Tata Elxsi Lost Half Its Market Value In A Year. Will It Rebound?

Shares of Tata Elxsi Ltd. have tumbled more than half from their all-time high in 2018 as global clients, including sister firm Jaguar Land Rover, cut spending.

While the Nifty IT Index has risen 11 percent year-to-date, outperforming the Nifty 50 Index, Tata Elxsi remains the worst-performing stock, falling 37 percent during the period. Its share price has plunged 57 percent since its peak in July last year.

A year down the line, the technology and design company, according to Bloomberg consensus estimates, is expected to report its slowest annual revenue growth in nine years. Its earnings per share is also expected to decline the first time since 2013.

Its annual revenue grew at a compounded annual growth rate of 15.5 percent over the last five years to Rs 1,597 crore in financial year 2018-19, according to stock exchange filings. That compares with 3.5 percent projected growth for the ongoing financial year, according to Bloomberg consensus. Its earnings per share is expected to dip 2.9 percent to Rs 44.9 in FY20.

But the company remains hopeful of a turnaround on the back of a strong deal pipeline.

Hit By Auto Slowdown

Tata Elxsi gets the biggest share of its revenue—around 52 percent—from the automotive and transportation segment, according to a note by HDFC Securities. Its clients include automakers, auto parts suppliers and software providers with expertise in active safety, telematics, body and chassis electronics and infotainment. It also has an autonomous car platform called ‘Autonomai’.

But the ongoing global slowdown dented its financial performance.

The fall in revenue from its largest client Jaguar Land Rover—also part of the Tata Group—was one of the key reasons behind more than 5 percent drop in revenue in the first quarter, Madhukar Dev, managing director and chief executive officer at Tata Elxsi, said in an earnings call after the first-quarter results.

Volumes of JLR shrank in the last two quarters, leading to fewer service contracts for Tata Elxsi. According to Dev, the automaker’s contribution to Tata Elxsi’s sales fell to 14.5 percent in the three months ended June 2019 from 21 percent in the previous quarter. It was over 24 percent a year earlier.

The pace and extent to which JLR carried “ramped down of expenditure on services required was a bit surprising”, Dev said. The luxury carmaker has been going through “a period of great uncertainty” but the company remains in JLR’s preferred suppliers list, he said.

JLR is not the only cause of worry.

Global auto clients have cut spends amid falling sales. The median revenue growth of global auto majors—Toyota, Volkswagen, Daimler, BMW, GM and Ford—fell to 2.1 percent in calendar year 2018 against 4.3 percent in 2017, HDFC Securities said in a research note. Global passenger vehicles sales declined 6.3 percent in the first three months of 2019, the brokerage said, adding that the slowdown impacts leading auto manufacturers’ research and development budgets that comprise 5-5.5 percent of revenue.

R&D programs have not been called off but there have been delays in decision-making and allotting funds to these programs, Dev said. “It’s understandable, when their own sales are affected, the pressure on spending money and doing something new becomes much less.”

According to Spark Capital, the company’s 50 non-JLR auto clients are likely to seek a downward revision of rates for services offered.

Other Verticals See Growth

Nearly a third of the company’s revenue comes from the broadcast and communications business which registered a 10 percent growth sequentially in the first quarter of FY20, according to HDFC Securities. The vertical caters to clients such as Comcast, Arris, Sagemcom, Echostar and Technicolor, where it manages payment gateway integration, multiple third-party applications and catalogues.

Healthcare, a smaller segment comprising just 6 percent of its revenue, witnessed 35 percent growth in the same period. The industrial design segment supports design and technology services for product engineering and includes clients like Panasonic, Marico BP Castrol, among others.

While these segments have done well, it will be hard for them to compensate for the lack of growth in the automotive business, Dev said.

Optimistic Outlook

Tata Elxsi targets annual revenue growth of 15 percent and hopes to keep its operating margin within 22-25 percent over the next few years. Despite a fall in revenue in the first quarter and the worst slowdown in the auto sector, Dev expects the next few quarters to more than make up for this weakness. “The trend is being reversed already,” he said, adding that a bulk of the gains could come from the automotive sector.

The company also doesn’t expect any drastic budget cuts by clients outside of JLR. While deals have been signed for certain projects with all paperwork in place, the work is yet to commence and the company will realise the revenues when the client gives them a ‘go ahead’, it said. This, according to Dev, makes the deal pipeline much larger, indicating potentially higher revenue on the horizon.

By 2020, over 250 million vehicles are estimated to be connected to the internet and equipped with a myriad of sensors, connectivity platforms, and geo-analytical capabilities, according to the company’s latest annual report.

There are large engineering, research and development opportunities for Tata Elxsi, HDFC Securities said, suggesting there is increased expenditure towards software development. The company, it said, will benefit from “re-location of budgets towards embedded systems and electronics with focus on autonomous vehicles, connectivity and shared mobility.”