Tata Elxsi Ltd – Stock up for the future

Tata Elxsi Ltd (TEL) is amongst the world’s leading providers of design and technology services for product engineering and solutions across industries including broadcast, communications and automotive. It provides technology consulting, new product design, development and testing services. TEL also provides solutions and services for emerging technologies such as IoT (Internet of Things), Big Data Analytics, Cloud, Mobility, Virtual Reality and Artificial Intelligence.
TEL in collaboration with Panasonic, has established an overseas development centre (ODC) for Panasonic in the home appliances space in Bangalore in April, 2017. Under the ODC, the Company will develop technologies such as Artificial Intelligence (AI) and robotics applicable to home appliance products to be sold in Indian as well as global markets.
TEL has recently won the bid with Airports Authority of India (AAI) to improve the passenger experience for all AAI managed airports in India. AAI manages 126 airports, including 21 international airports and 78 domestic airports in India. The Company will help AAI to provide a seamless passenger travel experience by developing customer friendly information design and way-finding guidelines. The designs will be developed such that it matches with the global standards.
TEL has entered into a partnership with U.S.A. based DiSTI Corp. This partnership will help the Company to provide superior User Interface (UI) solutions to its automotive clients and help the company deliver elevated Human Machine Interface (HMI) design and appealing visual content for futuristic displays in automobiles. DiSTI is a global leader in the development of HMI software for businesses and governments. DiSTI’s products enable developers to build highly trustworthy and secure critical 3D graphics for embedded automotive applications, while providing superior performance and visual quality.
TEL has entered into a partnership with MStar Semiconductor Inc., a leading global semiconductor company, to work towards enhancing display and digital home solutions. Under this partnership, the Company’s “RDK Prime” suite is made available on MStar’s Set-Top Boxes (STB) chipset products. This partnership will help the broadcasting operators to launch new services faster while maintaining high security standards. Headquartered in Taiwan, MStar is a leader in Application Specific Integrated Circuit (ASIC) with a focus on consumer electronic products and communication applications. MStar has a strong brand and leadership position in Liquid Crystal Display (LCD) controller and STB technology.
During Q4FY17, TEL won the contract for designing the entire interiors of the prototype Indian Multi-Role Helicopter (IMRH), developed by Hindustan Aeronautics Limited (HAL). The work was completed within the set target of 60 days. As of now, HAL is awaiting clearance from the union government to start developing the IMRH.
TEL’s Visual Computing Labs (VCL) is one of the leading animation and visual effects studio in India. They have collaborated on several successful and award-winning motion pictures, television programs, and TV commercial which were executed for leading Indian and global media and consumer brands. Of late TEL was one of the main VFX studios that had worked on the feature film “Baahubali 2”
Going ahead we expect Tata Elxsi to benefit from increase in off-shoring of global engineering, research & development (ER&D) activity. We believe that significant investments in the global automotive technology space, which contributes 48% of revenues of TEL to push demand for design services. Outsourcing of design services by global OEMs and companies due to factors such as cost efficiency and quality talent pool in India should also benefit TEL. Currently, only 3.5% of $232 bn outsourcing services industry is catered by India. We believe that India’s share in the pie can go up to 5-7%.
The Company garnered 36 new clients during FY17. Majority of them were in the transportation and broadcast space. As of now, the company has about 200 active customers. The company generated close to 60 % of its total revenue from servicing its top 10 customers during FY17. Total headcount for Tata Elxsi at the end of FY17 was 5,500, marking a growth of 23.5% YoY. The utilization rate for FY17 was about 75 %.
TEL is rightly placed in all high growth industries, i.e. automotive, broadcast & media, semi-conductor, communications and healthcare which will serve as key triggers to drive 20% revenue CAGR over the next few years. We believe that TEL has significant pricing power compared to its peers which have witnessed deterioration in prices for traditional services over the last 3 years. TEL specialized services means that pricing power for the company has remained intact. I value the Company at 25X FY19E EPS and recommend a BUY with a target price of Rs.2010/sh.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named 'The Tortoise' 

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