensation or other benefits from the subject NO
company or third party in connection with the research report
i) whether it or its associates have received any compensation from the subject company in the past NO
twelve months
j) whether the subject company is or was a client during twelve months preceding the date of NO
distribution of the research report
k) whether the research analyst has served as an officer, director or employee of the subject comp any NO
l) whether the research analyst or research entity has been engaged in market making activity for the NO
subject company

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