Tata Elxsi hosted a conference call on July 17, 2023. In the conference call, the company was represented by Mr Manoj Raghavan-CEO & MD, Mr Nitin Pai – Chief Marketing and Chief Strategy Officer and Mr Gaurav Bajaj – Chief Financial Officer.

Key Takeaways of the call

Revenue grew by 17.1% YoY despite challenging macro-economic environment. In constant currency terms revenue grew by 1.2% QoQ and 11.9% YoY.

Healthcare and life sciences business grew by 3.2% QoQ a significant improvement when compared to previous 2 quarters. The vertical also reported new product development deal wins for medical diagnostics and smart hospital equipment.

In the transportation business the company continues to see good traction and strong deal pipeline especially in software defined vehicles. Transportation vertical grew 1.8% QoQ and 17% YoY in CC terms. While some deal closures were delayed in this quarter, the company won significant new deals including a strategic multi-year multi-million US$ SDV deal with a leading Asian OEM for their SDV platform and software development, and a multi-country licensing and deployment of the company’s connected vehicle platform with a global Top 5 OEM.

Media and communication business grew creditably. The company retained and grew market share. The absolute revenue growth was muted. Revenue grew by 0.2% QoQ in CC terms. The company  won its first multi-year deal for its 5G network orchestration and automation suite with a leading telecom operator. Media and telecom sector is still soft globally and the company remains cautious on the short-term growth for the sector while remaining close to the key customers and focussing on intelligent AI power solutions and technology that will drive next leg of transformation in the industry.

Customer contribution to revenue:

Revenue from top 5 customers grew from 39.8% in Q4FY2023 to 42% in Q1FY2024 and revenue from top 10 customers grew from 49.4% in Q4FY2023 to 51.9% in Q1FY2024.

EBITDA margin: EBITDA margin came in at 29.6% despite wage hike and strong employee addition.

Margin walk: EBITDA margin declined by 20 bps QOQ. There was a margin impact of 140 bps due to salary hike and 1 month ESOP cost. This was offset by around 40-50 bps by reduction in contract  cost, foreign exchange gain to the tune of 20 bps, and gain of another 50 bps due to operating leverage and better utilization.

Effective tax rate: Effective Tax Rate (ETR) in this quarter has increased on account of lower tax exemption due to completion of 5 years for two of its SEZ units, impacting the company’s PAT Margins.

Effective tax rate for the remaining quarters of the financial year will be similar to Q1.

Human Recourse:

Net employee addition during the quarter stood at 422 taking the total head count to more than 12000.

Attrition further dropped to 15.6% in Q1FY2024.

ESOP expenses to be in the range of 0.4-0.5% during quarters going forward.

The company has rolled out salary hikes for 70% of the employees in Q1. It will roll out salary hikes to 30% of employees from 1^stjuly. Impact of increase in salary expenses will not be significant on margins in Q2.

Utilizations stood at 72.5% in Q1. The company plans to increase the utilisation and take it 80% going forward by utilising the bench strength.

The company plans to hire 1800-2000 engineers during the financial year. However, lateral hiring will be need based.

The company says that Tata Technologies and itself can co-exist as two different companies on account of different verticals and services they offer.

Geography: European business is led by automotive while US business is led by Media and communication. US also has medical business. The performance of the geography is based on the performance of verticals. The company will continue to invest in these geographies and expects growth to return eventually.

Generative AI: On the engineering side the impact of generative AI is limited however the impact is significant on CSR and marketing side like KPO and BPO side.

Outlook:

Transportation vertical - Some of the deal closures are taking time. However deal pipeline is strong. Large deals are being chased by the company. Lack of conversion is resulting in low revenue growth. However going forward it is expected to accelerate. What was to be closed on early quarter is still open. Customers are cautious and careful. The company expects additional revenue to kick in from Q2 and is confident in growth.

Media and telecommunication- The entire industry is witnessing de-growth. However, the company has held the ground. The company has maintained the business from Top-5 clients resulting in market share gain. The industry is still soft. The company wants to wait and watch how the deal closures will progress in Q2.

Healthcare: Last 2 quarters did not show any growth due to concerns in Europe. However, in Q1Fy2024 the company has done well with new deals and product launches. The company is pretty optimistic on the succeeding quarters as well and aims to get back to earlier growth rates.

Industrial business(IDV) is a smaller business for the company. It had a healthy growth in the previous financial year however; growth was soft in Q1 on QOQ basis. The company expects Industrial business division business to grow significantly for the next 3 quarters of financial year.

Management commentary:

Commenting on the performance Mr. Manoj Raghavan, CEO and Managing Director said:

“We are happy to report a healthy growth of 17.1% YoY in the current macro-economic environment, while delivering industry leading EBITDA margin of 29.6%. While the overall global economic outlook remains challenging, our customer focus and targeted efforts to keep the growth momentum going is showing good results.

During the quarter, our Healthcare & Lifesciences business has reported a healthy QoQ growth of 3.4% which is a significant improvement over the performance during the earlier two quarters. This vertical also reported new product development deal wins for medical diagnostics and Smart Hospital equipment.

In the Transportation business, we continue to drive differentiated software capability and scale, and see good traction and a strong deal pipeline, especially in Software Defined Vehicles and EV. While some deal closures were delayed in this quarter, we won significant new deals including a strategic multi-year multi-million US$ SDV deal with a leading Asian OEM for their SDV platform and software development, and a multi-country licensing and deployment of our Connected vehicle platform with a global Top 5 OEM. To expand our automotive and smart mobility focus in North America, we have opened an Innovation Hub and nearshore engineering centre in Troy, Michigan that will innovate along with leading institutes and technology ecosystem in the region.

We also signed a Memorandum of Understanding (MoU) with the Indian Institute of Technology, Guwahati (IIT-G) to jointly work on developing and commercializing state-of-the-art solutions for the fast-evolving space of electric mobility.

Our Media & Communications business performed creditably to retain and grow market share even though absolute revenue growth was muted. We won our first multi-year deal for our 5G network orchestration and automation suite with a leading telecom operator. This is an important milestone for the renewed portfolio we are building for this industry vertical. However, the Media, Telecom and Technology sector is still soft globally and we remain cautious on short-term growth in this sector, while staying close to our key customers and focusing on intelligent AI powered solutions and technologies that will drive the next wave of transformation in this industry.

I am delighted by the all-round customer excellence demonstrated by Elxsians that has allowed us to grow strongly with our key customers and positioned us well for competitive differentiation and new project considerations across our customer base.

On the people front, we continue to invest in our talent base. With a net add of 422 Elxsians in this quarter, the Tata Elxsi family is now 12,000+ strong, with attrition dropping further to 15.6%.

We have driven strong operational excellence across the organization and protected our EBITDA margins, despite wage hikes and strong employee additions in the quarter. Our Effective Tax Rate (ETR) in this quarter has increased on account of lower tax exemption due to completion of 5 years for two of our SEZ units, impacting our PAT Margins.

In our aspirational journey of being carbon neutral by 2030, we were awarded a silver medal by EcoVadis, the world’s largest and most trusted provider of business sustainability ratings. The silver medal underscores our ESG standing amongst the global corporate community, and demonstrates our commitment to responsible practices across areas including environmental impact, labour conditions, ethical sourcing, and business conduct.

It is a matter of great pride for all of us at Tata Elxsi to partner with ISRO and play a role in the Gaganyaan project. This collaboration will help push the boundaries of technology, and provide us a unique opportunity to advance our capabilities while strengthening India’s space mission. We wish ISRO the very best as it progresses further in the ambitious Human Space Flight mission.

As we step into the second quarter of this financial year, the confidence of our customers in our differentiated Design Digital proposition and delivery excellence, and a strong deal pipeline especially in the automotive, healthcare and design businesses, provides us the confidence and foundation for accelerating growth through the year.”