Tata Elxsi: Driving into an exciting future

Tata Elxsi

Initiating Coverage | Sector: Technology

Tata Elxsi

BSE Sensex

27,177

S&P CNX

8,214

CMP: INR1,003

TP: INR1,300 (+30%)

Buy

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

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

Avg Val (INRm)/Vol

‘

Free float (%)

product development (EPD), followed by industrial design, which contributes 9% to

TELX IN

31.1

1,488/472

-10/64/63

36.6

0.6

631/856

55.0

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

4,000 people and derives approximately equal revenues from US, Europe and Asia.

Driving into an exciting future

Opportunity huge; re-rating in the offing



Financial Snapshot (INR Billion)

Y/E Mar

2015E 2016E 2017E

Sales

8.5

9.9

11.5

EBITDA

PAT

EPS (INR)

EPS Gr. (%)

BV/Sh. (INR)

RoE (%)

RoCE (%)

P/E (x)

P/BV (x)

1.8

1.0

32.4

39.5

91.7

38.7

58.6

31.0

10.9

2.2

1.3

40.8

26.0

112.6

39.9

60.5

24.6

8.9

2.7

1.6

51.3

25.6

138.1

40.9

61.9

19.6

7.3



Global R&D spends by auto companies’ stand at USD120b annually, of which the

outsourcing proportion is just 10% and offshoring to India is just ~0.4%, providing

immense growth potential.

Software, which comprised 2% of total value of a vehicle in 2000, now comprises

15% of the total value and is expected to reach 20% by 2020. With 40-50% cost

savings and just 0.4% penetration, offshoring to India is a multi-year growth story.

By 2020, there will be a quarter billion connected vehicles on the road, enabling

new in-vehicle services and automated driving capabilities, according to Gartner.

We expect TELX to post secular growth led by automotive, broadcast and

consumer electronics divisions which together contribute ~75% to its revenues.

TELX has restructured its loss-making VCL business and has evolved into a high

quality business focused on niche software services, with minimal capital needs.

We expect PAT CAGR of 26% over FY15-17 with strong capital efficiency (RoCE of

62% and RoE of 41% for FY17). Initiate with Buy and a price target of INR1,300.

Shareholding pattern (%)

As on

Promoter

DII

FII

Others

Dec-14 Sep-14 Dec-13

45.0

3.5

7.0

44.5

45.0

3.8

7.2

44.0

45.1

5.1

2.3

47.5

Low off-shoring penetration sets the stage for multi-year secular growth

Global R&D spend by auto companies stands at USD120b annually, and is

expected to grow at a CAGR of 6.4% over 2014-16 (Source: Thomson Financials,

Roland Berger Analysis). Of the total R&D spend, 90% is undertaken captively by

auto OEMs, with outsourcing proportion being just 10% and offshoring to India

being just ~0.4%, providing immense growth potential for players like TELX.

Since new-age electronics and software development involving multimedia,

connectivity, and consumer technologies have traditionally not been a focus

area for car OEMs, they are increasingly finding it favorable to outsource to

specialized players. Global paucity of engineering and software talent for

embedded systems, along with cost advantages (40-50% cost savings adjusted

for productivity differences), strongly favors offshoring. Additionally, given the

small ticket nature of deals (sub-million dollar deals) associated with embedded

product development, the market is relatively niche and hence is not a major

focus area for large Indian players like TCS and Infosys. Thus, high growth

potential, minimal 0.4% penetration, and niche nature of this segment, sets the

stage for multi-year secular growth for focused players like TELX.

FII includes depository receipts

Stock Performance (1-year)

27 April 2015

Tata Elxsi

Automotive and broadcast segments set for exponential growth

Software, which comprised 2% of total value of a vehicle in 2000, now comprises

15% of the total value and is expected to reach 20% by 2020. By 2020, there will

be a quarter billion connected vehicles on the road, enabling new in-vehicle

services and automated driving capabilities, according to Gartner. Key areas for

growth in the automotive vertical include Infotainment (40% of revenues),

Powertrain and Hybrids (40% of revenues), and Safety and Security (20% of

revenues). Similarly, we expect strong growth in broadcast segment led by

investments by operators in developing newer services and features.

Automotive and broadcast together account for ~75% of TELX’s EPD revenues

and have been key growth drivers (CAGR of 49% and 41%, respectively over

FY12-14). We expect high growth in both these key segments to continue (CAGR

of 25% and 15%, respectively over FY15-17).

Restructuring of VCL done; focus on pure software service business

TELX management took corrective action, exiting the loss making Visual

Computing Labs (VCL) businesses of overseas studio as well as JV with A2E

Entertainment. Similarly, the management is not looking to grow the lower

margin hardware related systems integration (SI) business, instead focusing on

higher margin software business in SI. The SI business, which was once

significant, now forms a minimal proportion of TELX’s consolidated revenue (SI

revenue proportion down from 39% in FY04 to 12% in FY14). Further, unlike

peers that engage in aggressive capex to develop a non-linear profitability

profile, TELX is focused on a pure service business model (Auto and Broadcast

being key growth drivers), requiring minimal capital investments. We expect

TELX to derive significant operating and free cash flows from operations, which

should total INR3.6b and INR3.2b, respectively over FY15-17. Similarly, the

business model delivers superior return ratios – 62% RoCE and 41% RoE for

FY17E along with ~50% dividend payout.

Poised for re-rating; initiate coverage with Buy

We expect revenue to grow at a CAGR of 16% over FY15-17, led by 18% CAGR in

EPD business. We estimate 22% EBITDA CAGR and 26% PAT CAGR. We believe

TELX has significant margin levers, which provide further upsides to our

estimates – (a) increase in off-shoring proportion from the current 55% to 60-

65%, (b) increase in proportion of fixed price contracts from the current 25% to

30-35%, (c) increase in utilization rates from the current 70% to 80%. The stock

trades at 24.6x FY16E and 19.6x FY17E EPS. Given high growth prospects and

robust cash generation, we value the stock at 25x FY17E EPS. We initiate

coverage with a

Buy

rating and a target price of INR1,300.

27 April 2015

Tata Elxsi

Story in charts: Massive opportunity

Exhibit 1: High revenue contribution from software business

Systems

Integration

12%

Exhibit 2: EBIT contribution from software business higher

Systems

Integration,

Software

Development

88%

Software

Development

94%

Source: Company, MOSL

Exhibit 3: Transport and Broadcast – Key growth drivers

Exhibit 4: Greater demand for electronics – A secular trend

Electronics cost as a propotion of car value (%)

30%

Communications,

Others, 25%

Transportation,

40%

Broadcast

and

Consumer

Electronics,

35%

Source: Company, MOSL

2002

2014

Source: Company, MOSL

Exhibit 5: Robust cash generation

Free cash flow (INR m)

1,751

1,289

1,370

1,097

Exhibit 6: Strong return ratios

RoCE (%)

382

FY13

FY14

FY15E

FY16E

FY17E

FY13

FY14

FY15E

FY16E

FY17E

Source: Company, MOSL

27 April 2015

Tata Elxsi

Embedded Product Development – massive opportunity

Autos and broadcast to drive growth, communications in slow lane



Increasing spend on electronics/car is a secular trend. Given that auto makers have

traditionally not been focused on the electronics segment, and possibility of 40-50%

cost savings, offshoring is set to grow exponentially.

Similarly, proliferation of new technologies is causing broadcast service providers to

continuously innovate their products, driving strong growth.

We expect the communications division to report flat growth due to challenges faced

by the end-customer – the telecom industry.

Autos (40% of EPD revenues) – Largest growth driver

The connected car – infotainment in cars growing exponentially

The global passenger car market is witnessing significant changes. With influx of new

technologies, the car is increasingly becoming a connected device, with a host of

new features. For instance, infotainment systems within cars have progressed

significantly in richness of features, support for various types of multimedia and

graphic content, as well as in integrating consumer devices into the car. This is

further enhanced by connectivity of 3G or 4G into the car, allowing for content and

information to be delivered real time into the vehicle on the move. From simple

radios and in-built cassette and CD players in the 90s, today’s infotainment systems

provide playing of content from in-built storage, external storage devices such as

USB sticks or via Bluetooth from a tablet or mobile phone.

Entertainment is now even classified by occupants, with rear-seat systems that can

play videos and movies, while the front head units display maps, etc. The integration

of consumer devices with the infotainment system allows routing of phone calls to

the car speakers, playing of content or even live maps, etc, from the phone to the

car display unit.

Exhibit 7: The connected car

Source: Company, MOSL

27 April 2015

Tata Elxsi

Human machine interface (HMI) – also witnessing sea change

The HMI or human machine interface is also undergoing significant change, with

physical knobs being supplemented by touch screens, steering wheel controls, audio

commands and upcoming gesture-based commands. Latest features include heads-

up display that projects key parameters onto the windscreen in front of the driver,

and personalization of the vehicle and infotainment settings based on the car

recognizing the driver and his/her preferences.

Exhibit 8: Human machine interface – moving to next level

Source: Company, MOSL

Powertrains and hybrids – emission norms driving hybrid engines

Due to the regulatory pressure for stringent emission and safer transport from

governments across the world, demand for intelligent electronics is expected to

increase substantially. Leading OEMs and system suppliers are thus working on the

development of next-generation hybrid vehicles driving higher growth.

Exhibit 9: Migrating from old fashioned combustion engines to new generation hybrids

Source: Company, MOSL

27 April 2015

Tata Elxsi

Advanced driver assistance systems (ADAS) – making driving safer

Today’s cars are increasingly getting equipped with advanced driver assistance

systems (ADAS). Governments in developed countries are mandating their use to

make driving easier and safer. The first ADAS or active safety feature mandated by

government regulation was tire pressure monitors, which continuously monitor and

warn of low pressure in any tire. The next to follow was rear view cameras for

reversing ease; most developed countries are now considering this. ADAS features

are diverse – from lane departure warning and collision detection to adaptive cruise

control and automatic park assist. These features are now percolating to mid-range

cars.

As technology develops and vehicles are capable of interacting in machine-to-

machine (M2M) mode with other vehicles (V2V) and infrastructure on the road or in

buildings and parking lots (V2X), ADAS systems will become more sophisticated,

ultimately leading to fully autonomous driving or driverless cars. Google already has

fully automated cars under trial in the US, while Mercedes, BMW and other leading

brands have announced significant programs towards driverless car technology.

These are mega-changes expected in the automotive world, which will drive huge

demand for auto-electronics.

Exhibit 10: Advanced driver assistance systems (ADAS) – making driving safer

Source: Company, MOSL

27 April 2015

Tata Elxsi

All-round investments in R&D and new products – to drive growth for TELX

The size of the global passenger car market is estimated at ~USD1,300b. Given the

strong demand for auto electronics, electronics cost (hardware plus software) now

comprises 30% of the total vehicle value, up from 12% in 2000 and expected to

reach 40% of total vehicle value by 2020. Further, cost of software now comprises

15% of the total vehicle value, up from 2% in 2000 and expected to reach 20% of

total vehicle value by 2020. Increased spend on electronics/car is a secular trend,

which will shape up a massive opportunity for niche and dedicated players like TELX.

Luxury car market (28% of passenger car market) is the key innovation driver.

Exhibit 11: Worldwide car sales on a continuous growth path

Worldwide car sales 1990-2014 (m units)

60.8

65.0

68.7

72.2

50.7

39.2

1990s

2000s

2011

2012

2013

2014

Source: Industry, MOSL

Exhibit 12: Increasing proportion of electronics in cars

Electronics cost as a propotion of car value (%)

30%

Exhibit 13: Increasing proportion of software in cars

Software cost as a propotion of car value (%)

15%

2014

2002

2014

2002

Source: Company, MOSL

Exhibit 14: Global luxury car makers' revenues (USD b)

Global luxury car makers' revenues (USD b)

152.6

115.6

65.0

30.2

Exhibit 15: Global luxury car makers' R&D spend (USD b)

Global luxury car makers' R&D spend (USD b)

7.0

6.2

5.2

2.0

Daimler

BMW

Audi

JLR

Daimler

BMW

Audi

JLR

Source: Company, MOSL

27 April 2015

Tata Elxsi

Auto R&D spend stands at USD120b annually

Global R&D spend by auto companies’ stand at USD120b annually, and is expected

to grow at a CAGR of 6.4% over 2014-16 (Source: Thomson Financials, Roland Berger

Analysis). Of the total R&D spend, 90% is undertaken captively by auto OEMs with

outsourcing proportion being just 10%.

Exhibit 16: Global R&D spend by auto companies stands at USD120b annually

OEM Captive

Outsourced

15.1

9.2

85.2

10.9

91.5

96.7

12.5

103.4

12.9

108.4

14.3

114.8

122.2

2010

2011

2012

2013

2014

2015

2016

Source: Thomson Financials, Roland Berger Analysis, MOSL

Exhibit 17: Powertrain, Infotainment and Body together form ~80% of R&D spend

Powertrain

Infotainment

11%

12%

25%

26%

27%

22%

27%

2010

23%

27%

2011

24%

28%

2012

Body/ Exterior

10%

24%

25%

29%

2013

Interior

10%

23%

25%

29%

2014

Full Vehicle

23%

26%

30%

2015

Chassis

22%

27%

31%

2016

Source: Thomson Financials, Roland Berger Analysis, MOSL

Low off-shoring penetration sets the stage for multi-year secular growth

Of the USD121b auto R&D spends, 10% is the outsourced proportion aggregating to

USD12.9b, while off-shoring to India currently stands at just ~0.4%, thus providing

immense growth potential for players like TELX.

Exhibit 18: Outsourced R&D spend is 10% of total, with offshoring to India being 0.4%

Source: Company, MOSL

27 April 2015

Tata Elxsi

How TELX is placed to capture this massive opportunity

Automotive has been the highest growth segment for TELX, with revenue from this

segment growing at a CAGR of 49% over the last two years. TELX’s revenue mix

within autos is (1) infotainment: 40%, (2) power train (PT), chassis and body

electronics: 40%, and (3) active safety and telematics: 20%. Given hyper-growth in

this segment, and huge untapped opportunity, we expect 25% CAGR over FY15-17.

Exhibit 19: Autos – Revenue mix by type of product for TELX

Active

safety and

Telematics

, 20%

PT, Chassis

and Body

electronics

, 40%

Infotainment

40%

Source: Company, MOSL

Exhibit 20: Automotive – key segments

Telematics & Infotainment

In-car connectivity

Front & Rear Seat Entertainment

Driver Information

Navigation & Location Based Services

Remote Vehicle Interactions

Vehicle Telemetry

Powertrain & Hybrids

Engine Management

Tranmission

Start Stop

Hybird Controllers

Battery Management

DC-DC Converters

Safety & Security Electronics

Airbag & Occupant

classification

Immobilisers

PEPS & CLSS

Blind spot warning

Night Vision

Driver drowsiness

Park Assistance

Lane Departure Warning

Body & Chassis Electronics

Automotive Lighting

Instrument Cluster

Steering

HVAC Controllers

Seating systems

Door Systems

Roof Systems

Braking System

Suspension System

Rear Spoiler

Source: Company, MOSL

Exhibit 21: Strong credentials built in the automotive segment

15+

Years of Competence

in Automotive E/E

solutions

400+

Man years of

Competence in

AUTOSAR, BSW &

MCAL

1000+

Man years of

Competence in

Automated HILS

validation solutions

2500+

Man years of

Competence in

Modeling &

Simulation solutions

350+

Man years of

Competence in

Electrical systems

build & launch for

OEMs

100+

Man years of

Competence in

ISO26262 compliant

solutions

Source: Company, MOSL

27 April 2015

Tata Elxsi

Product differentiation – key driver for higher spend on auto EPD

A major driver for higher spend on auto EPD is OEMs’ need to differentiate their

product features. OEMs invest themselves and develop patents to protect their R&D

and differentiation. TELX has over 30 clients in the auto division, of which 7 are

OEMs, 14 are tier-1 suppliers, 6 are tools suppliers, and 4 are chip companies. It

derives 40% of its revenue from OEMs and the balance from suppliers. Tier-1

suppliers have been the higher growth segment for TELX, with revenue contribution

from this segment increasing from 50% to 60% over FY11-14. TELX derives 50% of its

auto division revenue from Europe, 30% from US, 15% from Japan, 5% from APAC

including India, China and Korea.

Exhibit 22: Autos – client mix

Tools and

Suppliers, 6

OEMs, 7

Chip companies,

Tier 1s, 14

Source: Company, MOSL

Exhibit 23: Autos – FY11 revenue mix by type of client

Exhibit 24: Autos – FY14 revenue mix by type of client

OEMs, 40%

Tier 1s, 50%

OEMs, 50%

Tier 1s, 60%

Source: Company, MOSL

Exhibit 25: Autos – revenue mix by geography

China, 5%

Japan, 15%

Europe, 50%

US, 30%

Source: Company, MOSL

27 April 2015

Tata Elxsi

Key drivers for growth in auto segment

The car has undergone very little innovation over the last 100 years. Engines – both

diesel and petrol – have remained largely unchanged. However, the industry is now

entering a phase of massive innovation in engine as well as in accessories. The

electronics versus electro-mechanics mix is shifting in favor of electronics. The

biggest change is happening in the hybrid vehicles space. Electric motors, which are

electronically controlled, are increasingly shaping the future of the industry. Players

like Apple and Google are writing mathematical models to control the entire

working of the car. As this is not the domain of the traditional car manufacturers,

new technology companies are taking this forward. The changes would be dynamic

and require continual investments. The net implication of this will be increasing use

of electric-controlled systems, where players like TELX come to the fore.

TELX works with OEMs and tier-1 suppliers in the auto segment. Backing the right

suppliers is the key, given their dependability on the OEMs to win new business. If

they don’t win new business, growth for TELX could be impacted. Needs of OEMs

tend to be more stringent than the suppliers, as the suppliers are really looking here

and now, while the OEMs are largely looking to develop futuristic products and

solutions. OEMs typically look for developing differentiation from a 5-year / 10-year

/ 20-year timeframe. For TELX, the OEM-supplier mix has changed from 50:50 three

years ago to 40:60. Business from tier-1 suppliers has grown at a faster pace

compared to OEMs over the last three years.

a) Infotainment

In-vehicle infotainment is rapidly extending to multiple applications such as

navigation and location services, telephony, and Internet services. This demands

experience with integration of multiple technologies, along with enhanced user

interfaces to allow drivers to use these features easily and without distraction. TELX

has built a unique value proposition for this market owing to its combined

knowledge of user experience design, multimedia and connectivity technologies,

and experience of the automotive-specific processes and systems. It is also working

with leading aerospace OEMs and suppliers for avionics and electronics design.

TELX’s work in infotainment requires hardware to support computing and real-time

processing, along with multimedia format support. This is supplemented by various

connectivity-related chips and antennae for Bluetooth, Wifi and 3G/4G. The actual

functionality and features are realized via custom software that has to be

developed, optimized and integrated onto the selected hardware. For example, it

may be possible to select a common hardware platform for a range of models and

realize various features to distinguish between the top and the base model via

software. However, as one progresses from one model of a brand to another,

hardware ‘commonization’ becomes difficult to justify against pricing pressures,

necessitating continuous rounds of investments in EPD and product testing. With

rapid progression of features and functionality in infotainment, hardware design

needs to be refreshed once in a while, based on limitations of performance and

supported functionality as well as upgraded technology for connectivity, etc.

Software change is more continuous, and will undergo significant change even from

one model year and minor model refresh to the next.

27 April 2015

Tata Elxsi

b) Powertrains and hybrids

TELX is engaging with leading OEMs and systems suppliers for the development of

next-generation hybrid vehicles. TELX recently worked with a leading Japanese

automotive OEM to design and develop a complete electronic control unit (ECU) for

a hybrid electric vehicle, including software and hardware. The hybrid vehicle was

successfully released in the market in June 2013. The division also supported India’s

Mars Orbiter mission – Mangalyaan, by designing its data control hardware. The

Mars Orbiter was launched into space on November 05, 2013.

c) Advanced driver assistance systems (ADAS)

Due to the regulatory pressure for stringent emission and safer transport from

governments across the world, demand for intelligent electronics is expected to

increase substantially. It is leveraging its extensive experience in imaging and video

technologies, digital signal processing, imaging and video technologies to help

automotive customers develop advanced driver assistance systems that can help

make driving safer and less tiring.

ADAS is complex, involves significant hardware and software development, and

requires high levels of safety validation and testing. The primary drivers for ADAS

will be safety regulations by governments and need for differentiation by car brands

to provide consumers with sophisticated features that ensure higher levels of ease

and safety in driving. Similarly, on the infotainment, active safety and telematics

front, systems are evolving rapidly. For instance, high-end cars now come with

electronics that (1) display directions directly from Google maps on the screen, and

(2) enable driver assistance in the form of assisted parking, automated parking,

reversing cameras, etc. TELX helps build such systems for OEMs and suppliers.

d) Body & chassis electronics – increased innovation on ground

In the body & chassis segment, innovation has picked up significantly in key areas

like designing front & rear lighting systems, instrument cluster, steering &

suspension systems, door systems, etc.

Ability to cross-sell provides operating leverage

TELX does not work on any exclusivity arrangements on work done or capabilities

built with tier-1 suppliers. It can largely plug-and-play the capabilities built with one

client, with other clients. Our interaction with management suggests work done

with one client tends to build up as a portfolio for other clients. However, it is

important to note that there are not many tier-1s operating in the world. Of the 20-

25 tier-1s that operate globally, TELX already has relationships with 14. Ability to

cross-sell products and solutions across customers lends operating leverage to TELX.

Project-based relationships have 12-month lifecycle

TELX has a project lifecycle spanning 12 months. Typically, a team for a project starts

to build over 3-4 months from project award, delivers for the next 7-8 months, and

then slowly starts to ramp down as the project approaches completion. Post 12-15

months, only a small team, aggregating 4-5 people is left working on the project. A

typical code name for a project would be ‘Ford – Infotainment – Program – Model

Year 2016’.

27 April 2015

Tata Elxsi

Focus on EPD, partnerships with industry bodies makes TELX well placed

TELX offers customized R&D services, spanning across the product lifecycle to

automobile manufacturers and component suppliers. Its industry experience in

working with leading OEMs, tier-1 suppliers, tool and chip vendors, makes it the

preferred partner for system and sub-system design for the entire product lifecycle.

Its partnerships with industry bodies such as AUTOSAR, Artop, and Genivi enable it

to provide expertise in the design and development of next-generation automotive

electronics, pertaining to powertrain and hybrids, body & chassis, safety & security,

and infotainment & telematics. TELX is certified for ISO 27001:2005 and ISO

9001:2008 standards and compliant with Automotive SPICE® Organization Maturity

Level 5 and SEI CMMi Level 5 requirements. This experience reflects in high quality

deliverables and services to its customers.

Offshoring an attractive opportunity for OEMs

Car OEMs and suppliers have traditionally not been equipped for new-age

electronics development, which involves multimedia, connectivity, and consumer

technologies. The difficulty and costs associated with developing and owning all of

this capability in the face of ever-changing technologies and functionality favors

outsourcing. The nature of software development is also highly specialized and

involves domain and technology knowledge apart from language and platform skills.

Global paucity of engineering and software talent for embedded systems, along with

cost advantages (40-50% cost savings adjusted for productivity differences), strongly

favors off-shoring (currently, penetration is 0.4%).

TELX benefits from fragmented competition, which works on a high cost base. Most

of the competitors are local players in each client country (usually ex-employees of

auto companies), working in teams of 10-15 people, who serve the auto company

100% onsite. These local players (30-40 such outfits around each OEM) are not

corporatized; hence it is difficult to get the exact quantum of work done by such

firms. Additionally, TELX competes with vendors like KPIT, specialized in this niche.

As most of TELX’s customers are well sophisticated to understand the pricing

differences between offshore and onsite, TELX places its value proposition purely on

delivering superior capabilities and domain knowledge. Given the huge size of the

market, India’s cost and skill-led competitiveness and minimal offshoring

penetration (0.4%), we believe TELX is well placed to post strong 25% growth in the

auto business, going forward.

27 April 2015

Tata Elxsi

Broadcast (35% of EPD revenues) – innovation driving growth

TV broadcast can be via cable, terrestrial signals, satellite or IP-based via wired /

wireless networks. Broadcast service providers or MSOs have to continuously

innovate and offer richer services and features to drive market and wallet share, and

reduce customer churn. Conventionally, the cost of the set-top-box or gateway

device in the house is funded by the service provider with the aim of locking the

subscriber and recovering through subscription fees over a period of time. As

subscription fees are driven lower through static or even diminishing subscriber

base in mature markets, service providers are under pressure to innovate and offer

richer features and packaged services. This implies constant upgradation and

replacement of the hardware. Further, to avoid such costly replacement, MSOs are

migrating to a cloud based delivery model whereby most features can be delivered

through the cloud, and the box in the home is a thin or dumb device.

Key drivers for growth in this segment



Migration in content type:

Migration in all developed and many developing

nations from analog signals to digital broadcast.

Migration in content quality:

Progression of video quality from standard

definition to HD and now ultra HD.

Significant expansion in content choice:

Expansion in broadcast packages to

include hundreds of channels, video-on-demand, recording of content, and

over-the-top or OTT content from the internet.

Packaged/bundled services:

IP and cable providers are increasingly bundling

landline, broadband, TV through triple or even quad-play packages.

Device proliferation:

Latest broadcast services now enable viewing of content

and interaction through a second-screen (such as a tablet or phone), and multi-

screen distribution within the home through a single connection.

Outsourcing and offshoring drivers

Given significant innovation across the broadcast value chain, there is a requirement

for continuous software development and testing, and all development is typically

customized to the service provider. Also, the permutations and combinations of

features and packages imply significant amount of testing and validation at the

device, network and service level, before it is deployed.

Aspects such as testing are usual candidates for outsourcing and offshoring to

reduce costs and enable 24x7 development and testing cycles. Continuously

changing skills and domain experience, and cost savings favor offshoring to

countries like India, benefiting players like TELX.

Growth to be driven by operators in the broadcast segment

TELX’s broadcast and consumer division caters to ecosystem players like – operators

(50% of revenue; 12 clients), vendors (50% of revenue; 8 clients) like CISCO,

Motorola, etc, silicon companies (Broadcom, Qualcom, Intel, ST), and conditional

access (software aspects). Like auto OEMs, operators in the cable TV market are

looking to develop a host of new and differentiating features to help them stay

ahead of competition. Operators like Comcast, Time Warner Cable, Sky, BT, etc, are

27 April 2015

Tata Elxsi

TELX’s key customers. Operators look for products/features that help them drive up

ARPU (average revenue per user). TELX has developed a product for an operator

that helps users to chat online in groups on TV while watching sports telecast.

Operators have been a high growth segment for TELX. Revenue from operators,

which was non-existent, increased to 50% of TELX’s broadcast revenue in five years.

On the vendors (device companies) front, TELX’s key clients include ST Micro,

Entropic, etc. Like vendors, device companies are looking to build differentiators on

their platforms. However, unlike operators, the device business is now increasingly

commoditized. For TELX, device revenues have been virtually constant over the last

3-4 years. Devices contributed 100% of broadcast revenue five years ago. The

operator business, which was virtually non-existent five years ago, has now grown

to a size equal to that of the device business. We believe mega changes like

migration from 3G to 4G can drive device revenue growth, but in the absence of

this, operators will continue to drive growth.

Exhibit 26: Broadcast – Revenue mix by type of client

Exhibit 27: Broadcast – Number of clients

Vendors, 8

Vendors,

50%

Operators,

50%

Operators,

Source: Company, MOSL

Exhibit 28: Broadcast – Revenue mix by geography

Japan / Others,

10%

Europe, 30%

US, 60%

Source: Company, MOSL

27 April 2015

Tata Elxsi

Communications (25% of EPD revenues) – in a slow lane

currently

In the communications division, TELX works with networking & wireless

communications product companies for product development, testing, maintenance

and support services. Both the enterprise and service provider markets are

experiencing increased adoption of IP (Internet Protocol) based voice and video

communications, as well as cloud-based applications that can be enabled on any

connected device. TELX is working with leading product companies to build next

generation voice and video solutions, based on the latest cloud technology.

Traditionally, wire was the key technology. Over time, Wimax, LTE, and combination

(wire+wireless) technologies have been increasingly adopted. Combination – a mix

of both wire and wireless – is the future.

TELX caters to major divisions in the communications vertical – wire (60% of

revenues) and wireless (40% of revenues). Communications has been witnessing

weak growth, and has been the slowest growing sub-segment within the software

services vertical. This is due to growth challenges faced by the end customer, the

telecom industry, especially key players like Nortel and Nokia-Siemens. Going

forward, with no dramatic changes, we expect this segment to witness low growth.

Exhibit 29: Communications – revenue mix by segment

Wireless, 40%

Wire, 60%

Source: Company, MOSL

Exhibit 30: Device and network management software

Exhibit 31: Broadband (3G & 4G) wireless software system

development

Source: Company, MOSL

27 April 2015

Tata Elxsi

Medical electronics, Cloud based communication devices and

Internet of Things (IoT) – segments with hyper-growth potential

TELX entered the medical electronics segment around 2008 through tie-ups with

Japanese companies but did not scale up due to lack of focus initially and risks

associated with liability clauses. Till 2010, the business segments at TELX were

horizontally structured. Post 2010, segments were defined vertically, with individual

P&L responsibilities for division heads.

Further, due to restructuring in 2010, the management decided to focus on core

transportation, broadcast, and communications, and dropped focus on a number of

other smaller divisions like medical, storage, computer peripherals, etc. The

management wanted to make sure that the company is not present as a niche

player in niche segments, as this would limit growth and critical mass.

The management is now focused on developing the medical electronics segment

through introduction of futuristic products and solutions. TELX has appointed Mr

Vasant Shah as the division head, with individual P&L responsibility. The segment is

in incubation currently, and is yet to achieve critical mass. However, given renewed

interest in developing this segment along with necessary scale, capacity, capability

and revenues, we believe medical electronics could be the fourth core segment for

TELX in the software solutions business.

Exhibit 32: TELX is targeting medical devices in point of care and diagnostic segments

Source: Company, MOSL

Cloud and Internet of Things (IoT)

Exhibit 33: TELX helping customers in unified communications Exhibit 34: TELX working with customers across industries

segment transition to cloud based applications and solutions (retail, energy, smart home, healthcare) for IoT developments

Source: Company, MOSL

27 April 2015

Tata Elxsi

Industrial Design – making the right moves

Niche services to ensure strong growth ahead



Industrial Design (ID) includes services like mechanical design of products and user

experience design. This business contributes 10% to TELX’s software revenues.

There is huge potential to scale up non-India revenues from the current levels of 50%

to 80-90% in line with high international revenue contribution from the EPD division.

As ID requires significant local presence, TELX has set up a new satellite studio in

Europe in FY14. It plans to open satellite studios in the US and other markets like

Japan. These will drive higher international contribution.

Delivering niche design services, enhancing user experience

TELX’s Industrial Design (ID) division helps customers develop endearing brands and

products by using design and technology as a strategic tool for business success. In

the case of products, this includes form, color, branding and texture, as well as the

way the product interfaces with the user. The division also helps customers improve

their service delivery by studying, analyzing, and providing design interventions that

improve end-user experience at every touch point. It services a spectrum of

industries, including automotive, consumer electronics, retail, consumer goods,

communications, and healthcare. With increasing competition in the services sector,

many companies may need to take a fresh look at their existing services and to

redesign the workflow and every aspect of their services to create better user

experience. Service design is an emerging opportunity for the ID division, across

multiple segments such as retail, travel, hospitality, and banking. TELX’s ID division

has grown at a CAGR of 18% over FY12-14, we expect 15% CAGR over FY15-17.

Exhibit 35: TELX’s life-cycle for a Industrial Design Project

Source: Company, MOSL

27 April 2015

Tata Elxsi

Key growth drivers

As products get more digitial, user interface is the most important element. It is no

longer about buttons on products. Key growth drivers:

1) Need to enhance user interface for products across industries

2) Service design – T2, Taj Hotels, Bangalore metro, Mumbai monorail, hotels,

infrastructure, banking, real estate, etc.

3) Enhancing closeness to the customer through satellite studios.

Major projects executed by TELX in the ID division

TELX’s ID division executed multiple projects in FY14. It worked with GVK to create

enhanced experience for travelers at Mumbai International Airport’s new integrated

terminal-2, while increasing efficiency and productivity for the airport staff. As part

of this project, the ID team designed entertainment zones, customer service zones,

general and lifestyle seating areas in the main terminal area, payphones, charging

stations, ATM vending machines and Internet workstations/kiosks.

It worked with (1) St James’ Court, and (2) Taj 51 Buckingham Gate, Suites and

Residences in London to redefine the visual identity of the two hotels. The design

team executed over one hundred design interventions as part of this re-branding

project that encompassed amenities, services, communication, and promotional

collateral and stationery. TELX was also declared winner of the first Automotive

Grade Linux (AGL) User Experience Contest in the “Best User Experience” category

for its concept of a next-generation user interface for cars.

Exhibit 36: Product design for wearables

Exhibit 37: Product conceptualization for HUL’s Pure it

Source: Company, MOSL

Exhibit 38: Packaging design for FMCG

Exhibit 39: Experience design for Mumbai Airport, T - 2

Source: Company, MOSL

27 April 2015

Source: Company, MOSL

Tata Elxsi

Focus on expanding region-centric model to Europe and US

The ID division is a business that requires high degree of local presence. India

accounts for 50% of the division’s revenue. TELX has a 300-member team in the ID

division. To be better equipped to meet local needs, TELX has set up a new satellite

studio in Europe. It is planning to open satellite studios in the US and in other key

global markets like Japan. The management believes there is huge potential to scale

up non-India revenues from the current 50% to as high as 80-90%, in line with high

international revenue contribution from the EPD division.

Exhibit 40: Industrial Design – revenue mix by geography

US, 25%

India, 50%

Europe, 25%

Source: Company, MOSL

FMCG, autos key revenue contributors to ID division

The ID division caters to three large addressable markets – FMCG, autos and

appliances. The division’s key responsibilities include understanding consumer

needs, converting them into designs, and delivering the final product to the

customer. FMCG, for example, does not have anything to do with electronics. Here,

orders mean delivering on product designs, branding, and shelf-spacing for clients

like P&G, Unilever, Emami, Dabur, etc, in categories like personal care, healthcare,

foods, etc. Similarly, in autos, cross-selling to global customers from the EPD division

helps drive ID revenues. In appliances, there are more opportunities to work with

category players like Phillips, LG, etc, as against large and deep-pocket players like

Apple and Samsung. The management believes retail could be another major sub-

sector, contributing meaningfully to ID revenue, going forward.

Exhibit 41: Industrial Design – revenue mix by client type

Appliances, 20%

FMCG, 40%

Auto, 40%

Source: Company, MOSL

27 April 2015

Tata Elxsi

Visual

Computing

Labs – restructuring done

Focus now on profitable projects



TELX has significantly ramped down its VCL business, with closure of the loss-making

Los Angeles studio and termination of the A2E JV with Andrew Heyward.

Having learnt lessons from losses in the overseas studio and the JV, TELX is now

focused on domestic business and short-contract overseas business.

Going forward, VCL is expected to be a small business segment for TELX, contributing

just 5% to software business and 0% to profitability.

Restructuring done; focus now on lean, profitable sub-segments

VCL provides high-end animation and visual effects (VFX) services. It caters to the

entertainment industry by providing these services for feature films, television

serials and high-end gaming. It also caters to the marketing and advertising industry

by providing these services for TV ad commercials and corporate videos for

visualization and new product launches. VCL is focused on winning and executing

projects that ensure financial sustainability while maintaining its proposition for

world-class creative services. TELX won the 2013 Filmfare award for the Best Visual

Effects for ‘Dhoom 3’, strengthening its position as the leading creative services

company in India. It was also recognized for its stellar work in delivering visual

effects for ‘Bhaag Milkha Bhaag’.

Developed unique capabilities over the years

Very few studios in the world do both animation as well as special effects. TELX’s

VCL division is one of these. The division is largely focused on post-production work,

with no exposure to live shoots. The array of work it covers includes movies, TV,

custom content in gaming, corporate AVs, etc. TELX has a 125-member team that

supports the VCL business.

What went wrong with Los Angeles studio

TELX was doing well in the India market, but was not making major breakthrough in

the US due to lack of a front-facing team. There were two key sub-segments – visual

effects and 3D animation. To gain US business, TELX opened a studio in Los Angeles

(LA). In the first year, the LA studio worked on Hollywood movies and did a lot of 2D

to 3D conversion work, to which the entire skill base in that studio was oriented.

However, the 2D to 3D conversion work dried up pretty quickly. In the absence of

revenues, TELX found it extremely expensive to run the LA studio and had to

downsize.

The 3D animation sub-segment got a handful of projects. They were long-duration

projects and all of them ended up costing much more than the revenue agreed upon

because of changes in the quality of animation (number of characters, background,

etc). TELX went back to most customers seeking price revision but was unsuccessful.

It winded down contracts relating to 3D animation engagements and started to

focus more on the VFX for films - Indian or international, completely doing away

with long form animation contracts. Focus was re-oriented to doing short-form

animations like those for TV commercials, 7-10 minute visualization films, etc, which

are not loss-making.

27 April 2015

Tata Elxsi

A2E@ JV – another VCL sub-business which went wrong

TELX formed a JV with A Squared Entertainment (A2E), an international kids’

entertainment company, to create, develop and distribute original brands, including

animated entertainment, digital gaming and originally-designed consumer products.

A2E was owned by Andrew Heyward, a Hollywood veteran who has created over

500 animation characters in his career. Led by Andrew Heyward, the JV intended to

combine A2’s creative development, brand management and multimedia

distribution expertise with Tata’s animation capabilities and technological

innovation. The JV gained licenses for a powerful stable of brands involving

personalities ranging from Warren Buffett to Martha Stewart, Gisele Bündchen and

Stan Lee. TELX invested USD4m (INR220m) in the venture. Success of content could

provide a non-linear revenue and profitability stream, which had attracted TELX to

enter the JV.

Problems began to surface as the JV progressed:

Within a year’s time TELX exited

the JV, as it was not progressing as per its original business expectations. The initial

focus of the JV was to create animated characters of renowned personalities,

targeting children in the age group of 10-14. Heyward had obtained the rights to

produce shows featuring animated characters of personalities like Warren Buffet,

Martha Stewart, Gisele Bündchen and Arnold Schwarzenegger. As the JV partner,

TELX’s role was to fund these projects apart from providing animation services.

However, during the life of the JV, TELX did not see significant uptake in this

content. Though it saw some interest among broadcasters for its animation shows

like Secret Millionaires Club, pictured on Warren Buffet, those did not translate into

enough business. To compound problems, it was also hamstrung by the fact that it

had to abandon the show featuring the animation character of Arnold

Schwarzenegger because of the scandal that came out about him. Broadcasters did

not want to touch anything about him since it was meant for the children.

Investments required in the JV were higher than initial commitment:

As per the JV

contract, TELX was expected to invest USD3m every year from the second year.

However, realizing that the actual investment would be much more, TELX decided to

part ways in order to contain further risk of losses. In terms of the JV, TELX provided

for full loss of equity as well as the financing that it had made available to the JV.

Consequently, it also explored taking legal action to see if it could recover some of

the money that it had lent to the JV.

Exit from overseas business, a decision in time

Though TELX made the right investments in developing its overseas business, the

results were not as per expectations. The management finally exit from its overseas

loss-making businesses. It has decided to continue this business in areas where TELX

has strengths, that is, strong offshore execution capability, while not engaging in any

own property development or co-production opportunities, where it cannot

exercise complete control on cost or revenue generation.

27 April 2015

Tata Elxsi

Past tense; future promising for VCL division

Having learnt lessons from losses in the overseas studio as well as the JV, TELX is

now focused on domestic business and short-contract overseas business. It derives

70% of the overall revenues of this division from India, with the balance 30% coming

from overseas markets. In its worst times, the division reported a loss of INR500m

(INR300m studio loss + INR200m JV loss), with a negative EBITDA margin of 20%. It

has now broken even and we expect further improvement, going forward. However,

profitability is likely to remain low. The management aims at 20% EBITDA margin in

this business in the long term.

Exhibit 42: Revenue mix for VCL division by geography

Overseas, 30%

India, 70%

Source: Company, MOSL

Pipeline management key to achieving maximum productivity

The VCL business is lumpy and the management has to dynamically allocate

resources to various projects. It is difficult to allocate people. Sometimes there is a

need to allocate 100% of the workforce to a single project. Sometimes it becomes

challenging to accept new projects, as the people working on old projects cannot be

suddenly ramped down. Pipeline management is a fundamental challenge that the

industry faces globally. In the US, as there are well-defined models of hire and fire, it

is easier to ramp up and ramp down. However, in India, as it is difficult to fire

employees, the management has to hire conservatively. The management is

currently not considering hiring new employees. The division has only one location –

Mumbai, with a 125-member team.

VCL projects implemented by TELX

Source: Company, MOSL

27 April 2015

Tata Elxsi

Systems

Integration

– not a major focus area

Expect this business to remain largely stable



Revenue contribution from the Systems Integration (SI) division has declined

substantially over the last 10 years – from 39% of TELX’s revenue to 12%.

The management prefers to focus on increasing the share of software sales and

support services against hardware. This helps to improve margins; hardware is a low

margin business.

Increasing share of software and support services in the business mix should improve

revenue composition and margins, going forward.

Systems Integration not a major focus area

The proportion of revenue from Systems Integration (SI) has been declining over the

years. In FY14, SI contributed over 39% of TELX’s revenue; this has now declined to

just 12%. This business segment implements and integrates complete systems and

solutions for high-performance computing, CAD/CAM/CAE/PLM, broadcast, virtual

reality, storage, and disaster recovery. It also provides professional services for

maintenance and support of IT infrastructure in India and overseas.

Exhibit 43: Revenue composition from Systems Integration has been declining

Software Development

Systems Integration

39%

22%

20%

15%

10%

13%

12%

61%

78%

80%

85%

90%

87%

88%

91%

88%

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

Source: Company, MOSL

Driving higher software sales in Systems Integration

In SI, the management is focused on increasing the share of software sales and

support services to improve margins. Though hardware contributes heavily to

revenues, it does not contribute significantly to EBITDA. Further, there is

considerable unpredictability and cyclicality associated with the hardware business,

both in annual terms as well as on a quarterly basis. The SI segment reported

revenue of INR920m in FY14, as against INR687m during FY13, registering an

increase of 34%. Proﬁt was INR84m in FY14 as against INR17m in FY13. This business

delivered improved results through focus on a solution-centric approach that drives

higher composition of software and support services in the business mix to improve

revenues and margins.

27 April 2015

Tata Elxsi

Earnings

post 26% CAGR over FY15-17

Drivers: Transport and Broadcast



We expect revenue to grow at a CAGR of 16% over FY15-17, led by 18% CAGR in EPD

business. EBITDA would grow at 22% CAGR, with margins expanding 210bp to 23.4%

led by mix improvement. Adjusted PAT would grow at a CAGR of 26%.

Return ratios are expected to remain robust with RoCE expected at 62% and RoE

expected at 41% for FY17. We expect strong cash generation to continue, with free

cash reaching INR2.0b in FY17. We expect ~50% payout. Cash on books should rise to

INR2.8b (~9% of market capitalization) in FY17.

Expect revenue CAGR of 16% over FY15-17

We expect revenue to grow at a CAGR of 16% over FY15-17, led by 17% CAGR in

software business, while we expect 5% CAGR for the SI business. Within software,

we expect 25% CAGR for transportation, 15% CAGR for broadcast business, while we

expect 5% CAGR for communications over FY15-17. Revenue mix for the software

and SI business would be 95:5.

Exhibit 44: Revenue to post 16% CAGR over FY15-17

Revenues (INR m)

11,492

6,217

7,748

8,538

9,866

FY13

FY14

FY15E

FY16E

FY17E

Source: Company, MOSL

EBITDA to post 22% CAGR over FY15-17

We expect EBITDA to post 22% CAGR over FY15-17. Margins should expand 200bp

to 23.4%, driven by higher contribution from software business. We expect software

margins to expand by 200bp from to 25% led by higher margin auto and broadcast

businesses. We expect 200bp improvement in SI margins due to higher focus on

software sales. EBITDA mix for software and SI business would stand at 97:3.

Exhibit 45: EBITDA to clock 22% CAGR over FY15-17

EBITDA (INR m)

21.3%

17.6%

11.6%

Margin (%)

22.5%

23.4%

721

FY13

1,365

FY14

1,818

FY15E

2,220

FY16E

2,689

FY17E

Source: Company, MOSL

27 April 2015

Tata Elxsi

PAT to post 26% CAGR over FY15-17

We expect PAT to grow at a CAGR of 26% over FY15-17, from INR1b to INR1.6b.

Exhibit 46: PAT (INR m)

PAT (INR m)

1,596

1,270

1,008

723

320

FY13

FY14

FY15E

FY16E

FY17E

Source: MOSL

Working capital cycle to remain strong

We expect working capital days to remain strong, with improvement to 28 days.

Exhibit 47: Cash conversion cycle (days)

Receivables (days)

-45

-14

FY13

-43

-22

FY14

-43

-28

FY15E

-43

-29

FY16E

-43

-32

FY17E

Loans and Advances (Days)

Payables (days)

Provisions (Days)

Working Capital Days

Source: MOSL

Operating cash flows to remain strong; free cash flows robust

We expect operating cash flow to remain strong. Given minimal reinvestment

needs, free cash flow should improve to INR1.8b over FY15-17. Capex during the

period would only be minimal at INR200m per annum.

Exhibit 48: Operating cash flow to remain strong

Operating cash flow (INR m)

1,951

1,570

1,215

328

FY13

FY14

FY15E

FY16E

FY17E

1,247

382

1,289

1,097

Exhibit 49: Robust free cash generation

Free cash flow (INR m)

1,751

1,370

FY13

FY14

FY15E

FY16E

FY17E

Source: Company, MOSL

27 April 2015

Tata Elxsi

Return ratios to remain strong

We expect strong return ratios with RoCEs and RoEs expected at 62% to 41%,

respectively for FY17.

Exhibit 50: RoCE (%)

RoCE (%)

Exhibit 51: RoE (%)

RoE (%)

FY13

FY14

FY15E

FY16E

FY17E

FY13

FY14

FY15E

FY16E

FY17E

Source: Company, MOSL

Dividend payout at 50%; strong cash accretion on books

We expect TELX to continue its strong dividend track record, with ~50% payout.

Despite high payout, we expect cash on books to rise from INR1.2b in FY15 due to

INR2.8b in FY17, approximating 9% of the current market capitalization.

Exhibit 52: Dividend payout (%)

Dividend Payout (%)

Exhibit 53: Cash on books (%)

Cash on books (%)

% of Mcap

233

FY13

FY14

FY15E

FY16E

FY17E

515

1,102

FY14

FY15E

1,853

FY16E

2,802

FY17E

FY13

Source: Company, MOSL

27 April 2015

Tata Elxsi

Initiating

coverage with a Buy rating

Target price of INR1,300 implies 30% upside



We like TELX’s niche presence in the high growth embedded product development

market. It has undergone significant restructuring in the last two years, and has

evolved into a more focused player with presence in the most promising business

segments.

Along with secular growth prospects, we believe TELX has significant margin levers,

which provide further upsides to our estimates – (a) increase in offshoring proportion

from the current 55% to 60-65%, (b) increase in proportion of fixed price contracts

from the current 25% to 30-35%, (c) increase in utilization rates from the current 70%

to 80%.

We expect revenue to grow at a CAGR of 16% over FY15-17, led by 18% CAGR in the

EPD business. Consequently, we expect 22% EBITDA CAGR and 26% PAT CAGR.

The stock trades at 24.6x FY16E and 19.6x FY17E EPS. Given its high growth prospects

and robust cash generation, we value the stock at 25x FY17E EPS. We initiate coverage

with a Buy rating. Our target price is INR1,300, implying 30% upside.

Exhibit 54: Comparison with peers on key operating metrics (%)

Key matrices

Offshore mix

Onsite mix

Utilization

Employee base (Nos)

Attrition rate

Fixed price contracts

Time and material contracts

TELX

3,000

~15

KPIT

9,933

~20

Infosys

165,411

TCS

MTCL

313,757

13,018

Source: Company, MOSL

Exhibit 55: PE (x)

P/E (x)

10 Yrs Avg(x)

5 Yrs Avg(x)

15 Yrs Avg(x)

26.4

15.8

17.9

15.4

Exhibit 56: PB (x)

12.0

9.0

6.0

3.0

0.0

4.3

4.9

5.3

P/B (x)

10 Yrs Avg(x)

5 Yrs Avg(x)

15 Yrs Avg(x)

9.6

Source: Company, MOSL

27 April 2015

Tata Elxsi

Exhibit 57: Assumption Sheet

Assumptions

Software Development

Systems Integration

Total Revenues (INR m)

Software Development (%)

Systems Integration (%)

Total Revenue Growth (%)

Software Development (%)

Systems Integration (%)

Total Revenue Mix (%)

Software Development

Systems Integration

Total EBITDA (INR m)

Software Development (%)

Systems Integration (%)

Total EBITDA Margin (%)

Software Development (%)

Systems Integration (%)

Total EBIT Mix (%)

FY12

4,543

845

5,387

100

598

740

100

FY13

5,530

687

6,217

-19

100

624

721

100

FY14

6,827

921

7,748

100

1,379

1,364

100

FY15E

7,893

645

8,538

-30

100

1,815

1,818

100

FY16E

FY17E

9,189

10,781

677

711

9,866

11,492

100

2,205

2,695

2,220

2,689

100

Source: Company, MOSL

Risks and concerns

Changes in US immigration policy:

The Indian IT industry is facing some challenges

due to the changes in immigration policies in countries such as the US and UK, which

increase the cost of deploying resources in those regions.

INR appreciation:

INR appreciation can impact margins and profitability due to

>70% export dependence. The recent appreciation of INR against the Euro can

impact margins for TELX as it derives ~1/3

of revenues from European geography.

27 April 2015

Tata Elxsi

Annexure

1: Management

Exhibit 58: Composition of the Board

Mr. N Ganapathy Subramaniam

Chairman

Mr. P McGoldrick

Independent Director

Dr. R Natarajan

Independent Director

Mrs. Shyamala Gopinath

Independent Director

Mr. P G Mankad

Independent Director

Mr. Madhukar Dev

CEO and Managing Director

Source: Company, MOSL

Exhibit 59: Corporate Structure

Managing Director &

Chief Executive Officer

Madhukar Dev

Embedded Product

Design (EPD)

Manoj Raghavan

Chief Financial Officer

Ramaseshan

Industrial Design (ID)

Anil Sondur

Strategic Initiatives &

BPR

Rajesh Kumar

Human Resources

Philip Mammen

IT & Systems

Arunava

Mukhopadhyay

Visual Computing Labs

(VCL)

Nagarajan S

Marketing

Nitin Pai

Administration

Lokeshwaran

Systems Integration &

Support (SIS)

Mannmohan Prasad

P Shivakumar

Company Secretary &

Legal Head

G Vaidyanathan

Source: Company, MOSL

Mr. Madhukar Dev, 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.

27 April 2015

Tata Elxsi

Mr. P McGoldrick, Independent Director

Mr. P McGoldrick is the Independent Non-Executive Director on the board of Tata

Elxsi. He began his career with the Lawrence Livermore National Laboratory, where

he worked primarily on defense-related projects including the Mirror Fusion Test

Facility for which he was the chief computer architect. In 1981, McGoldrick joined

the Tata group and honed his vision of applying technology to help manufacturers

create better products, which led to the establishment of Tata Technologies. He is

also the Chief Executive Officer and Managing Director of Tata Technologies Ltd.

Mr B V R Mohan Reddy, Independent Director

Mr Reddy holds a Graduate degree in Mechanical Engineering from the College of

Engineering, Kakinada and Postgraduate degrees from IIT, Kanpur, and University of

Michigan, Ann Arbor. He has received an honorary Doctorate from JNTU,

Hyderabad. Mr Reddy is a member of the NASSCOM Executive Council. He is also a

member on the National Council of CII and is the Co-Chairperson of CII’s National

Committee on Design. He is the Chairman of the Board of Governors of IIT,

Hyderabad. He is the Founder Chairman and Managing Director of Infotech

Enterprises Limited. He is also on the Boards of Vizag IT Park Limited, Ocimum Bio

Solutions Limited, and Tele Atlas (India) P Limited.

Mrs. Shyamala Gopinath, Independent Director

Mrs. Shyamala Gopinath is the Independent Non-Executive Director on the board of

Tata Elxsi. She has vast experience in guiding and influencing the national policies in

the diverse areas of financial sector regulation and supervision, development and

regulation of financial markets, capital account management, management of

government borrowings, forex reserves management, RBI accounts, and payment

and settlement systems. Mrs. Gopinath holds a Master of Commerce degree and is a

Certified Associate of Indian Institute of Bankers. Mrs. Gopinath retired as Deputy

Governor of Reserve Bank of India. She is also on the Board of Indian Oil Corporation

Ltd., Gas Authority of (India) Ltd., and National Stock Exchange Ltd.

Dr. R Natarajan, Independent Director

Dr. R Natarajan is an Independent Non-Executive Director on the Board of Tata Elxsi.

Natarajan is currently the Vice President of The Indian National Academy of

Engineering, and the Chairman of the Research Council of the Central Fuel Research

Institute, Dhanbad. He received his Ph.D. and MASc degrees from the University of

Waterloo, Canada. He was awarded Distinction in the M.E. Degree Program of the

Indian Institute of Science, Bangalore.

Mr. P G Mankad, Independent Director

Mr. Mankad is an Independent Non-Executive Director on the board of Tata Elxsi. He

is a retired civil servant with a distinguished career of over 40 years in the

prestigious Indian Administration Service, which he joined in 1964, topping his

batch. Mankad was educated at Delhi University and later at Cambridge, UK, where

he obtained a Post Graduate Diploma in Development Studies, with distinction.

27 April 2015

Tata Elxsi

Annexure

2: About Tata Elxsi

Tata Elxsi is a design company that blends technology, creativity and engineering to

help customers transform ideas into world-class products and solutions. Tata Elxsi

addresses the communications, consumer products, defence, healthcare, media &

entertainment, semiconductor and transportation sectors. This is supported by a

network of design studios, development centers and offices worldwide. Key services

include embedded product design, industrial design, animation & visual effects and

systems integration. Headquartered in Bangalore, India, its global network of offices

includes Dubai, France, Germany, Japan, Malaysia, Singapore, South Africa, UAE, UK,

and USA. Key Divisions:-

Exhibit 60: Revenue Mix

Systems

Integration

12%

Exhibit 61: EBIT mix

Systems

Integration,

Software

Development

88%

Software

Development

94%

Source: Company, MOSL

Exhibit 62: About Tata Elxsi

Source: Company, MOSL

27 April 2015

Tata Elxsi

Exhibit 63: Tata Elxsi – India Locations

Source: Company, MOSL

Exhibit 64: Tata Elxsi – Global Locations

Source: Company, MOSL

Exhibit 65: Tata Elxsi – Key segments

Source: Company, MOSL

27 April 2015

Tata Elxsi

Software development is the core business for TELX

TELX has two major reporting divisions – Software development and Systems

integration. Software development is the core revenue earner for the company and

also the key focus area for the company. Revenues for the software division have

posted a 22% CAGR over the last 10 years, while the Systems Integration division

revenues grew by a mere 4% CAGR during the same period. Thus, revenue

contribution from the Software division has increased from 61% in FY04 to 88% in

FY14. Going forward, given management’s focus on growing the software division,

we believe the revenue contribution from the software division will further increase.

In terms of EBIT, Software development contributes 95% to total EBIT and is a higher

margin business as compared to SI (SD has a 20% margin against SI margins of 8%).

Exhibit 66: Software development contributes 88% to TELX’s revenues

Systems

Integration

12%

Software

Development

88%

Source: Company, MOSL

Exhibit 67: Software development division’s revenue contribution up from 61% to 88%

Software Development

Systems Integration

39%

22%

20%

15%

10%

13%

12%

61%

78%

80%

85%

90%

87%

88%

91%

88%

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

Source: Company, MOSL

Exhibit 68: Software development division’s EBIT contribution up from 24% to 95%

Software Development

Systems Integration

24%

12%

15%

10%

14%

16%

12%

76%

88%

85%

90%

86%

96%

93%

84%

88%

97%

95%

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

Source: Company, MOSL

27 April 2015

Tata Elxsi

Exhibit 69: Software development is a higher margin business as compared to Systems

Integration

23%

21%

Software Development

23%

18%

15%

17%

10%

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

19%

Systems Integration

17%

10%

13%

14%

FY13

FY14

11%

20%

21%

15%

10%

12%

Source: Company, MOSL

Software Development and Services is dominated by the EPD segment

TELX has three major divisions under the software development and services

business segment. Embedded Product Design (EPD), Industrial Design (ID) and Visual

Computing Labs (VCL). EPD is the dominant contributor to software development

revenues and contributes 80% to the division’s revenues, followed by ID and VCL

which contribute 15% and 5% respectively.

Exhibit 70: Revenue contribution of the software development division

VCL, 5%

ID, 15%

EPD, 80%

Source: Company, MOSL

Embedded Product Design (EPD)

The Embedded Product Design division provides technology consulting, new product

design, development, and testing services for transportation (40% of revenues),

broadcast (35% of revenues) and communication (25% of revenues) industries. The

segment helps customers develop electronic products by providing design of

hardware, implementation of technologies such as audio, video, imaging and

connectivity onto the hardware, and developing software applications and user

interface that enable users to use the product and its functionality with ease.

27 April 2015

Tata Elxsi

Exhibit 71: Revenue mix of the EPD division (%)

Communications,

Others, 25%

Transportation,

40%

Broadcast and

Consumer

Electronics, 35%

Source: Company, MOSL

Exhibit 72: EPD - Integrating hardware, software and system development services across the product development lifecycle

Source: Company, MOSL

Exhibit 73: EPD is structured into self-contained business units aligned to key industry verticals

Broadcast & CE

Communications

Medical Electronics

Transportation

Smart TVs & Gateways,

Smart Phones, Tablets,

Consumer AV, Wearable

devices

Unified Communications

Equipment, 3G and 4G

wireless devices,

Routers & Switches

Diagnostic equipment,

Point-of-care equipment,

Regulatory compliance

Infotainment,

Safety & Security,

Powertrain, Chassis,

Telematics, Avionics

Systems Custom hardware, Operating System, Drivers and Firmware

Source: Company, MOSL

27 April 2015

Tata Elxsi

Transportation (40% of EPD revenues)

Exhibit 74: Scope of services provided by TELX in transportation division

Source: Company, MOSL

Key focus areas include:



Body & Chassis Electronics:

Designing Front & Rear Lighting Systems,

Instrument Cluster, Steering & Suspension Systems, Door Systems etc.



Telematics & Infotainment:

Connectivity, Navigation and location-based

applications, Front and Rear Seat Entertainment, Multimedia, Human Machine

Interface system etc.



Powertrain Electronics:

Designing an engine management system (Gasoline,

Diesel & Hybrid), Transmission systems etc.



Hybrid Electronics:

Battery Management system, DC-DC Converter, Motor

Control etc.



Safety & Security:

Designing central locking system, passive entry system, night

vision system, blind spot warning, parking assistance system etc.



AUTOSAR:

AUTOSAR migration services, AUTOSAR component & tool

development, AUTOSAR stack support & maintenance, AUTOSAR training etc.

Key offerings include:



Verification and validation



Rapid prototyping



Hardware design



Model-based design



Development of control systems



Embedded coding



Process and domain consultancy

27 April 2015

Tata Elxsi

Infotainment and Power train – Key segments driving auto EPD growth

TELX transportation division offers electronics, software development and system

design services for the automotive, rail and aerospace industry. Leading automotive

manufacturers and system suppliers have collaborated towards an initiative called

Automotive Open System Architecture (AUTOSAR) to better manage the increasing

complexity of automotive electronics and heightened passenger and legal

requirements. TELX has been associated with the AUTOSAR consortium from its

early stages and is helping the automotive ecosystem adopt and implement

AUTOSAR compliant systems in next-generation vehicles. Current mix between

infotainment, power train (PT), chassis and body electronics for TELX stands at

40:40, with the balance coming from Active safety and Telematics.

Exhibit 75: Auto’s – Revenue mix by type of product

Active safety and

Telematics , 20%

PT, Chassis and

Body electronics ,

40%

Infotainment, 40%

Source: Company, MOSL

TELX caters to the entire value chain leading up to the OEMs

TELX caters to the entire value chain leading up to the in the auto OEMs. Proportion

of electronics cost as a proportion of car cost is only increasing, suggesting

increasing penetration of high-end electronics in high-end as well as mass-oriented

cars. For instance, high-end cars now come with electronics that display directions

from Google maps directly on your screen, electronics that enable driver assistance

either in the form of assisted parking, automated parking, reversing cameras, land

departure, etc. As OEMs traditionally did not focus or build all required capabilities

around these areas, it is beneficial for players like TELX to build products for OEMs

and win new business. Presence in the fast evolving electronics business presents a

huge opportunity for niche, and focused players like Tata Elxsi.

Exhibit 76: Automotive segment ecosystem

Source: Company, MOSL

27 April 2015

Tata Elxsi

Broadcast and Consumer Electronics (35% of EPD revenues)

Tata Elxsi addresses the complete product development lifecycle from R&D, new

product development (STB, Smart TVs, encoders, decoders, head-end, Value added

services – Pay TV market, Cameras, video cameras, tablets, mobiles, etc ) and testing

to maintenance engineering for Broadcast and Consumer Electronics. It also engages

with Broadcast service providers across the world for the development of value-

added applications that enhance the experience of their services and helps them

reduce engineering costs associated with service deployment. Next generation cloud

computing technologies and Internet bandwidth efficiency are driving the

availability and consumption of content anywhere and everywhere. The Internet of

Things (IoT) is allowing additional services on the same medium to enable services

such as home automation, home surveillance and collaboration for the connected

home. TELX is targeting engagements with service providers and product

manufacturers to address these emerging opportunities.

Exhibit 77: Broadcast segment ecosystem

Source: Company, MOSL

Broadcast and Consumer Electronics

TELX in the broadcast and consumer division caters to 4 large ecosystem players –

Operators (50% of revenues – 12 clients), Vendors (50% of revenues – 8 clients) like

CISCO, Motorola, etc, Silicon companies (Broadcom, Qualcom, Intel, ST), Conditional

Access (Software aspects – work more as partners with them). Like in the

automotive OEMs sector, operators in the cable TV market globally are looking to

develop a host of new and differentiating features to help them stay ahead of

competition. This is what entails new investments in technologies where players like

TELX come to the fore.

Operators like Comcast, Time Warner Cable, Sky, BT, etc are key customers for TELX

on the operator’s front. Operators build products that help them drive their user

ARPU (Average Revenue Per User) higher. Examples of products developed by TELX

for operators – TELX developed a product for an operator which helped users to

chat online in groups on TV while watching a sports telecast. Operators have been a

high growth segment for TELX, revenue from operators which was non-existent rose

to 50% of broadcast revenues in 5 years. Similarly on the vendors (device

companies) front, TELX’s key clients include ST Micro, Entropic, etc. Device

companies like vendors are looking to build differentiators on their platform.

27 April 2015

Tata Elxsi

However, unlike operators, device business is now increasingly commoditized.

Hence, device revenues for TELX have been virtually constant over the last 3-4 years.

Devices infact contributed 100% to broadcast revenues 5 years back, and operator

business which was virtually non-existent 5 years back has now grown to equal of

the device business. Going forward, we believe mega changes like migration from

3G to 4G can drive device revenue growth; but in the absence of which operators

will continue to drive growth.

Exhibit 78: Broadcast – Revenue mix by type of client

Exhibit 79: Broadcast – Number of clients

Vendors, 8

Vendors,

50%

Operators,

50%

Operators,

Source: Company, MOSL

Broadcast and Consumer Electronics

TELX in the broadcast and consumer electronic business derives 60% of revenues

from the US, 30% from Europe and balance 10% from Japan and other markets.

With emerging segments like cloud based TV Video Recording (TVR), Video on

Demand (VoD), enabling operators for cloud for Pay TV, etc management is

confident of strong growth across geographies.

Exhibit 80: Broadcast – Revenue mix by geography

Japan / Others,

10%

Europe, 30%

US, 60%

Source: Company, MOSL

Communications (25% of EPD revenues)

TELX in the communications business division derives 50% of revenues from the US,

30% from Europe and balance 20% from Japan. It has 15 to 20 clients in this division.

27 April 2015

Tata Elxsi

Exhibit 81: Communications – Revenue mix by geography

Japan, 20%

US, 50%

Europe, 30%

Source: Company, MOSL

TELX participates in leading industry events

TELX participates in leading industry events such as the Consumer Electronics Show

(CES) - Las Vegas and SAE Convergence Show in Detroit, to showcase its capability

and innovations to the global market. It also presented technical papers on topics

such as next-generation vehicle security at the VDI conference in Germany.

Exhibit 82: Key events TELX participates in auto segment

Events Participated in 2014:

•

FISITA 2014 World Automotive

Congress

•

R-Car Consortium 2014 Meet

•

TMSC Forum 2014–Presentation

•

Euroforum 6th International Annual

Conference on ISO 26262

•

International CES 2015

TBU IPs:

•

AUTOSAR Software stack

•

Infotainment related components and codecs

such as

•

Audio Codecs such as

MP3, Windows

Media Audio, DTS

•

Speech codecs such as G.711,

G.722,

G.722.1, AMR

•

Video:

MPEG-2, MPEG-4, H.264, H.263,

Windows Media Video, etc

Source: Company, MOSL

Exhibit 83: Key events TELX participates in broadcast segment

Events Participated in 2014:

•

CES

RDK Users Conference – Denver

Euro RDK Conference

ASP RDK Program – Atlanta

IBC - Amsterdam

•

BBU IPs:

RDK Prime - RDK Deployment Framework

FalconEye - Test Automation Solution

RDK Emulator - Desktop RDK Emulator

Cloud based Autonomic Healing

Proactive Diagnostics Solution

Media Asset Manager (MAM ) - Asset

management Solution

Source: Company, MOSL

27 April 2015

Tata Elxsi

Exhibit 84: Key events TELX participates in semiconductor segment

Events Participated in 2014:

•

ARM tech Symposia

•

Design Automation Conference

•

SBU IPs:

H.264 - Ultra low latency CODEC

H.265/ HEVC

CPRI

JESD 204 (High speed interface)

Source: Company, MOSL

2) Industrial Design

Tata Elxsi helps customers develop successful brands and products by using design

as a strategic tool for business success. It caters to a broad spectrum of industries

like Automotive, Communications, Consumer products, Healthcare and Retail. Its

services include research & strategy, branding & graphic design, product design,

packaging design, UI design, retail design & signage, transportation design, design

engineering and prototype development. It has supported the launch of multiple

brands and products across the world and won several international awards and

patents for design and innovation.

Exhibit 85: Software components and products

Source: Company, MOSL

27 April 2015

Tata Elxsi

Exhibit 86: Software components and products

Source: Company, MOSL

Exhibit 87: Software components and products

Source: Company, MOSL

3) Visual Computing Labs

Tata Elxsi provides Animation and Visual Effects (VFX) services for feature films and

episodic television. It also supports advertising and marketing by providing these

services for TV Ad Commercials and corporate videos for visualization and new

product launches. It has a world-class studio in India and a creative team that

includes national and international award winning professionals. It has won the

coveted 59th Filmfare Award and the Star Guild Award 2014 for “Best Visual Effects

for a Feature Film” for its work in Dhoom 3 and has been acclaimed for the stellar

work in delivering visual effects for Bhaag Milkha Bhaag.

27 April 2015

Tata Elxsi

Exhibit 88: Software components and products

Source: Company, MOSL

Exhibit 89: Software components and products

Source: Company, MOSL

27 April 2015

Tata Elxsi

Exhibit 90: Software components and products

Source: Company, MOSL

4) Systems Integration

Tata Elxsi implements and integrates complete systems and solutions for Broadcast,

CAD/CAM/CAE/PLM, Disaster Recovery, High-Performance Computing, Storage and

Virtual Reality. It addresses the Broadcast, Defence, Education, Government and

Manufacturing sectors with an expert team of integration specialists and support

engineers located across a wide network of offices. This is backed by strategic

partnerships with best-in-class software and technology providers. It also provides

Professional Services, extending maintenance and support services for data mining,

storage, IT facilities and network management in India and overseas.

Exhibit 91: Software components and products

Source: Company, MOSL

27 April 2015

Tata Elxsi

Annexure

3: Technology Partners

1) ADC

As a Premier Apple Developer Connection Member, Tata Elxsi has access to the

latest tools and technical support needed to deliver in time. Its competence on Mac

& iOS has resulted in many repeat design solution for healthcare, media &

entertainment, and consumer electronics segment.

2) Altera Design Services Network

Tata Elxsi's partnership with Altera Design Services Network gives it Access to

Altera's DSN Resource Center. This is a gateway for accessing technical training and

certification, free tools/IP licenses, among others. It also serves as a platform to

connect FPGA deigns engineers, business development, marketing, and sales team,

and other interested engineers from Tata Elxsi and Altera.

3) Cadence

Tata Elxsi’s partnership with Cadence provides it with verification tools/software

(Specman simulators) for its internal training. This enables its engineers to

effectively use the latest changes in tools, thereby reducing the verification time for

the customers.

4) Comcast RDK

Comcast RDK is a pre-integrated software bundle that powers tru2way® IP or hybrid

set-top boxes, and includes the CableLabs OCAP Reference Implementation

software along with other open source components. Owing to this partnership, Tata

Elxsi provides a framework that enables MSOs, SOC, and other box

manufacturers/OEMs to rapidly optimize and deploy new broadcast and IP-based

solutions for a richer consumer TV experience.

5) CommAgility

Tata Elxsi uses AMC form factor cards from CommAgility for solution development.

CommAgility is a leading manufacturer of signal processing AMC modules for

wireless baseband applications, combining flexible CPRI/OBSAI antenna interfaces,

the latest TI DSPs and Xilinx FPGAs, and high bandwidth on and off-card

communications using Serial RapidIO, PCI Express and Ethernet.

6) Polaris Networks

Polaris Networks provides EPC solution, which enables Tata Elxsi to offer an

integrated solution to its customers.

7) Kontron

Tata Elxsi utilizes hardware platforms from Kontron for development. Kontron offers

industry leading embedded computing platforms, which helps us provide

accelerated embedded solution development for OEMs and system integrators.

8) DTS

Tata Elxsi is an implementation partner for DTS, and enables DTS algorithms to be

ported on multiple semiconductor platforms for variety of applications. It brings

together the multi-year DTS algorithm expertise in the pre and post processing

components to ensure quick and efficient porting of DTS audio codecs onto various

semiconductor platforms.

27 April 2015

Tata Elxsi

9) Interphase

Tata Elxsi uses AMC cards from Interphase for developing broadband wireless

software solutions. Interphase delivers customers best in class solutions for

connectivity, interworking, packet processing, electronic manufacturing services,

and electronic engineering design services.

10) Freescale

Tata Elxsi, an authorized codec partner and supplier on QorIQ platform, delivers high

quality and optimized codecs. Its clients have competitive advantage of test lab set

up equipped with the latest hardware and software tools to verify and validate

complete solution on the Freescale’s communication processor.

11) Intel

Tata Elxsi’s membership with Intel Embedded Alliance membership provides its

engineering teams with access to the latest technology, devices and SDK from Intel.

Tata Elxsi enables customers with a world-class professional engineering team

across technologies and industries, trained on the latest Intel platforms and

technologies. This allows its customers reduce development effort and time-to-

market for their products and solutions.

12) Mentor Graphics

Tata Elxsi’s partnership with Mentor Graphics entitles it with free access to Mentor

Graphics’ simulator tools/ Software like Model sim/ Questa prime for its internal

training. This enables it to ramp up the team for any new projects within a short

period of time and upgrade its engineers for effective usage of latest changes in

tools thereby reducing the verification time for the customer.

13) Signalion

Tata Elxsi utilizes compact radios from Signalion for integration with its COTS based

reference/custom solutions. Signalion offers test and measurement products and

services for wireless communications along with highly specialized consulting

services in mobile communications.

14) Qualcomm

Tata Elxsi has tied up with Qualcomm to help the users of QDSP - Hexagon platform

get optimal software porting services on the Hexagon DSP’s. Being the only service

company to have entered into the Hexagon partnership with Qualcomm, Tata Elxsi

provides software optimization, porting, customization, and integration services on

the Hexagon platform DSPs.

15) R-Car

With a strong focus on the automotive and infotainment segment Tata Elxsi has

joined R-Car consortium to bridge the gap in the infotainment value chain. With its

expertise on the media codecs, connectivity protocols, applications, RTOS and

hardware, Tata Elxsi has been able to provide right combination of technology and

services to its automotive customers. This alliance gives its customers the desired

expertise for complete solution and integration services on infotainment system.

16) Texas Instruments

Texas Instruments Tata Elxsi in partnership with Texas Instruments has access to the

latest chipsets, software libraries, tools and technical support. Its competence in LTE

L1 has resulted in many design solutions for public safety.

27 April 2015

Tata Elxsi

Financials and valuations

Income statement

Y/E Mar

Net Sales

Change (%)

EBITDA

EBITDA Margin (%)

Depreciation

EBIT

Interest

Other Income

Extraordinary items

PBT

Tax

Tax Rate (%)

Reported PAT

Adjusted PAT

Change (%)

2012

5,387

29.5

740

13.7

205

535

554

167

30.1

387

346

6.4

2013

6,217

15.4

721

11.6

237

483

-159

652

110

16.9

542

320

-7.6

2014

7,748

24.6

1,365

17.6

350

1,015

126

1,122

399

35.6

723

126.1

2015E

8,538

10.2

1,818

21.3

353

1,465

1,528

519

34.0

1,008

39.5

2016E

9,866

15.6

2,220

22.5

395

1,824

100

1,925

654

34.0

1,270

26.0

(INR Million)

2017E

11,492

16.5

2,689

23.4

431

2,258

161

2,418

822

34.0

1,596

25.6

Balance sheet

Y/E Mar

Share Capital

Reserves

Net Worth

Debt

Deferred Tax

Total Capital Employed

Gross Fixed Assets

Less: Acc Depreciation

Net Fixed Assets

Capital WIP

Investments

Current Assets

Inventory

Debtors

Cash & Bank

Loans & Adv, Others

Curr Liabs & Provns

Curr. Liabilities

Provisions

Net Current Assets

Total Assets

2012

311

1,608

1,920

342

131

2,392

1,963

964

999

105

2,243

1,369

267

606

1,048

719

329

1,195

2,392

2013

311

1,640

1,952

585

192

2,729

2,190

1,198

992

213

2,449

1,567

233

645

1,071

830

241

1,378

2,729

2014

311

2,046

2,357

128

2,485

1,821

853

968

126

2,789

1,748

515

526

1,458

994

463

1,331

2,485

2015E

311

2,544

2,855

128

2,983

2,097

1,205

892

3,552

1,871

1,102

579

1,520

1,006

514

2,032

2,983

(INR Million)

2016E

2017E

311

3,195

3,990

3,506

4,301

128

3,634

4,429

2,297

2,497

1,601

2,032

696

465

4,651

6,021

2,162

2,519

1,853

2,802

636

700

1,773

2,116

1,162

1,354

611

763

2,878

3,904

3,634

4,429

E: MOSL Estimates

27 April 2015

Tata Elxsi

Financials and valuations

Ratios

Y/E Mar

Basic (INR)

EPS

Cash EPS

Book Value

DPS

Payout (incl. Div. Tax.)

Valuation(x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Profitability Ratios (%)

RoE

RoCE

Turnover Ratios (%)

Asset Turnover (x)

Debtors (No. of Days)

Inventory (No. of Days)

Creditors (No. of Days)

Leverage Ratios (%)

Net Debt/Equity (x)

2012

11.1

17.7

61.7

7.0

73.2

2013

10.3

17.9

62.7

5.0

85.5

2014

23.2

34.5

75.7

9.0

45.3

43.2

29.1

13.3

4.0

22.5

0.9

33.6

46.6

3.1

82.3

0.0

56.9

0.0

2015E

32.4

43.7

91.7

14.0

50.6

31.0

23.0

10.9

3.5

16.6

1.4

38.7

58.6

2.9

80.0

0.0

54.6

0.0

2016E

40.8

53.5

112.6

17.0

48.8

24.6

18.7

8.9

3.0

13.2

1.7

39.9

60.5

2.7

80.0

0.0

55.5

0.0

2017E

51.3

65.1

138.1

22.0

50.2

19.6

15.4

7.3

2.5

10.6

2.2

40.9

61.9

2.6

80.0

0.0

56.1

0.0

0.7

18.5

26.6

2.3

92.8

0.0

56.4

0.2

0.5

16.5

22.2

2.3

92.0

0.2

55.1

0.3

Cash flow statement

Y/E Mar

OP/(Loss) before Tax

Depreciation

Others

Interest

Direct Taxes Paid

(Inc)/Dec in Wkg Cap

CF from Op. Activity

(Inc)/Dec in FA & CWIP

(Pur)/Sale of Invt

Others

CF from Inv. Activity

Inc/(Dec) in Net Worth

Inc / (Dec) in Debt

Interest Paid

Divd Paid (incl Tax)

CF from Fin. Activity

Inc/(Dec) in Cash

Add: Opening Balance

Closing Balance

2012

554

205

-138

-86

624

-282

-51

-332

-23

-218

-232

208

267

2013

334

237

-177

-89

379

-307

-304

183

-39

-218

-109

-34

267

233

2014

1,122

350

-174

-99

1,288

-221

-585

-18

-156

-786

282

233

515

2015E

1,528

353

-519

-114

1,247

-150

-510

587

515

1,102

(INR Million)

2016E

2017E

1,925

2,418

395

431

-654

-822

-96

-77

1,570

1,951

-200

-619

-801

-619

-801

751

949

1,102

1,853

2,802

E: MOSL Estimates

27 April 2015

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