Analysis Report: TATA ELXSI (BUY; Estimated Price: Rs. 3172)

About the Company

Tata Elxsi founded in 1989 is a design company that blends technology, creativity and engineering to help customers transform ideas into world-class products and solutions.

A part of the $100 billion Tata group, it addresses the communications, consumer products, defence, healthcare, media & entertainment, semiconductor and transportation sectors. This is supported by a network of design studios, development centres and offices worldwide.

Tata Elxsi is uniquely positioned with its proven capabilities in technology and user experience, insight-led design and product engineering across multiple industries. It leverage these unique intersections to help customers create exceptional products, services and experiences and drive their strategic growth.

Shareholding Pattern

Cat  Code	Category of Shareholder	Total number of shares	Number of shares held in dematerialized form	Total shareholding as a percentage of total number of shares
A	SHAREHOLDING OF PROMOTER AND PROMOTER GROUP	1,39,97,288	1,39,97,288	44.95
B	Public Shareholding
1	INSTITUTIONS
A	MUTUAL FUNDS/UTI	2,15,028	2,14,828	0.69
B	Financial institutions/Banks	21,654	21,454	0.07
C	Insurance Companies	7,96,339	7,96,339	2.56
D	FII	25,39,203	25,36,903	8.15
2	NON- INSTITUTIONS
A	Corporate Bodies (Indian/foreign/Overseas)	21,21,710	21,17,809	6.81
B	Individuals
(i)	Individual shareholders holding Nominal share Capital up to Rs.1 lakh	92,70,143	77,18,292	29.77
(ii)	Individual shareholders holding Nominal share Capital above Rs.1 lakh	21,66,645	21,66,645	6.96
C	Others	10210	10210	0.03
	Total Public Share Holding (B)	1,71,40,932	1,55,82,480	55.05
	TOTAL(A+B)	3,11,38,220	2,95,79,768	100

Key Services

Embedded Product Design

Tata Elxsi provide technology consulting, product development and testing services for leading product companies, service providers and start-ups. This is backed by an in-depth understanding of technology, a large multi-disciplinary product development team, mature processes and systems. They also create and license intellectual property and software components; helping customers create product differentiation and reduce development costs and time-to-market.

The company offers electronics, software development and system design services for the automotive and aerospace industry, address the complete product development lifecycle from R&D, new product development and testing to maintenance engineering for Broadcast and Consumer Electronics.

Industrial Design

Tata Elxsi help customers develop successful brands and products by using design as a strategic tool for business success. Its services include research & strategy, branding & graphic design, product design, packaging design, UI design, retail design & signage, transportation design, design engineering and prototype development. They have supported the launch of multiple brands and

products across the world, winning various international awards and patents for design and innovation. The company serves a broad spectrum of industries including automotive, consumer electronics, retail & consumer goods and healthcare.

Visual Computing Labs

Tata Elxsi provides animation and visual effects (VFX) services for feature films and episodic television. It also support advertising and marketing by providing these services for TV commercials and corporate videos for visualization and new product launches.

They develop custom content for visualization and product marketing. We have executed several audio-visual films for use in promotional and launch events, concept showcases to management or customers and advertising. We have executed several prestigious projects for customers in the automotive, consumer electronics, real estate and hospitality industries.

Systems Integration

Tata Elxsi implement and integrate complete systems and solutions for broadcast, CAD/CAM/CAE/PLM, disaster recovery, high-performance computing, storage and virtual reality. It also provides Professional Services, maintenance and support services for data mining, storage, IT facilities and network management in India and overseas.

Top Management

Chairman

N. Ganapathy Subramaniam is the Chairman of Tata Elxsi. He is the Executive Vice President at Tata Consultancy Services Ltd. and head of TCS Financial Solutions, a strategic business unit of TCS. He is the newly appointed additional director and Chairman of the board, appointed on November 01, 2014. He takes over the role of Chairman from Mr. S. Ramadorai, who stepped down from the Board of Directors of the Company, on attaining the age of 70 years as per the Company's policy.  He is part of TCS and the Indian IT Industry for over 30 years.

Managing Director

Mr. Madhukar Dev is the Managing Director of Tata Elxsi. He has over 30 years of industry experience, including 20 years in Sales & Marketing. He joined Tata Elxsi in 1991, and since then has held various positions in Sales & Marketing. He has been instrumental in nurturing the company’s economic, professional and, most importantly, intellectual growth. Prior to joining Tata Elxsi, Madhukar has worked in industries spanning Information Technology, Power Electronics and Publishing where his work experience included roles in Field Sales, Product Management and Market Development. Madhukar is a qualified MBA from IIM Bangalore and has also completed his M.Sc. in Physics.

Business Description

Tata Elxsi is an engineering services company with presence in various industries such as Aerospace and defence, Automotive, Broadcast and media, Communications, Consumer Products, Healthcare and semiconductors. The main focus area of company is automotive sector. It provides various services like verification and validation, rapid prototyping, hardware designing, model based designing, embedded coding, process and domain consultancy etc. It also has significant business in the area of communication, broadcast and media and visual effects.

Industry Analysis

Tata Elxsi is an engineering services company with the presence in various industries such as Aerospace and defence, Automotive, Broadcast and media, Communications, Consumer Products, Healthcare and semiconductors. The global aerospace and defence (A&D) industry is expected to return to growth in 2016 with total sector revenues estimated to grow at 3.0 percent, according to the Deloitte Ltd. According to SIAM (Society of Indian Automobile Manufacturers), the automobile industry in India registered a growth of 8.68% in the year 2014-15.So there is a huge opportunity in this sector for future growth. India’s animation industry generated revenue worth Rs.4490 crore in 2014, a 13% increase from the previous year, according to data from a FICCI-KPMG report on India’s media and entertainment industry. The industry is expected to double in size to Rs.9550 crore within five years, as Hollywood studios tap a large pool of low-cost, English-speaking animators who are familiar with Western culture.

Market Analysis

Tata Elxsi operates in various fields such as industrial design, visual labs, embedded product design and system integration. It main sources of revenues are from design of infotainment systems for automobiles and visual labs. The strength for Tata Elxsi is its global presence in all the above industries. Also Tata Elxsi is leader in visual effects industry in India. So currently it is incumbent in this industry. There is no immediate threat from local competitor in infotainment industry and visual labs business. The Company might face threat from various new entrants in the emerging markets which can take away the business. The company’s visual effects business might face the threat of substitutes like Virtual Reality and Augmented Reality.

Financial Analysis

Tata Elxsi has grown phenomenally in the past 5 years. It has zero long term and short term borrowings which shows that the financial health of company is good. The cash conversion cycle of company has reduced from 33.46 days in 2011-12 to 22.23 days in 2014-15. The Return on Capital Employed (RoCE) increased from 24.09% in 2010-11 to 40.22% in 2014-15 which means that the efficiency with which the company utilizes its money has doubled in 5 years. Company’s Cash and Cash equivalents has increased more than 6 times in past 5 years from 20.80 crores in 2010-11 to 133.26 crores in 2014-15. It shows that the company does not have cash crunch in short term and has enough working capital to meet its requirements.

Balance Sheet of Last 5 Years

(Rupee in crores)	2010-11	2011-12	2012-13	2013-14	2014-15
EQUITY AND LIABILITIES
Share capital	31.14	31.14	31.14	31.14	31.14
Reserves and surplus	151.23	160.84	164.04	204.57	252.29
Non-current liabilities	8.36	10.61	9.53	11.95	10.76
Trade payables	41.03	46.85	52.46	64.22	66.15
Other current liabilities	69.91	85.45	106.23	76.73	105.19
TOTAL	301.68	334.62	363.39	388.61	465.53
ASSETS
Fixed assets	90.75	99.88	99.14	96.83	98.49
Other non-current assets	61.64	60.90	75.70	53.26	38.78
Inventories	0.57	0.02	0.31	0.00	0.29
Trade receivables	107.23	125.65	140.98	155.61	154.08
Cash and cash equivalents	20.80	26.72	23.30	51.45	133.26
Other current assets	20.96	21.45	23.97	31.22	40.62
TOTAL	301.68	334.62	363.39	388.61	465.53

The company’s total revenue has increased 19.38% CAGR in past 5 years while its profitability has increased by 33.07% CARG in these years. The company’s operating expenses also dropped from 88.65% in 2010-11 to 79.12% in 2014-15. All these things shows that company’s operations have become more efficient and as a result profitability has increased.

Profit & Loss Statement for Last Five Years

(Rupee in crores)	2010-11	2011-12	2012-13	2013-14	2014-15
INCOME
Total Operating Revenue	415.91	538.71	621.67	774.78	849.40
Other income	3.86	4.20	4.84	12.54	3.35
Total Revenue	419.77	542.91	626.51	787.32	852.75
EXPENSES
Operating Expense	368.70	464.70	549.61	638.23	672.08
Depreciation and amortization expense	17.20	20.52	23.73	34.99	25.54
Other Expenses	1.88	6.44	4.97	1.83	0.00
Tax Expenses	-0.55	16.65	10.99	39.92	53.10
Total Expenses	387.24	508.31	589.31	714.97	750.73
Profit for the year	32.53	34.60	21.31	72.35	102.02

This industry has a bright future as per our analysis and understanding. Given Tata Elxsi growth history, this forecasted bright future of this industry should only propel this company forward. Using the discounted cash flow method, we project the stock price of Tata Elxsi to be Rs. 3172. 

Profit & Loss Statement of last Two September Quarters

(Rs in Crores)	Sept 2014	Sept 2015
REVENUE
Net Sales (Net of excise duty)	205.88	263.65
Other Operating Income	0.00	0.00
Total Income from Operations (Net) (1)	205.88	263.65
Other Income (2)	1.31	2.71
Total Revenue (1) + (2)	207.19	266.36
EXPENSES
Costs of Materials Consumed	16.79	17.33
Changes in inventories of finished goods, WIP	-0.05	0.00
Employee Benefit Expenses	113.97	143.57
Other Expenses	33.37	41.46
Operating Expense (3)	164.08	202.36
Depreciation & Amortization (4)	7.87	5.68
Other Expenses (5)	0.00	0.00
Total Expenses (3) + (4) + (5)	171.95	208.04
Interest Expense	0.00	0.00
Profit Before Tax	35.24	58.32
Tax Expenses	11.59	20.21
Profit After Tax	23.64	38.09

Projected Balance Sheet for Next 5 Years

(Rupee in crores)	2016	2017	2018	2019	2020
EQUITY AND LIABILITIES
Share capital	31.14	31.14	31.14	31.14	31.14
Reserves and surplus	359.75	472.35	590.07	712.88	840.76
Non-current liabilities	10.76	10.76	10.76	10.76	10.76
Trade payables	69.43	71.57	75.08	77.44	81.18
Other current liabilities	105.19	105.19	105.19	105.19	105.19
TOTAL	576.28	691.02	812.24	937.42	1069.02
ASSETS
Fixed assets	94.26	91.65	90.81	91.92	95.17
Other non-current assets	38.35	38.35	38.35	38.35	38.35
Inventories	0.01	0.30	0.02	0.32	0.04
Trade receivables	168.00	166.96	181.40	108.90	195.89
Cash and cash equivalents	234.59	352.21	459.51	583.37	697.18
Other current assets	40.62	40.62	40.62	40.62	40.62
TOTAL	576.28	691.02	812.24	937.42	1069.02

Projected Income Statement for Next 5 Years

(Rupee in crores)	2016	2017	2018	2019	2020
INCOME
Total Operating Revenue	883.38	918.71	955.46	993.68	1033.48
Other income	0.00	0.00	0.00	0.00	0.00
Total Revenue	883.38	918.71	955.46	993.68	1033.48
EXPENSES
Operating Expense	698.97	726.93	756.00	786.24	817.69
Depreciation and amortization expense	20.32	19.86	19.71	19.91	20.48
Other Expenses	0.00	0.00	0.00	0.00	0.00
Tax Expense	56.63	59.33	62.03	64.72	67.38
Total Expenses	775.91	806.11	837.74	870.86	905.55
Profit For the Year	107.46	112.60	117.72	122.82	127.87

Price Performance

References

http://www.tataelxsi.com/index.html

http://www.siamindia.com/statistics.aspx?mpgid=8&pgidtrail=14

http://www.business-standard.com/company/tata-elxsi-2322/information/company-history

http://www.tataelxsi.com/investors/financials.html

About the Author

This report has been prepared by Sahil Karodia and Uttam Khunt and published by Jayant Gupta. They are pursuing MBA from Institute of Management, Nirma University located in Ahmedabad, India.

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The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidelines only.