2 November 2016
2QFY17 Results Update | Sector: Technology
Tata Elxsi
Buy
BSE SENSEX
27,527
Bloomberg
Equity Shares (m)
M.Cap.(INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, (INR m)
Free float (%)
S&P CNX
8,514
TELX IN
31.1
39.6/ 0.6
2,396/1,224
-8/-40/-34
1,069
55.4
CMP: INR1,273
TP: INR1,619 (+27%)
Results below estimates; incremental margin expansion looks tough
Financials & Valuations (INR b)
Y/E Mar
2016 2017E 2018E
Sales
10.8
12.4
14.7
EBITDA
2.5
3.0
3.6
PAT
1.5
1.9
2.3
EPS (INR)
49.7
60.2
73.6
EPS Gr. (%)
50.5
21.1
22.2
BV/Sh. (INR)
123.9 157.7 195.3
RoE (%)
46.3
42.8
41.7
RoCE (%)
46.3
42.8
41.7
P/E (x)
25.6
21.1
17.3
P/BV (x)
10.3
8.1
6.5
Estimate change
TP change
Rating change
Pound depreciation impacts growth:
Tata Elxsi’s (TELX) overall revenue grew
15% to INR3,033m (est. of INR3,230m) in 2QFY17 from INR2,637m in the year-
ago period. Although 2Q benefited from healthy volume growth, adverse
impact of INR100m due to pound (~30% exposure) depreciation led to lower
value growth. EBITDA margin expanded 133bp to 24.6% (est. of 23.7%) from
23.2% in 2QFY16, led by gross margin improvement. EBITDA rose 22% to
INR745m (est. of INR765m) from INR613m in 2QFY16. Additionally, other
income at negative INR30m was impacted by restatement of pound-
denominated assets. Thus, PAT grew 13% from INR381m in 2QFY16 to
INR431m (est. of INR490m) in 2QFY17.
Little room for further margin expansion:
With the pound depreciating post
the Brexit vote, newer orders are expected to face pressure on realization,
thereby impacting margins. Also, management highlighted that margins are at
peak levels, leaving little scope for further expansion. TELX added close to ~700
new employees, taking the total count to 5,300 (as of Sep-2017). We also note
that the company plans to add another 400-500 employees by year-end.
Utilization rate was 75% in 2QFY17 (inclusive of lateral new employees). TELX
intends to sustain current margin levels with growth mainly driven by revenue.
Growth momentum in key segments to continue:
In the transportation
segment, TELX has been focusing on OEMs over past few years, which has
reaped rich dividends. Transportation will continue to be the fastest growing
segment for TELX, in our view. In the broadcast segment (second fastest
growing), the US and Europe are seeing good traction, while it has added one
client in South Africa. In the medical equipment segment, TELX added one
client in 2QFY17. It is a small order but a good brand, and thus the company is
expecting a larger and sustained growth from this client. The company is in
this business for two years and now engaged with 10-12 companies.
Valuation and view:
Given the miss on our estimates and the expected impact
from Brexit vote, we cut our revenue estimates by 6%/12% and PAT estimates
by 8%/11% for FY17/FY18. We expect 17% revenue CAGR and 22% PAT CAGR
over FY16-18, led by EPD. Given its expertise in the areas of technology,
engineering and design, as well as its standing as a strong play on IoT, we
recommend
Buy
with a price target of INR1,619—22x FY18E EPS.
Niket Shah
(Niket.Shah@MotilalOswal.com); +91 22 39825000
Chintan Modi
(Chintan.Modi@MotilalOswal.com); +91 22 3982 5422
/Chitvan Oza
(Chitvan.Oza@MotilalOswal.com); +91 22 3010 2415
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Tata Elxsi
Results below estimates
TELX reported overall revenue of INR3,033m (est INR3,230m) in 2QFY17 as
against INR2,637m in 2QFY16 marking a YoY growth of 15%.
EBITDA margins expanded 133bp from 23.2% in 2QFY16 to 24.6% (est 23.7%) in
2QFY17 led by gross margin expansion. EBITDA during the quarter stood at
INR745m (est INR765m) as against INR613m in 2QFY16, up 22% YoY.
Other Income stood at negative INR30m as against INR27m in 2QFY16.
Consequently, PAT grew from INR381m in 2QFY16 to INR431m (est. INR490m) in
2QFY17, a growth of 13% YoY.
Exhibit 1: Revenue trend (INR m)
Revenue from Operations(INR m)
28%
29%
28%
11%
28%
Growth %
27%
21%
15%
18%
22%
24%
10%
8%
9%
1,732 1,900 2,001 2,115 1,908 2,059 2,215 2,313 2,435 2,637 2,741 2,940 2,943 3,033
Source: MOSL, Company
Exhibit 2: EBITDA trend
EBITDA (INR m)
22% 22%
17%
8%
135 324 436 470 377 418 504 474 560 613 663 672 691 745
20% 20%
23%
20%
EBITDA Margins (%)
23% 23% 24% 23% 23% 25%
Exhibit 3: PAT trend
PAT (INR mn)
13%
11% 13%
PAT Margins (%)
15% 14% 15% 14% 14% 14%
10% 11% 10% 11%
5%
89 199 216 218 208 236 278 298 357 381 399 411 419 431
Source: MOSL, Company
Source: MOSL, Company
Software development reports 16% growth, SI de-grows 2%
Software division revenues grew by 16% YoY to INR2,879m, while systems
integration (SI) revenues de-grew 2% YoY to INR154m.
Segment EBIT margins for software development stood at 25% (vs 26% YoY) and
SI increased to 10% (vs 1%YoY).
2 November 2016
2

Tata Elxsi
Exhibit 4: Software business trend (INR m)
Software Development
27
10
16
31
29
Growth %
28
Exhibit 5: System integration business trend
System Integration
33
24
16
139
(55)
13
(4)
(35)
169
194
174
184
157
(7)
(36)
124
204
161
154
Growth %
18
(12)
(2)
24
10
1,769 1,890 2,021 2,139 2,251 2,479 2,616 2,735 2,782 2,879
Source: MOSL, Company
Source: MOSL, Company
Exhibit 6: Software EBIT trend
EBIT (INR m)
20% 21%
EBIT Margins (%)
Exhibit 7: System integration EBIT trend
EBIT (INR m)
11%
8%
3%
1%
1
11%
14%
EBIT Margins (%)
14% 14%
10%
10%
26% 26% 26% 25% 25%
24% 25% 25%
352
403
478
534
570
648
680
698
684
709
4
19
16
20
25
12
28
22
16
Source: MOSL, Company
Source: MOSL, Company
Conference Call Takeaways:
The management highlighted that revenue growth of 15% on YoY basis to
INR3,033m was characterized by healthy volume growth however, adverse
impact of INR100m due to pound depreciation led to lower value growth.
Additionally, other income at negative INR30m was impacted due to
restatement of pound denominated assets. The company’s 30% revenue is GBP
denominated which is hedged to extent of 10-30% through options.
The company added close to ~700 new employees taking the total number to
5,300 employees as of Sept 2017 and plans to add another 400-500 nos by end
of the year. Utilization rate was 75% in 2QFY17 (inclusive of lateral new
employees)
The management highlighted that there is not much scope for margin expansion
beyond 24% and will be happy to maintain it at this level and thus growth will
largely come from revenue.
Medical Equipment:
Added one client in 2QFY17, small order but a good brand
so expecting a larger and sustained growth from it. Customers typically include
companies which make medical equipment used in hospitals especially the ICU
(Intensive Care Unit). Currently, engaged with 10-12 companies and developing
products for them and has been in this business for 2 years, growth muted
compared to other segments but hopeful of strong growth in long term.
Transportation:
Focus on OEMs in last few years have reaped dividends and see
new opportunities of growth. It will continue to be fastest growing segment for
Tata Elxsi.
3
2 November 2016

Tata Elxsi
Broadcast:
US, Europe seeing good traction. Added one more client in south
Africa. The business segment is second fast growing.
Valuation and view
Higher offshoring in auto to drive multi-year growth:
With higher penetration
of automotive electronics – (software, which comprised 2% of total value of a
vehicle in 2000, now comprises 15% of the total value and expected to reach
20% by 2020), just 0.4% offshoring penetration and 40-50% cost savings -
offshoring to India can be a multi-year growth story. This, we believe can drive
19% CAGR over FY16-18 in automotive revenues for TELX as against 46%
revenue CAGR over FY12-16.
Broadcast – another high growth segment:
Similar to automotive, we expect
17% revenue CAGR over in the broadcast division over FY16-18 as against 25%
revenue CAGR over FY12-16 segment led by investments by operators in
developing newer services and features. With automotive and broadcast
together accounting for ~70% of TELX’s revenues in FY18, we believe TELX can
post 17% overall revenue CAGR between FY16-18.
Medical electronics and Internet of Things (IoT) – could see significant
contribution going forward:
Medical segment is in incubation currently, and is
yet to achieve critical mass. However, given renewed interest in developing this
segment, we believe medical electronics could be the fourth core segment for
TELX in the software solutions business. TELX is targeting medical devices in
point of care and diagnostic segments. Similarly, TELX is working with customers
across industries (retail, energy, smart home, healthcare) for IoT developments
which hold hyper growth potential.
Best in class return rations, cash generation and dividend payout:
With a pure
service business model requiring minimal capital investments, TELX delivers
superior return ratios – 42% RoCE and 42% RoE for FY18E along with ~49%
dividend payout. We expect TELX to derive significant operating and free cash
flows from operations, which should total INR4.6b and INR4.23b, respectively in
FY17 & 18.
We value the stock at 22x FY18E EPS of INR73.6, arriving at target of INR1,619.
Exhibit 9: 1-year forward PB (x)
15 Yrs Avg(x)
10 Yrs Avg(x)
18.5
15.5
12.5
P/B (x)
5 Yrs Avg(x)
15 Yrs Avg(x)
10 Yrs Avg(x)
Exhibit 8: 1-year forward PE (x)
48
P/E (x)
5 Yrs Avg(x)
33
18.7
18
17.6
16.7
18.3
9.5
6.5
3.5
0.5
6.3
5.7
5.4
6.9
3
Source: MOSL
Source: MOSL
2 November 2016
4

Tata Elxsi
Exhibit 10: Key assumptions
Segments
Software Development - (A+B+C)
Systems Integration- (D)
Total Revenues (INR m)
Software Development
Systems Integration
Total Revenue Growth (%)
Software Development
Systems Integration
Total Revenue Mix (%)
Software Development
Systems Integration
Total EBIT (INR m)
Software Development
Systems Integration
Total EBIT Margin (%)
Software Development
Systems Integration
Total EBIT Mix (%)
FY12
4,543
845
5,387
27%
46%
30%
84%
16%
100%
598
84
740
13%
10%
14%
88%
12%
100%
FY13
5,530
687
6,217
22%
-19%
15%
89%
11%
100%
624
17
721
11%
2%
12%
97%
3%
100%
FY14
6,827
921
7,748
23%
34%
25%
88%
12%
100%
1,379
84
1,364
20%
9%
18%
94%
6%
100%
FY15
7,817
676
8,493
15%
-27%
10%
92%
8%
100%
1,829
54
1,765
23%
8%
21%
97%
3%
100%
FY16
10,075
667
10,741
29%
5%
26%
94%
6%
100%
2,597
67
2,471
26%
10%
23%
97%
3%
100%
FY17E
11,778
667
12,445
17%
0%
16%
95%
5%
100%
3,180
67
3,114
27%
10%
25%
98%
2%
100%
FY18E
14,076
667
14,743
20%
0%
18%
95%
5%
100%
3,871
73
3,755
28%
11%
25%
98%
2%
100%
Source: Company, MOSL
2 November 2016
5

Tata Elxsi
Financials and Valuations
Consolidated - Income Statement (INR Million)
Y/E March
Total Income from Operations
Change (%)
EBITDA
Margin (%)
Depreciation
EBIT
Int. and Finance Charges
Other Income
PBT bef. EO Exp.
PBT after EO Exp.
Current Tax
Deferred Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Margin (%)
FY12
5,387
29.5
740
13.7
205
535
23
42
554
554
144
22
30.1
346
346
6.4
6.4
FY13
6,217
15.4
721
11.6
237
483
39
48
493
334
102
8
32.9
213
320
-7.6
5.1
FY14
7,748
24.6
1,365
17.6
350
1,015
18
126
1,122
1,122
376
24
35.6
723
723
126.1
9.3
FY15
8,494
9.6
1,766
20.8
247
1,518
0
41
1,560
1,560
535
-4
34.0
1,029
1,029
42.3
12.1
FY16
10,752
26.6
2,471
23.0
226
2,245
0
119
2,363
2,363
815
0
34.5
1,548
1,548
50.5
14.4
FY17E
12,445
15.7
3,012
24.2
249
2,763
0
70
2,833
2,833
958
0
33.8
1,875
1,875
21.1
15.1
FY18E
14,743
18.5
3,642
24.7
267
3,374
0
88
3,462
3,462
1,170
0
33.8
2,292
2,292
22.2
15.5
Consolidated - Balance Sheet
Y/E March
Equity Share Capital
Total Reserves
Net Worth
Deferred Liabilities
Total Loans
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Capital WIP
Curr. Assets, Loans&Adv.
Inventory
Account Receivables
Cash and Bank Balance
Loans and Advances
Curr. Liability & Prov.
Account Payables
Provisions
Net Current Assets
Deferred Tax assets
Appl. of Funds
E: MOSL Estimates
FY12
311
1,608
1,920
131
342
2,392
1,963
964
999
105
2,243
0
1,369
267
606
1,048
719
329
1,195
93
2,392
FY13
311
1,640
1,952
192
585
2,729
2,190
1,198
992
213
2,449
3
1,567
233
645
1,071
830
241
1,378
147
2,729
FY14
311
2,046
2,357
128
0
2,485
1,821
853
968
126
2,789
0
1,748
515
526
1,458
994
463
1,331
59
2,485
FY15
311
2,523
2,834
0
0
2,834
2,293
1,308
985
26
3,640
3
1,791
1,333
514
1,821
1,139
682
1,819
4
2,834
FY16
311
3,546
3,857
0
0
3,857
2,603
1,534
1,070
19
4,895
0
2,152
1,825
919
2,140
1,250
889
2,756
13
3,857
FY17E
311
4,600
4,911
0
0
4,911
2,803
1,783
1,021
0
6,531
0
2,728
2,793
1,011
2,654
1,466
1,188
3,877
13
4,911
(INR Million)
FY18E
311
5,771
6,083
0
0
6,083
3,003
2,050
954
0
8,401
0
3,231
4,108
1,061
3,284
1,737
1,547
5,116
13
6,083
2 November 2016
6

Tata Elxsi
Financials and Valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
Return Ratios (%)
RoE
RoCE
RoIC
Working Capital Ratios
Asset Turnover (x)
Debtor (Days)
Leverage Ratio (x)
Current Ratio
Debt/Equity
FY12
11.1
17.7
61.7
7.0
73.2
FY13
10.3
17.9
62.7
5.0
85.5
FY14
23.2
34.5
75.7
9.0
45.3
FY15
33.0
41.0
91.0
11.0
39.9
38.5
31.1
14.0
4.5
21.7
18.5
18.6
19.2
2.3
93
2.1
0.2
FY12
554
205
23
-138
-86
558
66
624
-282
342
0
-51
-332
0
44
-23
-218
-35
-232
59
208
267
16.5
14.9
15.1
2.3
92
2.3
0.3
FY13
334
237
23
-177
-89
328
51
379
3
382
0
-307
-304
0
183
-39
-218
-35
-109
-34
267
233
33.6
30.0
31.7
3.1
82
1.9
0.0
FY14
1,122
350
16
-174
-99
1,215
73
1,288
1
1,289
0
-221
-221
0
-585
-18
-156
-26
-786
282
233
515
39.6
39.6
60.3
3.0
77
2.0
0.0
FY15
1,551
255
-54
-392
74
1,434
-4
1,430
-329
1,101
0
38
-290
0
0
0
-321
0
-321
818
515
1,333
FY16
49.7
57.0
123.9
14.0
33.8
25.6
22.3
10.3
3.5
15.3
46.3
46.3
84.3
2.8
73
2.3
0.0
FY16
2,363
226
0
-815
-445
1,329
0
1,329
-304
1,026
0
0
-304
0
0
0
-523
-11
-534
492
1,333
1,825
FY17E
60.2
68.2
157.7
22.0
43.8
21.1
18.7
8.1
3.0
12.2
42.8
42.8
88.5
2.5
80
2.5
0.0
FY17E
2,833
249
0
-958
-153
1,971
0
1,971
-181
1,790
0
0
-181
0
0
0
-821
0
-821
969
1,825
2,793
FY18E
73.6
82.2
195.3
30.0
48.9
17.3
15.5
6.5
2.4
9.8
41.7
41.7
109.2
2.4
80
2.6
0.0
Consolidated - Cash Flow Statement
Y/E March
OP/(Loss) before Tax
Depreciation
Interest & Finance Charges
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
Others
CF from Operating incl EO
(inc)/dec in FA
Free Cash Flow
(Pur)/Sale of Investments
Others
CF from Investments
Issue of Shares
(Inc)/Dec in Debt
Interest Paid
Dividend Paid
Others
CF from Fin. Activity
Inc/Dec of Cash
Opening Balance
Closing Balance
E: MOSL Estimates
(INR Million)
FY18E
3,462
267
0
-1,170
76
2,635
0
2,635
-200
2,435
0
0
-200
0
0
0
-1,120
0
-1,120
1,315
2,793
4,108
2 November 2016
7

Tata Elxsi
Corporate profile
Company description
Incorporated in 1989, Tata Elxsi (TELX) operates in
two core segments – software, which contributes
88% to revenues, and systems integration, which
contributes 12% to revenues. In the software
vertical, 77% of revenues are derived from
embedded product development (EPD), followed by
industrial design, which contributes 9% to revenues,
and the balance 2% is derived from visual
computing labs (VCL). Within EPD, TELX caters to
three core industries – automotive (40% of EPD
revenues), broadcast (35% of EPD revenues) and
communications (25% of EPD revenues). TELX
employs 4,200 people and derives approximately
equal revenues from US, Europe and Asia.
Exhibit 2: Shareholding pattern (%)
Sep-16
Promoter
DII
FII
Others
44.6
3.5
11.3
40.6
Jun-16
44.6
3.5
12.5
39.4
Sep-15
45.0
3.3
10.6
41.1
Source: Capitaline
Exhibit 1: Sensex rebased
Source: MOSL/Bloomberg
Exhibit 3: Top holders
Holder Name
Mutual Funds/ UTI
Life insurance Corporation
Wasatch Emerging Markets Small Cap Fund
Macquarie Emerging Markets Asian Trading
Pte.Ltd.
% Holding
1.9
1.2
1.1
1.1
Source: Capitaline
Note: FII Includes depository receipts
Exhibit 4: Top management
Name
N G Subramaniam
Madhukar Dev
G Vaidyanathan
Designation
Chairman
Managing Director & CEO
Company Secretary
Exhibit 5: Directors
Name
N G Subramaniam
Madhukar Dev
Gopichand Katragadda
M S Ananth*
Name
P G Mankad*
P McGoldrick*
Shyamala Gopinath*
Sudhakar Rao*
Source: Capitaline
*Independent
Exhibit 6: Auditors
Name
Deloitte Haskins & Sells
Type
Statutory
Exhibit 7: MOSL forecast v/s consensus
EPS
(INR)
MOSL
forecast
60.2
73.6
Consensus
forecast
64.8
81.9
Variation
(%)
-7.1
-10.1
Source: Bloomberg
FY17
FY18
Source: Capitaline
2 November 2016
8

Tata Elxsi
NOTES
2 November 2016
9

Disclosures
Tata Elxsi
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