1

Tata Elxsi Ltd

HOLD Target Price: Rs. 345.00

CMP: Rs.300.30 Market Cap.: Rs.9350.74mn.

Date: 22 January, 2010

Key Ratios:

Particulars FY09 FY10E FY11E

OPM(%) 19 18 19

NPM(%) 14 14 14

ROE(%) 38 25 22

ROCE(%) 59 40 35

P/BV(x) 6.17 4.46 3.56

P/E(x) 16.09 17.68 16.17

EV/EBDITA(x) 11.48 12.95 11.63

Debt equity Ratio 0.09 0.07 0.06

Key Data:

Sector IT

Face Value Rs.10.00

52 wk. High/Low (Rs.) 331.50/75.00

Volume (2 wk. Avg.) 636000

BSE Code 500408

SYNOPSIS

• We initiated the coverage of Tata Elxsi Ltd and set a

target price of Rs.345.00 for medium to long term.

• Tata Elxsi was incorporated in 1989; provides

system integration and software development. The

Company caters to various industries such as

aerospace, consumer electronics, entertainment,

FMCG, telecom etc. It is part of US$ 69 billion Tata

Group.

• Tata Elxsi provides easy access to its worldwide

customers, through 20 international offices across

Europe, US and Asia, and Global Engineering

Centers in India.

• Tata Elxsi, which is a part of the steel-to-salt

conglomerate Tata Group, is likely to achieve a

turnover of about $300 to $400 million in coming

3-4 years.

• The top and bottom line of the company are

expected to grow at a CAGR of 2% and 3% over

2008A to 2011E.

Share Holding Pattern:

V.S.R. Sastry

Vice President

Equity Research Desk

91-22-25276077

vsrsastry@firstcallindiaequity.com

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

drsastry@firstcallindia.com

2

Table of Content

Investment Highlights ............................................................................................................ 3

Peer Group Comparison ......................................................................................................... 6

Key Concerns ……………………………………………………………………………………………………………………………….6

Financials Results .................................................................................................................. 6

Charts ................................................................................................................................... 9

Outlook and Conclusion ....................................................................................................... 10

Industry Overview ............................................................................................................... 11

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Investment Highlights

• Q2 FY10 Results Update

Tata Elxsi Ltd disclosed results for the quarter ended September 2009. Net sales for the

quarter moved down 17% to Rs. 905.78million as compared to Rs. 1092.6 million during

the corresponding quarter last year. During the quarter, Net Profit is decreased by 19% to

Rs.127.18 million from Rs.156.11 million in previous same quarter. The Basic EPS of the

company is stood at Rs.4.08 for the quarter ended Sep 2009.

Quarterly Results - standalone (RS in mn)

As At Sep-09 Sep-08 %change

Net sales 905.78 1092.6 -17%

Net profit 127.18 156.11 -19%

Basic EPS 4.08 5.01 -19%

• Tata Elxsi’s division to launch studio in Los Angels

Visual Computing Labs (VCL), animation and visual effects arm of Tata Elxsi, is in the process

of establishing a studio in Los Angeles. The company has invested about $5 million on

development of this studio and it is set to be launched in the near future.

Tata Elxsi, which is a part of the steel-to-salt conglomerate Tata Group, is likely to achieve a

turnover of about $300 to $400 million in coming 3-4 years. The company has total four

divisions including VCL.

• Tata Elxsi planning projects from automotive and aerospace sectors

Tata Elxsi is planning to aggressively pursue projects in the automotive and aerospace

sectors in the current financial year. The Tata group company is a leading embedded product

design and engineering company.

The company has a development centre in Thiruvananthapuram, Kerala which focuses on

supporting automotive and aerospace customers for high-reliability and mission critical

embedded software, hardware and systems. Besides it also helps them to reduce time to

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market and cost of product development. The Thiruvananthapuram development centre was

expanded last year to meet the scale-up requirements of its clients in these industries.

• Tata Elxsi and Narayana Hrudayalaya enter into strategic alliance

Tata Elxsi Ltd and Narayana Hrudayalaya signed a MoU to mark their strategic alliance to

develop affordable, high quality healthcare solutions. The partnership brings together Tata

Elxsi’s technology and design expertise and Narayana Hrudayalaya’s domain knowledge to

develop medical devices for the mass market that will drastically reduce the cost of

procedures and thus make healthcare solutions more accessible and affordable for general

public. This is critical in a country like India where majority of the population does not have

access to even basic treatment facilities.

• Visual Computing Labs expands Hollywood presence

Tata Elxsi Ltd. (“TEL”), part of India’s giant Tata Group, made the addition of visual effects’

(“VFX”) industry veterans Joel Hynek, Tricia Ashford and Treva Blue to their team. The trio

will operate the Los Angeles arm of the company’s division Visual Computing Labs (“VCL”), as

part of its strategy to greatly expand its presence in Hollywood. The three will lead VFX

production for VCL in the US and work in tandem with VCL’s studio in Mumbai.

• Tata Elxsi & Wintegra collaborate to demonstrate LTE eNodeB reference solution

Tata Elxsi, a global technology and product engineering company and Wintegra, a Silicon

company based in Austin, TX, announced the availability of 3GPP-LTE eNodeB on COTS

platforms.

Company Profile

Tata Elxsi was incorporated in 1989; provides system integration and software development.

The company caters to various industries such as aerospace, consumer electronics,

entertainment, FMCG, telecom etc. It is part of US$ 69 billion Tata Group.

It provides hard core technology and strength in design. The company offers end-to end

solution across the product lifecycle. Tata Elxsi provides easy access to its worldwide customers,

through 20 international offices across Europe, US and Asia, and Global Engineering Centers in

India.

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Awards

• Tata Elxsi won Award for ‘Best Special Effects’ for the film Anniyan at the 53rd National

Film Awards.

• Company’s Visual Computing Labs also won nominations at Arena Animation CNBC - TV

18 Golden Cursor Animation Awards.

Business Divisions

• Product Design Services

The Company is engaged in product research and development outsourcing business since

1989. Under this it caters to clientele like ARM, Broadcom, Canon, Epson, Hella, Motorola,

Pace Micro Technology, Philips, Samsung and TI.

• Industrial Design Division

Being the largest design house in India, designs products that support in creation of brand.

According to client requirement it conceptualises products. Under this the company has

catered wide range of clients like Whirlpool, UB group, HUL, P&G, Cadbury, ITC and many

more. It has created products like Junior Horlicks, HUL’s Pureit, Pond’s Talc, Nyle Shampoo,

etc.

• Visual Computing Labs

The Company develops 3D and 2D animation, visual effects and gaming services. This

division offers services in Pre-production, Production, Animation, post production for

advertising, films, TV and Gaming. It has part of various Hollywood and Bollywood project

like Spiderman-3, Taare Zameen Par, Jodhaa Akbar, etc.

• System Integration Services

It caters to enterprise and high performance computing market with a wide range of

hardware, networking products and storage solution.

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Peer Group Comparison

Name of the company CMP Market

Cap.

EPS P/E (x) P/BV (x) Dividend(%)

(Rs.) (Rs. Mn.) (Rs.)

Tata Elxsi Limited 300.3 9350.74 18.66 16.09 6.17 70.00

Aptech Limited 179.00 831.46 17.63 10.14 5.08 0.00

Subex Limited 76.30 344.40 26.78 2.84 0.75 0.00

Tech Mahindra Ltd 1133.10 13853.49 63.95 17.72 7.36 40.00

Key Concerns

• Due to the global economic slowdown, the key markets of automotive, semiconductors,

consumer electronics etc. faced a contraction.

• Increasing Competition from unorganized players.

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Financials Results 12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) FY08 FY09 FY10E FY11E

Description 12m 12m 12m 12m

Net Sales 4015.52 4186.61 3916.66 4230.00

Other Income 22.73 0.00 0.00 0.00

Total Income 4038.25 4186.61 3916.66 4230.00

Expenditure -3269.08 -3372.42 -3194.33 -3426.30

operating profit 769.17 814.19 722.33 803.70

interest -21.32 -37.72 -17.77 -18.66

Gross Profit 747.85 776.47 704.56 785.04

Depreciation -134.41 -159.52 -167.78 -176.16

Profit Before Tax 613.44 616.95 536.78 608.87

Tax -86.77 -35.89 -7.9 -30.44

Profit After Tax 526.67 581.06 528.88 578.43

Equity Capital 311.38 311.38 311.38 311.38

Reserves 878.21 1204.25 1785.31 2314.19

Face Value 10 10 10 10

EPS 16.91 18.66 16.98 18.58

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) 30-Jun-09 30-Sep-09 31-Dec-09

30-Mar-09

(E)

Description 3M 3M 3m 3m

Net Sales 904.73 905.78 1002.93 1103.22

Other Income 0 0 0 0

Total Income 904.73 905.78 1002.93 1103.22

Expenditure -785.03 -728.84 -799.54 -880.92

Operating Profit 119.7 176.94 203.39 222.3

Interest -3.15 -2.87 -5.79 -5.96

Gross profit 116.55 174.07 197.6 216.34

Depreciation -40.35 -41.15 -42.5 -43.78

Profit Before Tax 76.2 132.92 155.1 172.56

Tax -4.05 -5.74 8.79 -6.9

Profit After Tax 72.15 127.18 163.89 165.66

Face value 10 10 10 10

Equity Capital 311.38 311.38 311.38 311.38

EPS 2.32 4.08 5.26 5.32

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Charts

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1 Year Comparative Graph

Outlook and Conclusion

• At the current market price of Rs.300.30, the stock is trading at 17.68 x and 16.17 x for

FY10E and FY11E respectively.

• Price to Book Value of the stock is expected to be at 4.46 x and 3.56 x respectively for

FY10E and FY11E.

• Earning per share (EPS) of the company for the earnings for FY10E and FY11E is seen at

Rs.16.98 and Rs.18.58 respectively.

• On the basis of EV/EBITDA, the stock trades at 12.95 x for FY10E and 11.63 x for FY11E.

• Tata Elxsi has signed a Memorandum of Understanding (MoU) with Open Engineering, the

research and development subsidiary of the Belgium headquartered Samtech Group,

Europe’s leading provider of Computer Aided Engineering (CAE) software. As per MoU the

company will partner Open Engineering in India for the distribution and support of

OOFELIE®, a multi-physics numerical simulation professional software dedicated to provide

an open powerful but easy to use CAD CAE all-in-one solution for industrial engineering

departments and research centers.

• Tata Elxsi, which is a part of the steel-to-salt conglomerate Tata Group, is likely to achieve a

turnover of about $300 to $400 million in coming 3-4 years.

• The top and bottom line of the company are expected to grow at a CAGR of 2% and 3%

over 2008A to 2011E.

• We recommend to ‘HOLD’ this stock at Target Price of Rs.345.00.

Tata Elxsi Ltd BSE SENSEX

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Industry Overview

The Indian information technology industry has played a key role in putting India on the global

map. Thanks to the success of the IT industry, India is now a power to reckon with. According to

the National Association of Software and Service Companies (NASSCOM), the apex body for

software services in India, the revenue of the information technology sector has risen from 1.2

per cent of the gross domestic product (GDP) in FY 1997-98 to an estimated 5.8 per cent in FY

2008-09.

Further, the industry body expects the sector to grow between 4 per cent and 7 per cent during

2009-10 and return to over 10 per cent growth next year.

India's IT growth in the world is primarily dominated by IT software and services such as Custom

Application Development and Maintenance (CADM), System Integration, IT Consulting,

Application Management, Software testing, and Web services.

As per NASSCOM's latest findings:

• Indian IT-BPO sector grew by 12 per cent in FY 2009 to reach US$ 71.7 billion in

aggregate revenue (including hardware). Of this, the software and services segment

accounted for US$ 59.6 billion.

• IT-BPO exports (including hardware exports) grew by 16 per cent from US$ 40.9 billion

in FY 2007-08 to US$ 47.3 billion in FY 2008-09.

Moreover, according to a study by Springboard Research, the Indian IT services market is

estimated to remain the fastest growing in the Asia-Pacific region with a CAGR of 18.6 per cent.

At present, there are 60 million Internet users in the country. According to Manufacturer’s

Association of IT (MAIT), the number of active Internet entities rose to 8.6 million by March

2009 from 7.2 million units in March 2008.

MAIT has outlined 'Goal 511', an ambitious target that talks about 500 million Internet users,

100 million broadband connections, and 100 million connected devices by 2012.

A latest study by MAIT estimated that the total PC sale in India is likely to grow by 7 per cent in

2009-10, with total sales expected to cross 7.3 million units.

Outsourcing

According to NASSCOM, software and services exports (including exports of IT services, BPO,

engineering services and R&D and software products) reached US$ 47 billion in FY 2008-09,

contributing nearly 78 per cent to the total software and services revenue of US$ 59.6 billion.

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India continues to be the most preferred destination for companies looking to offshore their IT

and back-office functions. It also retains its low-cost advantage and is among the most

financially attractive locations when viewed in combination with the business environment it

offers and the availability of skilled people, according to global management consultancy AT

Kearney.

Some big deals in the outsourcing space include:

• Tata Consultancy Services is understood to have bagged a US$ 248.75 million software

implementation contract from the Cardiff City Council, UK.

• Etisalat DB, formerly known as Swan Telecom, has outsourced implementation of its

software applications and IT infrastructure to Tech Mahindra as part of a US$ 400

million deal spread over the next 10 years.

India's domestic market has also become a force to reckon with, as the existing IT infrastructure

evolves both in terms of technology and depth of penetration.

According to NASSCOM, domestic IT market (including hardware) reached US$ 24.3 billion in FY

2008-09 as against US$ 23.1 billion in FY 2007-08, a growth of 5.3 per cent.

India Inc's demand for IT services and products has bolstered growth in the domestic sector

with deal sizes going up remarkably and contracts worth US$ 50 million-US$ 100 million up for

grabs.

The market for enterprise networking equipment in India is estimated to grow from US$ 1

billion in 2008 to US$ 1.7 billion by 2012, recording a compounded annual growth rate (CAGR)

of 15 per cent during this period, according to a study by Springboard Research.

Investments

• The Andhra Pradesh Government expects the IT-related SEZs and Software Technology

Parks of India (STPI) in the State to receive about US$ 3.27 billion investments in the

next five years.

• Mahindra Satyam has tied up with defence and security company Saab to develop its

operations in India for the global defence and homeland security market. The estimated

deal value is US$ 400 million.

• San Francisco-based Virtualisation solutions provider VMware Inc plans to invest US$

100 million in India by 2010.

• EMC Corporation, a leading global player of information infrastructure solutions, will

invest an incremental US$1.5 billion in India over the next five years (2010-2014).

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Rural Penetration

According to a report of the Internet and Mobile Association of India (IAMAI), rural India has 3.3

million active internet users. Since rural India was mapped for the first time, the year-on-year

growth of internet users in rural India could not be estimated.

The research also notes there are 5.5 million people who claim to have used Internet at some

point in time.

Government Initiatives

• The government set up the National Taskforce on Information Technology and Software

Development with the objective of framing a long term National IT Policy for the

country.

• Enactment of the Information Technology Act, which provides a legal framework to

facilitate electronic commerce and electronic transactions.

The government-led National e-Governance Programme, has played an important role in

increasing internet penetration in rural India.

Road Ahead

The Indian information technology sector continues to be one of the sunshine sectors of the

Indian economy showing rapid growth and promise.

According to a report prepared by McKinsey for NASSCOM, the exports component of the

Indian industry is expected to reach US$ 175 billion in revenue by 2020. The domestic

component will contribute US$ 50 billion in revenue by 2020. Together, the export and

domestic markets are likely to bring in US$ 225 billion in revenue, as new opportunities emerge

in areas such as public sector and healthcare, and as geographies including BRIC and Japan opt

for greater outsourcing.

________________ ____ _________________________

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation for the

purchase or sale of any financial instrument or as an official confirmation of any transaction. The

information contained herein is from publicly available data or other sources believed to be reliable but

we do not represent that it is accurate or complete and it should not be relied on as such. Firstcall

India Equity Advisors Pvt. Ltd. or any of its affiliates shall not be in any way responsible for any loss or

damage that may arise to any person from any inadvertent error in the information contained in this

report. This document is provide for assistance only and is not intended to be and must not alone be

taken as the basis for an investment decision.

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