Tata Elxsi Q4FY18 Concall Summary

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Financial Highlights

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4th Quarter

  • PBT for the quarter exceeded Rs. 100 crores for the first time.
  • Offshore revenues are about 60% and onsite revenues are about 40%. IP based revenue is about 5%.
  • Automotive segment contributes 60% of revenue, Service segment 30% and Medical & Hospital 10%.
  • The full year constant currency growth is 15% and the Q4 constant currency growth is about 5%.
  • Total odd income for the quarter breakup is not available but for the whole year, it is about 43 crores.
  • Cash in hand is about 390 crores.

Business Growth

  • The revenue share of top 5 customers is 44% and top 10 is 57%.
  • All the key segments delivered reasonably good growth in the quarter.
  • There have been challenges in the year, with some of major engagements flattening out, some even declining a bit, but new engagements came in to compensate and provided growth. E.g. EPD segment as well as IDV segment saw some setbacks but what is really pleasing is that the setbacks were handled reasonably well.
  • Tata Elxsi is not looking for further expansion in EBITDA margins as they exceeded internal targets in the current year, so they are happy to maintain it in this range.
  • The industrial design has recovered marginally this quarter, but it is flat in FY18 basis overall. However, Management has figured out what caused the problem last year and most of that is now sorted out. This segment should show strong growth in FY19.
  • Jaguar Land Rover sales contribute about 22% of sales revenue. Engineering budgets will not be altered because the market is not picking up their existing cars, so the urgency with which Elxsi need to introduce new technologies only increased.
  • Utilization rate was the same as at the end of December, about 82%.

EPD Segment

  • 3 segments within EPD are the automotive, broadcast and medical segments
  • The big one is the automotive segment and that is maintaining the growth rate that had been for the last several quarters.
  • The second one is broadcast which again is fairly stable, despite the fact that the offerings there are going through a churn because of new technologies
  • Management is fairly optimistic about the future of the medical business which is right now a very small part of revenue.
  • Automotive is the fastest growing segment and it is about 60% of the total revenue.

Autonomai 

  • Autonomous vehickle program has been enhanced to a full-fledged autonomous driving platform which have branded as Autonomai, and this was licensed to major OEM during FY18.
  • The company is in discussion with a number of people who have interest in the entire Autonomai as a full-fledged solution which would require some time to materialize and some time to execute. But the progress is fairly encouraging.
  • Services revenue would still be far more than the Autonomai revenue in the next 3-4 years.

Next gen Technologies

  • The new capabilities that have been built over the last 12-15 months have been relating to AR, VR, AI, analytics etc.
  • The progress so far has been mixed, off and on Elxsi seem to have good engagements in AR more than VR.
  • In the future, management intend in increasing  investment in the AI and analytics part of the business.

Problems solved using AI platform

  • In a car company, the application of AI is helping the car company get better organized for providing service or using predictive failure rates and so on.
  • In the broadcast business, they are trying using AI to predict subscriber churns and therefore what proactive action can customers take to prevent subscriber churn and so on.

Drivers of growth in Automotive segment

  • The two areas which are propelling business in the automotive industry.
    • Moving towards electrics and hybrids
    • Movin g towards enhanced assistance with the ultimate destination i.e. autonomous driving.
  • In terms of growth for the next year, Elxsi do not have guidance but in general terms, things are looking quite promising at the moment.

R&D

  • The company  sanctions budgets for in-house R&D depending on the effort. So it is very difficult to have a monetary value there, but the company certainly provides resources for doing in-house R&D.
  • Autonomai, requires a substantial amount of manpower, time and resources which Elxi allocated a couple of years back because without that, they couldn’t be a serious player in the automotive market.
  • They have also developed IP in the video world known as FalconEye when they saw existing solutions in the market were severely limited using in-house R&D.

What is stopping Tata Elxsi to be a 30% growth company

  • The market opportunity is big enough for Elxi to look at a 30% growth.
  • It is a question of matching the available skills to the available opportunity, and that requires a certain amount of anticipation and a certain amount of pre-planning.
  • Sometimes they get it spot on, sometimes they struggle a bit, but that is what is holding them back and they need to improve their planning process.

Business Development

  • The company looking to reduce the number of clients and want to deepen the relationship with existing clients.

Battery Management solutions:

  • In the future, multiple battery strategies are coming in, multiple power train strategies coming in, and more the variety the greater the opportunity for a company like Elxsi.

Airports and metro and highway:

  • Whenever the customer is sending out an RFP or a tender just for design services, Elxsi might very often win, but if it is clubbed with execution which means running an operation or fabricating something, they have to partner with people who can do that, and then Elxsi’s fortune depends on the fortune of the partners that they go with.

IP based revenues:

  • Currently it is not as profitable as services, because for every successful IP chances are that there is at least one other IP initiative which has not had that kind of success in the market, so that effort has not yielded results.
  • Potentially IP is very, very important for them not just for augmenting their margins but for survival itself.
  • In future Elxsi will win business demonstrating their IP which can be integrated into customer solutions and that is why the IP programs of the company are very important.

Attrition

  • On an annualized basis, the company has 12% attrition. Typically, in 3-7 year the attrition is higher.
  • There are two drivers for attrition:
    • One is the desire of the people to study more - so whether it is the master’s in technology or even a business degree, typically they look at those at the end of the first three years.
    • The other driver is the product companies which have captives or setting up captives in India. They look at service companies as a hunting ground because they do not have any P&L responsibilities; they are able to throw a lot more money than a service company can, even if the work is less interesting.
  • So the company's effort is to make sure that all employees realize that the work that they are doing is far more interesting here and in a matter of a few years they end up working with customers in different parts of world and often in different businesses. And the overall value to their CV is much higher in a company like Elxsi than in a product company.

Partnerships

  • Work with Unity is slower than expected but these are skills which will be useful in many areas in the future, so Elxsi is staying invested and partnership with Unity continues to be strong.
  • Partnership with National Instruments is for automotive test and simulation and Elxsi is recognized as probably India's leading hardware-in-loop-simulation service provider for auto companies and that is in part, thanks to alliance with NI.

IP on block-chain

  • One of the IPs that was built, and which should be getting deployed pretty soon is V2X emulator. It is a vehicle to vehicle, vehicle to infrastructure simulator.
  • Block chain will get integrated with anything to do with V2X and it will be the company's endeavor to build block chain capability into their simulator.
  • Elxsi is not looking at block chain in areas outside of our current business, and in the current business, the vehicle-to-vehicle, a vehicle-to-infra is where block chain should have a play.

Competitors

  • It is different in different geographies but in the automotive space, the company that is encountered most often is KPIT.
  • Cyient is also a competitor but what Elxsi bring to the customer is unique set of capabilities and the combination of design and technology is something that they have built up over the last 10-12 years. So, this combination is very potent and therefore is a key differentiator for Tata Elxsi.
  • A lot of international product companies have opened centers in India and whenever they open a new center, it is a bit of a challenge to Elxsi.

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