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MOSL: TATA ELXSI (Buy)-Better product mix drives profitability

Tata elxsi: Better product mix drives profitability

(TELX IN, Mkt Cap USD1.1b, CMP INR1078, TP INR1236, 15% Upside, Buy)

• Marginal miss on revenue; EBITDA and PAT beat estimates: TELX’s overall revenue grew 11.4% YoY to INR3,455m (our estimate: INR3,651m) in 3QFY18, led by 14% YoY growth in Software Development & Services business. However, System Integration business declined 40% YoY. EBITDA margin expanded 410bp YoY to 27.1% (our estimate: 24.4%) in 3QFY18, which can be largely attributed to product mix change. Additionally, employee expense declined 230bp to 53.2% of net sales in 3QFY18. EBITDA grew 31% YoY to INR935m (our estimate: INR891m). Other expenses declined 120bp YoY to 15.3% of net sales. Other income stood at INR68m, higher than our estimate of INR13m and INR24m in 3QFY17, leading to earnings beat. PAT grew 42.2% YoY to INR628m (our estimate: INR549m) in 3QFY18.
• Focus on reducing dependency on top accounts: Over the last few quarters, the contribution from top account has come down to ~20%. Contribution from top-five accounts has also gradually reduced to below 45%. Additionally, the company has brought down contribution from top-10 accounts to below 60%. The strategy is to diversify revenue contribution from accounts, and the focus would be to further reduce dependency on selected few accounts.
• Portfolio of IPs to provide edge: IPs contributed 5% of TECX’s 9MFY18 revenues, which realigns with TELX’s strategy to focus on building a portfolio of IPs that would enable an even higher contribution over the next few years. Although the mainstay of revenues is expected to be service-driven, a portfolio of IPs would help TELX to expand its clientele, and thus, reduce dependency on selected few accounts.