Tata Elxsi hosted a conference call on October 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

Revenues of the company stood at Rs 881.7 crore in Q2FY2024. A growth of 3.4% QoQ and 10.1% YoY in constant currency terms.

Transportation business, which accounts for 46.2% of the vertical revenues, witnessed strong growth of 6.9% QoQ and 19.1% YoY in constant currency. During the quarter, the company also won a land mark multi-year multi-million large deal for SDV from one of the leading Automotive OEMs. The deal is from a new customer which the company was pursuing from last 18-20 months. This will add to automotive revenue in subsequent quarters.

Healthcare & Life sciences business registered a healthy growth of3.2% QoQ and 4.8% YoY in constant currency.

Media & Communication business continues to face a cautious industry environment both in US and Europe. The revenue declined marginally by 0.4% QoQ and 1.3% YoY in constant currency basis.

Industrial Design division (IDV) crossed Rs100 crores in revenues for the first time in a quarter, growing 4.0% QoQ and 26.2% YoY in constant currency terms. IDV revenue run rate was around Rs 30 -40 crore 3-4 years back. The company has made significant investments and targets revenues of Rs 500 cr annually. Combination of EPD and IDV division will help company scale up its revenue .

Margin: EBITDA margin stood at 29.9% for the quarter up 30 bps QoQ.

There was an impact to the tune of 160 bps due to wage hike for senior management employees. Further, there was an impact to the tune of 50 bps on account of RSU which was there for the full quarter as against last one month in the previous quarter. This was offset by improvement in utilization, pyramidization, lower discretionary spends with respect to travel, visa and reduction in third party contractors cost totalling 120 bps. Also, in the first quarter, the company had made some investment in setting up centres which normalised in this quarter resulting in improvement in EBITDA margin to the tune of 120 bps. Over all there was an improvement of 30 bps QoQ in EBITDA margin .

In covid period margins were better as there were lot of cost which were not existent like travel and others. The company is better placed today and is in a position to mitigate any surprises with respect to margin through pyramidization, improvement in utilization and offshoring.

ESOP cost: ESOP cost is already accounted for. This will be there for forthcoming quarters and years.

Other Income: Other income increased in Q2 to Rs 31.1 cr when compared to Rs 22.2 crore in Q1.

This was on account of foreign exchange gain due to hedging. Also increase in interest yield also led to improvement in other income.

Human Resource:  Net additions were 585 employees in Q2FY2024.

Attrition declined to 13.7% in Q2FY2024.

The company had given salary hike to junior and middle level employees in Q1FY2024 and has provided salary hikes for senior management in Q2FY2024. Hiring will be in similar line for Q3.

The company has gone for campus interview and has rolled out offers.

Special Economic Zone: No new exemption for SEZ for IT from the government. The company expects ETR for rest of the year to be in similar lines of first 2 quarters.

Geopolitical: The company does not have any exposure in Israel. The company has some exposure in Dubai and Middle East. If the war spreads and if there is a hike in fuel rates than it will have adverse impact on the company’s business.

Furloughs: The company expects furloughs in line with previous financial year. It expects some impact for media and communication business. The company does not expect anything unusual and expects to mitigate the same.

Customers: Top 5 customers are important for the company as they drive volumes and growth. However the company’s focus is to increase top 10 and top 20 customers. As the company grow the contribution from top 5 and top 10 customers will come down but no deliberate efforts to reduce the same.

Offshoring:

The company is known for offshoring and delivery from best cost countries.  The company will continue to focus on offshoring.

Outlook:

Automotive: The deal pipeline is strong. The automotive business continues to see traction.

The company is witnessing lot of consolidation deals. Deals which were taking 6-8 months for are now taking longer time for closure.

Media and communication: The company is witnessing positive signs and expects some growth. The company is witnessing some green shots. The company is little conservative in H2FY2024 in Media and communication.

Health care: The company witnessed some good deals wins. The growth initiatives are around digital space and connected health devices. The company has won some new customers. The company is talking to lot of customers. Decision making from the customers is taking longer time. The company is cautious for next 2 quarters.

Overall despite macro economic uncertainty  and war, the company has done well . The company will continue to invest in people, provide solution where customer needs. The company is optimistic for H2FY2024.

Management Commentary:

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

“We are happy to report a healthy performance in the second quarter with a top-line growth of 3.7% QoQ and 15.5% YoY in a challenging quarter for the industry. Our EBITDA has grown 4.8% QoQ and 16.3% YoY and our EBITDA margin has improved by 31 bps to 29.9%. This underlines our strong focus on delivery and operational excellence, key account management and differentiated offerings.

Our Transportation business, which accounts for 46.2% of the revenue coming from three verticals, witnessed strong growth of 7.1% QoQ and 26.1% YoY. During the quarter, we also won a landmark multi-year large deal for SDV from one of the leading Automotive OEMs.

Our Healthcare & Lifesciences business too registered a healthy growth of 3.6% QoQ and 8.5% YoY. Our strong design capabilities are helping us win multi-year innovation deals with leading device manufacturers.

Our Media & Communication business continues to face a cautious industry environment and grew marginally at 0.1% QoQ and 2.8% YoY. We continue to closely engage with our key customers and are developing new offerings and relevant partnerships that will help them drive efficiencies and create new revenue streams in a challenging business environment.

Our Design-Digital strategy is playing out well and has helped our Industrial Design division to cross Rs. 100 crore revenue mark for the first time in company history. The division grew by 4.1% QoQ and 35.4% on a YoY basis, driven by strong demand for Design-Led engineering services.

We continue to invest in building our talent pipeline with a net add of 585 Elxsians in the quarter. Our employee engagement and talent retention strategies have contributed to attrition further improving to 13.7%.

We are starting our third quarter with the confidence in our differentiated Design-Digital capabilities and a strong deal pipeline.”