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MOSL: TATA ELXSI (Buy)-Revenue below estimate; Macro uncertain

2QFY19 RESULTS | TATA ELXSI: Revenue below estimate; Macro uncertain

(TELX IN, Mkt Cap USD0.8b, CMP INR1008, TP INR1400, 39% Upside, Buy)

 

• Revenue misses estimate: TELX's reported 18% revenue growth YoY which accounts to revenue of INR4b, lower than our expectation of 20% growth. Sequential growth for TELX at 5.4% was partially fueled by INR depreciation, adjusted for which, we estimate the growth would be marginal. Historically, 2Q has seen sharper growth for TELX given seasonality. EBITDA margin expanded by 190bp YoY to 26.5% in line with our estimates. Consequently, PAT growth of 44% YoY to INR822m was above expectations by 4% on account of higher-than-expected Other Income.
• Continued decline in Systems Integration: TELX has seen a gradual increase in growth rates since it hit its bottom in 1QFY18, from 9% YoY to 18% YoY now. Similar to the last quarter, revenue from SI (3% of revenue) declined by 12% QoQ, whereas that in Software Development & Services grew by 6% QoQ. Were the decline to not exist, revenue growth would have been higher by ~40bp.
• Operating margin currently above targeted levels: EBITDA margin at 26.5% contracted by 140bp QoQ, likely explained because of the impact of wage hikes. In the previous quarter, the management had expressed the intention to keep margins around 25% and plough any benefits above that back into the business. In line with this, we have kept forecasts bound to this level.