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MOSL: TATA ELXSI (Buy)-Ending the year on a positive note-Setting the stage for continued traction

TATA ELXSI: Ending the year on a positive note; Setting the stage for continued traction

(TELX IN, Mkt Cap USD1.1b, CMP INR1214, TP INR1400, 15% Upside, Buy)

 

• Industry leading growth rates: TELX's revenue grew 15% YoY (our estimate: +14%) to INR3.8b. EBITDA margin expanded 210bp YoY to 25.3% (largely in-line). PAT growth of 58% YoY to INR703m was above our estimate because of higher other income. For FY18, TELX clocked 15% CC growth, 120bp margin expansion and 38% PAT growth.
• Outlook positive: TELX's achieved 15% growth in FY18, despite challenges in some major engagements and setbacks in the vertical of Broadcast. However, with these issues now behind, visibility of growth from new customers and an encouraging pick-up in new technologies and IP, the outlook for FY19 appears optimistic.

Profits maintained despite investments: To stay ahead of the curve, TELX has been early at developing competencies in new technologies. Over the last few quarters, it has been making significant progress in the areas of augmented reality, artificial intelligence and analytics. Despite investments, it was able to expand margins over the year. However, this isn't likely to be the case going forward, and the target would be to maintain margins. Part of the expansion was also driven by 100% growth in IP revenue, which now constitutes 5% of total revenue. With strong growth expectations, IP revenue would enable TELX to expand clientele, introduce non-linearity in the business and also improve positioning.