ValuePickr Forum

Tata elxsi

TCS - with a P/ E of 25+ and M/Cap to Sales above 5 is valued higher than Elxsi. Hence, merger is not a threat from valuation perspective though the actual gain or loss will depend on the swap ratio.

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Thanks for the views Aman. Valuation is a very subjective concept in itself. Not super attractive valuation in my opinion and you have highlighted all the relevant things we could use in terms of historical + DCF kind of models. The only thing I could add is:
Big part of valuation in companies trading at fair to high multiple zone goes to ability to grow along with market size opportunity, business longevity with minimal impact of disruption leading to possible terminal value

Now these things differ based on once understanding of sector, market size opportunity and belief in company’s strength to leverage it. I think their journey has been benefited by electronification of auto sector and M&E sector through technical knowledge of embedded system and design. Now, they are getting into right areas which may look small but considering their experience, they can do well in areas like automation of vehicle, OTT platform design, Smart Transport, Smart homes driven by internet of things. Key will always remain execution and technological agility and not market size opportunity.
At less than 15x cash earnings with similar growth, I would jump to buy, between 15-20, would like to nibble slow and steady till it remains there, 20-30 i would do nothing and above 30 may like to offload a bit taking some profit home keeping all the other factors remain as it is. This is how I treat valuation n buy sell behavior

Edit: some corrections on views on valuation, ve corrected

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Flat results from Tata Elxsi. 8% core revenue growth rate but higher expense growth rate leading to flat bottomline

Rs 13.50 dividend (~1.5% on current price)

CEO & MD, Mr. Madhukar Dave would be replaced by Mr. Manoj Raghavan: "On the recommendation of the Nomination and Remuneration Committee, the Board has
decided to appoint Mr. Manoj Raghavan as CEO & MD of the Company with effect from
October 02,2019, subject to the approval of the shareholders.
Manoj, aged 47 years, is a B.Tech from IIT, Madras and an MBA from IIFT, New Delhi. He
has been with the Company for more than 20 years and has held various positions in sales,
marketing and operations before being appointed as the Executive Vice-President, EPD in
charge of the entire EPD business of the Company in20l4."

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Did anyone join today’s con call? Can someone post the summary/ highlights here?

CONCALL HIGHLIGTS:

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Just a couple of quarters back, the management was talking about 20% growth rate. Shows the complete futility of predicting the future. Even well-meaning managements don’t know what lies ahead for their company, let alone the research analysts.

All we can do is to follow a sound process of stock selection, maintain proper asset allocation and hope for the best.

(Disc: Invested)

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Tata Elxsi licenses AUTOSAR Adaptive to Great Wall Motors, China’s largest
SUV and pickup manufacturer

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Despite expected slowdown, the valuation continues to be rich … 18 times trailing twelve month profits… What could be helping company maintain valuation

Company has potential to grow in other verticals like AI, IOT etc. And in case auto picks up, it may start growing at the same rate as it was growing earlier.

Why is 18 times trailing P/E “rich” for this company?

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Here is the deck for Tata Elxsi I presented during VP Chintan Baithak 2019 Tata Elxsi.pdf (2.4 MB)

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Thanks @suru27

The low pay structure is concerning. Where did you get their salary data?

They advertise services like Big Data, AR, VR. Good engineers in those areas get a hefty pay. If they want to attract good talent in those fields they need to pay well.

Employee expense has been picked from P&L statement and employee count has been picked from respective company’s annual reports across the years. For FY19 TE, I have relied on headcount given during concall

Thank you @suru27 for detailed and excellent presentation. I have some clarifications

Do you know what percentage of revenue depends on Tata motors/JLR ? Who are other customers, if known in automotive sector? Is this also playing to keep share price below average p/e or else what do you think causing the current weakness and breaking 52 week lows recently ?

Do you have any insight on incoming CEO ?

Thanks @james_kerala.
Do you know what percentage of revenue depends on Tata motors/JLR ?
16%

Who are other customers, if known in automotive sector?
Many of top OEMs are customer . Names given in AR. Hyundai is one I remember.

Is this also playing to keep share price below average p/e or else what do you think causing the current weakness and breaking 52 week lows recently ?
Most important , reversion to mean . stocks work like pendulum of valuation where actual valuation lies somewhere in between that too is dynamic . So , a 35+ PE was not sustainable in my opinion other reasons could be auto slowdown, Tata motors issue n may be margin pressure .

Not much idea about new price but I saw something different by behavior reflected by both Tata IT companies last month. Commentary to drive prices. So much unlike Tata . Someone at top giving message :slight_smile:

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Current Tata Chairman being from IT world, I know him as an aggressive manager (being an ex-TCSer though not from close quarters) compared to CEOs before him, so I would be surprised if Tata groups gives a positive commentary. May be something in work behind scenes

The company is stead fast but conservative on growth track. They need to drive in more alliances if they want growth in high track business. I would like to see strategic investment in companies who have business and are willing to out source or need to drive the business to more IP centric which again has never been Tata group strategy.

TCS has given far superior return in last couple of years than TElxsi. Still potential merger will be negative for long term share holders.

Here I would like to correct you. TEL hire freshers but employ experienced people in middle Management for supervision. After some point in life importance o of money decreases but person yearns for good Work Life Balance. Tatas provide that. Moreover after working on good projects people get good job offers.