Tata Elxsi hosted a conference call on Oct 14, 2022. In the conference call, the company was represented by Mr Manoj Raghavan-CEO & MD, Mr NitinPai – Chief Marketing and Chief Strategy Officer and Mr Gaurav Bajaj – Chief Financial Officer.

Key Takeaways of the call

The company delivered steady performance in Q2FY2023 led by industrial design and EPD.

In Q2FY2023, the company reported Rs 763.2 cr of revenue from operations, a growth of 5.1% QoQ and 28.2% YoY. In constant currency terms also, the growth was 6.5% QoQ. Revenue grew by 4.7% in CC terms QoQ.

Growth rate was moderated in Q2 when compared to Q1 due to lower growth in media and communication vertical. Also one of the reason for moderation is on account of supply side challenges.

The company's growth was primarily volume led, with all three segments of EPD, IDV and SIS showing robust growth. Embedded Product Design grew by 3.1% QoQ and 29% YoY, Industrial design and Visualization grew by 15.5% QoQ and 15.4% YoY and System integration & Support growing by 26% QoQ and 41.7% YoY.

Vertical wise transportation grew by 4.6% QoQ and 34.2% YoY. Media and communications grew by 1% QoQ and 19.5% YoY and Healthcare and medical devices grew by 5.1% QoQ and 45.1% YoY.

India: The performance of Indian market was soft in Q2. This was not due to lack of demand but due to supply side constraints as the company had to deploy resources to other markets. The company is having discussions with customers who are being in PLI scheme. Most of these customers were earlier importing from China and just branding and selling. This gives the company opportunity to provide design and engineering services.

Other markets: China and Korean markets are still down due to Covid and other issues. However Japan is ramping up well and the company has won few large deals in the last and current quarter.

The company has signed some large deals in last 2-3 quarters. Ramp up is happening in these projects and the company has hired significantly in Q2 to meet the pipe line to ramp up

Margin: The operating margin came in at 29.7% in Q2 when compared to 32.8% in Q1. This was on account of the company adding 1532 head count in Q2FY2023. Also some of the other expensed are coming back as the employees are returning to office. Also, the company is expanding its facilities at some of the existing locations and adding new facilities in some cities.

Margins were impacted to the extent of 120 basis points due to campus hiring and 60 basis points on account of lateral hiring. The balance was on account of facility expansion and travel related expenses coming back.

Other expenses: Increase in other expenses includes cost related to recruitment, training and facility expansion and addition. It includes both one time as well as recurring. The company expects that some of the cost will continue while some will normalize.

Human Resource: LTM attrition in Q2 stood at 18.7% and the company expects the same to come down further going forward.

Net addition during the quarter stood at 1532. Of the total net additions around 1100-1150 were fresher's and the balance were lateral. The company hired around 250 fresher's in the last month of Q1.

Of the total fresher's hired around 100 have become billable. The company expects another 250 to become billable in Q3. The company expects all of the freshers to become billable in next 2-3 quarters.

The company hired 2500 fresher in H1 and plans to add another 750-1000 fresher's in H2.

The company considers that addition of employees and facility expansion which has led to increase in cost as investment for long term growth.

Utilization in Q2 stood at 78.9% which was earlier at 83-84%. The company's first focus is to get back utilisation to above 80%. However, the company will continues to hire for specialised capacity. However, will be careful with bulk hiring till the utilisation improves.

Onsite Offshore mix: The company's onshore revenue mix stood at 24.8% in Q2. However, of the total employees around 10% are in onsite location. The company is facing attrition issue in onsite .

The company is promoting offshore for clients and customers are fine with it.

Work from home: The company has put in place hybrid work model from Oct 1. Around 25-30% of the employees were coming to office in Q1 and Q2 which has increased to 68-70% currently and plans to increase the same to 80%. The company expects around 800-8500 workers coming back to office. This will lead to some of the performance metrics improving.

With most of the employees returning to office, expenses related to employees like cafeteria, drop facility and other facility related expenses will come back.

Outlook:

Transportation and medical business growth and pipeline is strong. The company is not witnessing any deferment in transportation and medical business. However, the company is witnessing slowness in media and communication vertical due to macroeconomic environment in Europe and high inflation in US. Some of the decisions are getting prolonged in media and communication and some are getting deferred.

The company is little bit cautious with respect to macro-economic environment and is regularly meeting with and connecting with the clients to understand the thought process. However, the company expects that the situation may change every month.

None of the top customers have stopped their committed investment. However, with respect to new opportunities customers are cautious and it is taking much longer time for closure. Further of the total revenues 93-94% of the revenues come from existing customers for the company.

Traditionally Q3 is impacted for the company due to Furlough.

The company said that the demand is not an issue. However, supply is a concern with respect to middle and some senior management. No issue with junior people.

The company is witnessing some deferment in platform business. However, the company is witnessing some demand on the services side of the platform business. Also, the company expects that clients will take decisions with respect to platform business in Q1 of calendar year 2023 as for most of the US companies budget allocation happens in Q1(Annual budget).

Management Commentary:

Mr. Manoj Raghavan, CEO and Managing Director, Tata Elxsi, commenting on the company's performance, said:

“We have delivered a quarter of steady growth amidst macro-economic uncertainty and currency headwinds in our key markets. We are seeing strong and sustained growth in the automotive and adjacent segments, led by our EV and digital capabilities. We are gaining market share in both Automotive and Media & Communications, especially in Europe. The numbers are muted in the region due to unfavourable currency movement.

We won multi-year deals in EV and autonomous driving systems in the automotive space, and a next-gen platform for connectivity and infotainment with a leading offroad equipment maker. We have won strategic platform-led deals in media and communications, with new SaaS and managed services models.

For us, this has been a quarter of investing strongly in growth for the future. With a net add of 1532, we have added the highest number of Elxsians in our history in a single quarter, while the attrition rate declined for the second consecutive quarter. We have also invested in expanding our facilities in existing locations of Bengaluru, Chennai and Pune, and new talent bases in Kozhikode and Hyderabad.

We are also making significant investments in growing our leadership pipeline for delivery, technology and sales. This is essential for us to establish the next base of talent to win, manage and grow the increasing number of strategic accounts and new offerings we are bringing to market.

We are entering the second half of the financial year with a strong order book and a healthy deal pipeline across key markets and industries, and the confidence of customers in our technology capabilities and differentiated delivery models. Importantly, we have invested in capacity and capability building for engineering talent, leadership and technology that will drive our next phase of growth.”