Tata elxsi

Stock Opportunities
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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 businessesâ embedded product design, industrial design and visual computing.

A. Embedded product designâ.EPDâ.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. TransportationâIt 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. Communicationsâ.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 designâ.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 TAILWINDSâ

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.

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Thanks Hitesh Bhai. Very well put.

I am convinced of this story and the stock is under my watch as the story unfolds.

I have taken an initial entry into the stock at opening just now today.

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Hitesh,

I could not beleive this stock story is written by a doctor. You have grasped it like an engineer.

You have missed the disclosures of holding if any.

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One of the growing areas is the Visual Computing Labs:Visual Computing Labs (VCL) offers Animation, Visual Effects (VFX) and 3D stereoscopic content for feature films, episodic television and advertising. It also offers custom content development for visualization and product marketing.VCL won several national and international awards including the Best VFX Shot of the year and Best Animated Feature Film(Theatrical) awards at the prestigious FICCI Frames BAF Awards 2013.It won the Best Special Effects award for ‘‘Ek Tha Tiger’’ at the Star Guild Awards 2013 (also known as Apsara Awards). It also won the Best Animated Feature Film (Theatrical) award for ‘‘Arjun - The Warrior Prince’’ at the Infocom-Assocham EME Awards 2013

Mr Ramadorai who also headed TCS is the chairman of the company ,“It is a company which is specially into- design &development, industrial designing,and animation; special effects. In the first two areas, our capabilities are exceptional.They are total intellectual assets.We have done some cutting-edge work for onboard electronics, design of water filters.Visual computing is slightly different. It touches on aspects like special effects, which plays a part in launches of cars like Tata Motors; Manza, Tata Motors,where the entire special effects were created purely from the engineering data .So there was no actual car used for creating those special effects. The animation business is also making progress with the company setting up a studio in the US”~Ramadorai

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Hitesh isnt h1 fy 14 and h1 fy 13 figures interchanged in your post?

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yes its true… the figures should be considered after interchanging.

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I had put up disclosure in my portfolio thread before i posted the details here… disc: hold…:slight_smile:

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I hold…:))

OK. Thanks.

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A research report by microsec

http://www.microsec.in/static/pdf/Tata%20Elxsi%20Ltd.pdf

Disc-holding

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I would suggest a bit of caution in this for a few reasons

)- Q2 FY’14 looks exceptionally good for two reasons 1) jump in sales 2) almost doubling of net margin from previous quarters. Jump in sales might continue but do we have confidence in sustainability of doubled net margins basis only the last quarter performance

?

)- The net profit comparison and the resultant jump is skewed due to Exceptional item in FY13 H1. Adjusting for it, the net profit wouldn’t jump that

drastically

)- Compared to industry bellwether TCS (group company). RoE is 18% vs 35% of TCS, even the inflated net margin of 10% of last quarter is half of TCS 22%. But the PE is 22 vs 28 of TCS

So my view is that it doesn’t provide enough margin of safety to be attractive.

I’m actually confused about the low margins compared to other industry players as Elxsi plays in specialized domain but doesn’t seem to command a premium.

I have been following the immensely valuable discussions in this forum but this is my first post. I have previously struggled to contribute due to technical issues exemplified by the previous blank post, apologies. Look forward to valuable discussions.

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hi rishi

thanks for the post.

regarding valuations, markets tend to pay for future earnings… If the problems for tata elxsi are a thing of past, the future could be bright… Next couple of quarters should provide a good idea about how much on track tata elxsi is.

regards

hitesh.

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Thanks Hitesh, the next quarters are key.

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Booked profits in tata elxsi.

valuations comfort has reduced due to the run up.

Will keep it in radar for any re entry points.

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Good times ahead for tata elxsi. I exited recently as it ran too fast. Hope to catch it soon. http://www.business-standard.com/article/companies/hidden-jewels-get-a-polish-at-tata-group-113120400013_1.html#.Up8d7mXSdBs.twitter

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The consolidated net profit at Rs 21.56 crore has more than doubled compared to YOY for the quarter ended December 31, 2013 (Q3) on back of strong growth in operational income.ITsoftware products maker had profit of Rs 8.74 crore in previous year quarter.

The companyas total income from operations grew 27% year-on-year at Rs 200 crore during the recently concluded quarter, Tata Elxsi said in a statement.

Meanwhile, the company has reported a net profit of Rs 50.41 crore for the first nine months (April a December 2013) of the current fiscal against Rs 13.17 crore in the same period last fiscal. The company had posted net profit of Rs 21.30 in entire previous financial year 2012-13.

The management has indicated that revenues of the company are expected to jump to Rs 2,000-3,000 crore in the next three to four years from Rs 621 crore in FY13.
I" Dhoom 3 was our largest visual effects project that we have done in the last 12 years that Visual Computing Labs has been in business" said Pankaj Khandpur of visual computing labs .Going forward they expect high end work and hollywood projects ,

The company seems nicely poised for a good future .

Disc-Invested

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Madhukar Dev Managing Director and CEO addressed the call

Highlights of the call by Capital Mkt:

Systems Integration & Support is the old business of company. This business segment integrates, installs and commissions complete systems and solutions for areas such as Computer Aided Design, Analysis and Manufacturing, Virtual Reality, High Performance Computing and Storage for enterprise customers. It provides best-of-breed solutions through partnerships and distribution agreements with leading international software and hardware vendors. It also provides infrastructure management, support and maintenance services.

Software Development & Services is the company's mainstay. It has 3 business divisions under this head. They are Embedded Product Design, Electronic Design and Industrial Design.

The Embedded Product Design division provides technology consulting, new product design and development, and testing services for the broadcast consumer electronics, healthcare, telecom, and transportation industries. It also creates and licenses intellectual property and software components, helping customers create product differentiation, and reduce development costs and time-to-market.

The company has renewed its thrust in the Software and Services business segment for Embedded Product Design and Industrial Design. These services are geared to deliver growth in-line with industry trends.

All customers in Electronic business is international clients. They get 40% of revenue from North America. Automotive electronic business hogs the most of this division followed by Broadcast electronic business and communication business.

Indian business includes large foreign companies based in India. Its clients are large international clients.

The Industrial Design division helps customers develop winning brands and products by using design as a strategic tool for business success. It provides an end-to-end design and innovation service for new products from consumer research and ideation, to interaction design, prototyping, and manufacturing support. It addresses the FMCG, Automotive, Healthcare, Consumer Electronics, and Retail sectors.

The Industrial Design division delivered significant user experience design projects for leading global brands across Automotive, Consumer Electronics and Telecom products.

Visual Computing Labs (VCL) offers Animation, Visual Effects (VFX) and 3D stereoscopic content for feature films, episodic television and advertising. It also offers custom content development for visualization and product marketing.

Tata Elxsi's Visual Computing Labs won the Filmfare award for best VFx in Dhoom3, at the 59th Filmfare Awards event held on Jan 24th, 2014. It was the largest project ever VFX business commissioned in the Indian film industry.

The company had been clocking 40% growth till 2008 but slowed down later. Now it expects to get back to that level soon.

With today's set up the company can grow 40%. However, opportunity is there for the company to above that %. But company will have to invest in capex to enjoy higher growth. Once the company invests in capex it expects to grow higher than 40%.

Automotive and Communication verticals will be the fastest growing verticals for the company.

The company does not have too much of conflict with Tata Technologies. But there is line of distinction which would blur over in period of time however both the company will find ways of not stepping into each other business domain.

Immigration bill will have impact on the company as getting visa becomes difficult.

On sequential basis, Tata Elxsi registered 5% rise in its consolidated sales to Rs 200.12 crore for the quarter ended December 2013. For the first time the company clocked sales of Rs 200 crore in a quarter.

Sales from Software Development & Services grew 6% to Rs 182.98 crore. Electronic Embedded Product Design accounted for the most (Rs 163 crore) of this Rs 183 crore. Rs 16 crore came from Industrial Design and Rs 4 crore came from Visual Computing.

q-o-q PBT grew 9% to Rs 32.74 crore. Last year the company was writing down losses of the Visual Computing business.

The company has registered continued growth across services and geographies. Its international revenues have grown q-o-q in spite of the negative currency impact as compared to the previous quarter. Profits have also shown a consistent and significant increase on a y-o-o and q-o-q basis.

The company will continue to focus on scaling up its Electronic Design and ID businesses, building domain centric capabilities and integrated offerings in select verticals, including broadcast and media, transportation, communications, semiconductor and medical electronics.

The company added over 100 artists in the Visual Computing business. It hopes to keep Visual Computing business such as it does not impact the company's P&L.

The company does not see currency depreciating further. If at all it expects to move in the other direction.

Utilization was around 68% against around 70%.

The company had net addition of 100 odd people. Attrition rate was 20% which includes performance related exits. Voluntary attrition would be around 12%. Current employee strength is close to 4000.

No dramatic plans for Capex for the next two years. Main capex invest is computer and computer tools of Rs 20-25 crore.

The company may get land allocated in Bangalore if that happens capex will be higher. But that plan is from past 2 years.

For the next two years there would not be any change in tax rate.

About 30% of its engagements in Electronics are fixed cost. Industrial design business and Visual Computing business both are entirely fixed cost.

Recently, Tata Elxsi showcased a range of innovative solutions at the International CES 2014 in Las Vegas, the premier show for technologies and innovations in consumer electronics. This included solutions and capability demonstrators for next generation in-vehicle infotainment, HEVC decoders for Ultra HD video, RDK based solutions for MSOs and operators, and prototype concepts for security in connected cars.

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from where did u get this concall report…how do u search them out

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I am just postman:)-

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is tata motors stake in jlr changing the games for tata elxsi?

http://www.autocarpro.in/ap/news-national/269/tata-elxsi-eyes-opportunities-global-automotive-electron-ics-product-design

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Some interesting article on elxsi’s website :

http://www.tataelxsi.com/whats-new/News/tatas-new-elxsi-r-wearables-deccan-chronicle.html

May be there are more interesting stories in the pipeline to get excited about the company …