Tata Elxsi

Tata Elxsi

Tata Elxsi

We recommend a sell in the stock of Tata Elxsi from a short-term perspective. It is evident from the charts of the stock that after encountering a significant long-term resistance in the zone between Rs 340 and Rs 350 in March 2010 itstarted to decline. Since then, the stock has been on a medium-term downtrend. Moreover, it met with twin resistance (down trendline and resistance level) around Rs 290 in early July and it had resumed its medium-term downtrend. On July 26, the stock tumbled 5 per cent, breaching its 21 and 50-day moving averages decisively. The volume traded was above average on that session. The daily relative strength index has entered in to the bearish zone from the neutral region and weekly RSI is slipping towards this zone in the neutral region. After signalling a sell, the daily moving average convergence divergence oscillator is entering in to the negative territory implying downward momentum. Considering that the stock's medium-term down trend-line is intact, our short-term forecast on the stock is bearish. We expect the stock to decline further until it hits our price target of Rs 250 or Rs 240 in the approaching trading sessions. Short-term traders can sell the stock while maintaining stop-loss at Rs 276.

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Tata Elxsi

Investors with a two-year horizon can buy the shares of Tata Elxsi, a niche software services provider, considering the improving prospects in its key business segment and the stock’s availability at an attractive valuation. At Rs 166, the share trades at nine times its likely 2009-10 per share earnings. Investors also have an added incentive in owning the share as it is a relatively high dividend-yielding stock. The dividend yield is around 4-5 per cent, based on payouts so far.

Despite 2008-09 being a challenging year for all software players, more so for niche providers, Tata Elxsi has seen its revenues grow 4.3 per cent to Rs.419.4 crore, while net profits expanded 10 per cent to Rs 58.2 crore. After a tepid first quarter, the company has seen further improvement in revenue growth in the September quarter.

Tata Elxsi broadly operates in two segments – software development services (mainly product design and industrial design services) and system integration. The relatively high-margin software development services segment has increased contribution over the years and forms a pie of nearly 90 per cent of the overall revenues in the current fiscal. Recovery in some of the key sectors where the company operates such as automotive, semi-conductors, broadcast and consumer electronics augurs well for the company. Even in 2008-09, revenues from its software development services went up by nearly 8 per cent, while system integration revenues declined. Pointers are also emerging on improving business confidence in key segments.

Gartner reports indicate that semi-conductor revenue in 2010 is expected to bounce back to the same revenue level as 2008 at $255 billion, a 13 per cent increase from 2009. In another report, Gartner also predicts that worldwide smartphone sales will grow by 29 per cent year-over-year to reach 180 million units in 2009. Car manufacturers around the world are increasingly adopting “electronics” for more comfort features and design and also for new concepts such as electric and fuel-efficient cars. Studies by Strategy Analytics Automotive Electronics suggest that electronics is likely to account for 35 per cent of the total cost of a car by 2010. All these point to the possibility of increasing outsourcing of design services to companies such as Tata Elxsi. Internally, the company has frozen wage hikes till a strong recovery is signalled, which should reduce the strain on margins. Rupee appreciation against the dollar is a key risk, but the US geography accounts for only about 30 per cent of revenues and the rupee’s direction against the yen, euro and pound have been more or less favourable for the company.

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Tata Elxsi

Tata Elxsi

Today's Pick - Tata Elxsi

We recommend a sell in Tata Elxsi from a short-term perspective. It is evident from the charts of Tata Elxsi that it had been on a medium-term uptrend between March 2008 and June 2008 (from a low of Rs 138 to a high of Rs 223).

However, the stock encountered resistance at around Rs 220, significant resistance level in June and resumed its long-term downtrend. Later on, the stock penetrated its medium-term up trendline by declining and it continues to trend downwards.

On July 22, the stock tumbled more than 6 per cent accompanied with heavy volume, reinforcing the bearish view. The daily and weekly relative strength indexes are featuring in the bearish zone. The moving average convergence and divergence has entered into the negative territory. Moreover, the long-term down trendline is still in place.

We are bearish on the stock in the short-term. We expect the stock’s decline to prolong until it hits our price target of Rs 160 in the short-term. Traders with short-term perspective can sell the stock while maintaining stop-loss at Rs 190.

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Ashok Leyland, Tata Elxsi

Ashok Leyland, Tata Elxsi

IDBI Capital - Andhra Bank, Everest Kanto, IndoAsian Fusegear, Jupiter Bioscience, Monnet Ispat Energy, Tata Elxsi, Usher Agro

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Anand Rathi - Daily Strategist & Emkay - Morning Notes, Tata Elxsi

The NIFTY futures saw a increase in OI 2.77 % with prices closing flat almost indicating that lot of shorts positions were covered in the initial stage and at the higher end huge profit booking happened. The FIIs were buyers in futures to the tune of 560 crores of which they bought nifty futures alone to the tune of 75 crs and options worth 636 crs , while they sold stock futures to the tune of 140 crores .The rollover today on the NIFTY was below normal . The PCR is in a range of 1.31 indicating the trend in the market. .The volatility has remained in the range of 26.70 levels indicating the feel in the market.

Among the Big guns, ONGC saw a gain of 2.59 OI with prices going down by 1.44% indicating that fresh shorts being built in the counter along with fresh genuine profit booking while RELIANCE gained OI t% to the tune of 8.39% and the price coming down indicating huge profit taking at the historical high in the counter. Also the rollover in both these counters was 70% plus.

On the TECH front, accept INFOSYSTCH where we saw short covering, SATYAM, TCS & WIPRO saw decrease in prices showing weakness in the markets, and forced long positions to sell with some fresh shorts formed there. This meant the weakening of the dollar took its toll on these stocks and were already taken into account by players. Accept SATYAM, where the roll over was good we saw an average roll over of 70 % in the other TECH majors.

On the other hand the BANKING counters we saw open interest gaining or loosing with gain in value. Also we saw the genuine buying coming in P.S.U banks like S.B.I & P.N.B and across the board prices gaining value in the sector .The rest like ICICI BANK & HDFC BANK saw short coverings and prices remaining positive. The average rollover was 80% in the sector.

In the METALS there across the board selling or profit booking be it TATA STEEL, HINDALCO, NALCO, OR STERLITE after the sector had a massive positive movement. The only stock that saw short covering was SAIL. The overall rollover in this sector was averages of 70% accept HINDALCO which was a whooping 93 %.

Considering the market data, it suggests the most awaited expected trend has been curtailed by profit booking today and finally set the decorum in the week for the settlement of un-certainty which means we have ample holidays before we see the new trend emerging at the almost high of the market, for the same it is advisable to traders to have strict stop losses.

Anand Rathi - Daily Strategist - Apr 27 Emkay -Morning Notes, Tata Elxsi

Sharekhan Investor's Eye dated April 23, 2007

Satyam Computer Services
Cluster: Apple Green
Recommendation: Buy
Price target: Rs560
Current market price: Rs485

Price target revised to Rs560

Result highlights

• Satyam Computer Services (Satyam) reported a revenue growth of 7.1% quarter on quarter (qoq) and 35.4% year on year (yoy) to Rs1,779 crore during the fourth quarter of FY2007. The revenue growth was higher than expected and driven by a healthy volume growth of 9.5% on a sequential basis. On the other hand, the 1.7% appreciation in the rupee limited the sequential growth in the revenues during the quarter.
• The operating profit margin (OPM) declined by 162 basis points to 23.1% on a sequential basis, largely due to the adverse impact of the charges related to restricted stock units (RSU; impact of 90 basis points), higher personnel cost (bonus) and the rupee appreciation. It was partly mitigated by a 64-basis-point saving in the selling, general and administrative (SG&A) expenses as a percentage of sales. Thus, the operating profit was flat at Rs410 crore on a sequential basis.
• However, the earnings growth was boosted by the jump in the other income component to Rs70.4 crore (up from Rs10.1 crore in Q3) as the company accrued better yield on investments and reported a foreign exchange (forex) gain of Rs3.8 crore as compared to a forex fluctuation loss of Rs35.5 crore in Q3FY2007. Consequently, the consolidated earnings grew by 16.7% qoq and 38.3% yoy to Rs393.6 crore, which is much ahead of the consensus estimate of around Rs358 crore.
• On a full year basis, the consolidated revenues and earnings have grown by 35.3% to Rs6,485 crore and by 43.1% to Rs1,404.8 crore respectively. The OPM has declined by 60 basis points to 23.7% which is in line with the company's guidance.
• In terms of the guidance for FY2008, the consolidated revenues and earnings are guided to grow at a healthy rate in the range of 28-30% and 27-29% respectively, in dollar terms. The growth in rupee terms would be dented by the 600-basis-point appreciation in the rupee (an exchange rate of Rs42.3 per US Dollar assumed in the guidance), resulting in revenue and earnings growth of 20-22% and 18-20% respectively. What's heartening and has come as a positive surprise is that the management expects to maintain its margins in FY2008, in spite of the wage inflation, rupee appreciation and additional expenses related to RSUs. On the flip side, the growth guidance for Q1FY2008 is quite subdued and indicates a flat or a marginal decline in the earnings.
• We have revised upwards our FY2008 earnings estimate by 4% and introduced our FY2009 estimate. At the current price the stock trades at 18.6x FY2008 and 15.6x FY2009 estimated earnings (including the non-cash charges for the stock options). We maintain our Buy call on the stock with a revised price target of Rs560 (18x FY2009 earnings estimates).

Tata Elxsi
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs385
Current market price: Rs325

Price target revised to Rs385

Result highlights

• Tata Elxsi has reported a robust growth of 10.8% quarter on quarter (qoq) and 25.6% year on year (yoy) in its revenues to Rs89.1 crore for Q4FY2007. The growth was contributed by a 6.6% sequential growth in the software service (SS) business while the system integration (SI) business showed an exponential jump of 35.7% qoq to Rs15.7 crore. The fourth quarter generally tends to be strong for the SI business.
• The operating profit margin (OPM) improved by 160 basis points to 24.3% (the highest ever) on a sequential basis. The margin improvement was boosted by the steep improvement in the profitability of the SI business (margins doubled from 13.7% to 29.5%). On the other hand, the segmental margins of the SS business declined by 190 basis points sequentially.
• Consequently, the company was able to report a double-digit sequential growth in its earnings for the third consecutive quarter. Its earnings grew by 14.8% qoq and 38.8% yoy to Rs16 crore, ahead of our expectations.
• On a full year basis, the revenues grew by 30.7% to Rs308 crore (slightly higher than our estimate of Rs304 crore). The OPM improved by 260 basis points to 22.4%, resulting in a 51.8% growth in the earnings to Rs52.1 crore.
• The company has given a healthy dividend of 70% (or Rs7 per share) in line with our expectations, amounting to a dividend yield of 2.1% at the current market price.
• To factor in the better than anticipated performance, we have revised upwards the earnings estimate for FY2008 by 9.4% to Rs21.4 per share and introduced our FY2009 estimate. At the current market price the stock trades at 15.2x FY2008 and 12.3x FY2009 estimated earnings. We maintain our Buy call on the stock with a revised price target of Rs385 (14.5x FY2009 earnings).

Bank of India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs210
Current market price: Rs184

Q4FY2007�first cut analysis

Result highlights

• Bank of India's (BOI) Q4FY2007 profit after tax (PAT) was way above expectations at Rs447 crore, up 76% year on year (yoy) compared to our estimate of Rs288.9 crore. The PAT growth was ahead of our estimate mainly due to an unexpected 78.9% quarter-on-quarter (q-o-q) jump in the non-interest income.
• The net interest income (NII) grew by 28.8% yoy and 7.7% quarter on quarter (qoq) to Rs991 crore against our estimate of Rs973 crore. The NII figure is adjusted for the one-off cash reserve ratio (CRR) interest to the tune of Rs40 crore in Q4FY2007.
• The non-interest income was a surprise as it reported a 78% growth yoy and 79% rise qoq to Rs576 crore. However the detailed break-up of the same is still awaited.
• The operating expenses grew by 22% yoy in line with the business growth; the operating profit was up by 63.6% yoy and 49.5% qoq to Rs918.3 crore.
• The provisions increased by 4.5% yoy and 27.5% qoq to Rs369.5 crore. The increase was mainly on account of higher other provisions as the non-performing asset (NPA) provision reported a decline both yoy and qoq.
• The bank's asset quality has shown a consistent improvement with the net NPAs and gross NPAs both showing a decline in percentage and absolute terms. The net NPAs stood at 0.74% as on March 2007 compared with 0.95% reported in December 2006 while the gross NPAs showed a decline to Rs2,100 crore from Rs2,186 crore sequentially.
• The higher non-interest component in this quarter has caused the bank's PAT to grow by 76% yoy to Rs447.4 crore compared to our estimate of Rs288.9 crore. We would provide our detailed result update later. At the current market price of Rs184, the stock is quoting at 7.6x its FY2008E earnings and 1.3x expected FY2008E book value. We maintain our Buy recommendation on the stock with a price target of Rs210.

Ceat
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs190
Current market price: Rs137

A brilliant performance

Result highlights

• Ceat's Q4FY2007 numbers are way ahead of our expectations. The net sales have risen by a brilliant 16.2% to Rs562.9 crore on the back of a 3% tonnage growth and a very strong realisation growth. The original equipment manufacturer (OEM) sales recorded a significant improvement of 58.4% during the quarter. The replacement sales continue to grow at a good pace of 10%.
• The operating profit margin (OPM) expanded by 250 basis points to 7.8% as a result of a lower raw material cost during the quarter and other efficiencies. As a result the operating profit grew by 70.3% to Rs43.9 crore.
• The company was able to lower its raw material cost due to forward booking of rubber at lower prices. The company has made arrangements to procure rubber at lower prices in future as well, which would help it to maintain its margins in the coming quarters.
• A lower interest cost due to the ongoing debt restructuring exercise and stable depreciation cost helped the company to report a 390% growth in the net profit, which stood at Rs23.4 crore.
• The company has declared a dividend of Rs1.8 per share and the board has also approved the financial restructuring of the company. A holder of 100 shares in Ceat would be getting 75 shares of the company and 25 shares of the new investment company. We believe that this is a positive move and would lead to greater unlocking of value for the shareholders. The sale of part of the property at its Bhandup plant is expected to be finalised by Q2FY2008, and is expected to fetch the company about Rs80-100 crore.
• At the current market price of Rs137, the stock is trading at 8.2x its FY2008E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4x. We maintain our Buy recommendation on the sock with a price target of Rs190.
  

Sharekhan Investor's Eye dated April 23, 2007

Morgan Stanley - Reliance Energy, Angel - Infotech Enterprises , Angel - ACC, Geojit - Tata Elxsi , Geojit - Batliboi , IISL - Clutch Auto

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Emkay - Morning Notes, Tata Elxsi

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Tata Elxsi: Buy

Investors with one/two-year perspective can consider taking exposure in the Tata Elxsi stock. At the current market price, the stock trades at a price-earnings multiple of 17 times its annualised 2006-07 per share earnings. Even in the latest correction in the market, the stock remained fairly stable. The returns from this stock are likely to be sedate and linked strongly to the company's financial performance and growth plans.

The sustained improvement in the business environment for offshoring, the encouraging demand for product design and engineering services, the strong third quarter financial performance and the association with the Tata group lend strength to the company.

However, the high exposure to project-based business, scale-up challenges, slowdown in end-user markets in the US, and appreciation of the rupee remain the key risks.

Key Segments

Tata Elxsi classifies its business broadly into two key segments: Software development and services, and systems integration and support services. Over the past four years, the company has consciously transformed its revenue profile from systems integration to software development and services.

For instance, systems integration, which accounted for 39 per cent of its revenues in 2003-04, had dwindled to 14 per cent in the first nine months of 2006-07.

This switch is clearly linked to the low profit before interest and tax (PBIT) margins of systems integration (below 10 per cent) vis-à-vis software development (at over 20 per cent).

The software development and services segment comprises three key focus areas: Product design services, design and engineering services, and visual computing.

The company offers product design services to a whole host of industries that range from automotive, consumer electronics, semiconductors, media, storage and wireless apart from handling IP and product solutions in these areas. Over 70 per cent of its employees are in this segment.

In engineering design services, the company is primarily involved in mechanical design for consumer products, electronic enclosures, FMCG packaging and transportation. It enjoys a roster of blue-chip clients for which it has executed projects, including GM and Toyota in automotives, Hindustan Lever and Procter and Gamble in packaging, Whirlpool and Maytag for consumer appliances and several international design firms. Finally, Tata Elxsi's Visual Computing Labs has created animation, special effects and gaming services for the entertainment industry.

Using its experience garnered in the domestic film and advertising industry, including films such as Dhoom 2 or Salaam Namaste, the company has bagged some significant work in Hollywood. Given the high quality manpower available at reasonable cost, the animation and gaming industry is likely to provide huge potential for Tata Elxsi in the coming years.

The steady rise in the operating profit margins in the last few quarters testifies to this strategic switch to software development.

For the nine months ended December 31, 2006, the company reported profit before interest and tax (PBIT) margins of 24 per cent for the software development and services segment compared to 20 per cent in the corresponding previous period.

Over the same period, both the revenues and PBIT margins from the systems integration business has been on a decline.

The contribution of systems integration to overall revenues fell to 14 per cent from 19 per cent. The PBIT margins were also lower at 7.8 per cent vis-à-vis 13.6 per cent over the same period.

Considering the niche focus of Tata Elxsi, it enjoys return on equity and capital employed in the 50-60 per cent range, significantly higher than most of its mid-sized peers.

Sharekhan Investor's Eye dated December 14, 2006

Tata Elxsi
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs320
Current market price: Rs232

Designed to grow

Key points

• Niche player with distinct competitive strengths: Tata Elxsi Ltd (TEL) has built the required scale of operations and established strong client relationships with leading global companies to effectively tap the huge opportunity emerging in the niche segment of product design and engineering space. In this space, the size of the opportunity for the domestic companies is estimated to more than double to $6.6 billion by 2010. TEL also has the advantage of having developed reusable components (intellectual property to provide faster and more valuable proposition to the customers) and is investing to boost its delivery capabilities in the high-end services like VLSI and chip design.
• Aggressive expansion plans: TEL has aggressive expansion plans in terms of the capital expenditure on physical infrastructure and employee addition. This clearly reflects the management's growing confidence in the revenue growth visibility over the next few years.
• Improving margins: The shift in the revenue mix in favour of the high-margin software development service business has significantly improved the company's operating margins in the past two years (up by 490 basis points to 19.8% in FY2006). The trend is expected to continue and further boost margins by 250 basis points during FY2006-08, in spite of the aggressive expansion plans and rising wage inflation.
• Attractive valuations and decent dividend yield: Revenues and earnings are estimated to grow at a robust rate of 26.8% and 34.5% respectively, during the period FY2006-08. Moreover, the company offers a decent dividend yield of 2.8% (based on the 65% dividend given in FY2006), which is likely to limit the downside risk. We recommend Buy call on TEL with a one-year target price of Rs320.

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INDUSTRY UPDATE

Positive sentiment bolsters equity AUMs

The assets under management (AUM) for equity funds increased by 6.2% to Rs135,851 crore in November 2006. The rise in the equity AUM was higher than the market movement of 5.2%

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Tata Elxsi: Sharekhan Stock Idea dated December 14, 2006

Tata Elxsi
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs320
Current market price: Rs232

Designed to grow

Key points

• Niche player with distinct competitive strengths: Tata Elxsi Ltd (TEL) has built the required scale of operations and established strong client relationships with leading global companies to effectively tap the huge opportunity emerging in the niche segment of product design and engineering space. In this space, the size of the opportunity for the domestic companies is estimated to more than double to $6.6 billion by 2010. TEL also has the advantage of having developed reusable components (intellectual property to provide faster and more valuable proposition to the customers) and is investing to boost its delivery capabilities in the high-end services like VLSI and chip design.
• Aggressive expansion plans: TEL has aggressive expansion plans in terms of the capital expenditure on physical infrastructure and employee addition. This clearly reflects the management's growing confidence in the revenue growth visibility over the next few years.
• Improving margins: The shift in the revenue mix in favour of the high-margin software development service business has significantly improved the company's operating margins in the past two years (up by 490 basis points to 19.8% in FY2006). The trend is expected to continue and further boost margins by 250 basis points during FY2006-08, in spite of the aggressive expansion plans and rising wage inflation.
• Attractive valuations and decent dividend yield: Revenues and earnings are estimated to grow at a robust rate of 26.8% and 34.5% respectively, during the period FY2006-08. Moreover, the company offers a decent dividend yield of 2.8% (based on the 65% dividend given in FY2006), which is likely to limit the downside risk. We recommend Buy call on TEL with a one-year target price of Rs320

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