Tata Elxsi : Financial Reporting Document

"Tata Elxsi Limited

Q3 FY '23 Earnings Conference Call."

January 25, 2023

MANAGEMENT: MR. MANOJ RAGHAVAN - MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER - TATA ELXSI LIMITED MR. NITIN PAI - CHIEF MARKETING OFFICER AND CHIEF STRATEGY OFFICER - TATA ELXSI LIMITED MR. GAURAV BAJAJ - CHIEF FINANCIAL OFFICER - TATA ELXSI LIMITED

MS. CAUVERI SRIRAM - COMPANY SECRETARY - TATA ELXSI LIMITED

MODERATOR: MR. SHASHANK GANESH - ERNST & YOUNG

Moderator:Ladies and gentlemen, good day, and welcome to the Tata Elxsi Limited Q3 FY '23 Earnings Conference Call. As a reminder, all participant lines will be in listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and then zero on your touchtone phone. Please note that this conference is being recorded.

I now hand the conference over to Mr. Shashank Ganesh from EY. Thank you, and over to you, sir.

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Tata Elxsi Limited

January 25, 2023

Shashank Ganesh: Thank you very much, Faizan. Good afternoon, and good evening to all the participants on the call. Good morning, if you're joining from the Western side. Before we proceed to the call, let me remind you that the discussion may contain forward-looking statements that may involve known or unknown risks, uncertainties and other factors. Therefore, it must be viewed in conjunction with the businesses that would cause further result performance or achievements that differ significantly from what is expressed or implied by such forward-looking statements.

To take us through the results and answer your questions today, we have the senior management of Tata Elxsi, represented by Mr. Manoj Raghavan, Managing Director and CEO, Mr. Nitin Pai, Chief Marketing and Chief Strategy Officer, Mr. Gaurav Bajaj, Chief Financial Officer, and Ms. Cauveri Sriram, Company Secretary.

We will start the call with a brief overview of the past quarter by Mr. Raghavan, followed by a Q&A session. Having said that, I would like to hand over the call to Mr. Manoj Raghavan. Over to you, Manoj.

Manoj Raghavan: Thank you, Shashank. Good evening, everyone. Thank you for joining the Q3 earnings call this evening. Wishing you all a very successful and prosperous 2023. I'm glad to report that in a challenging macroeconomic and business environment across regions and markets, we have reported a steady quarter with healthy growth in revenues and net profit and improvement in our margins as compared to last quarter.

Our revenues from operations during the third quarter stood at INR 817.7 crores, a quarter-on- quarter growth of 7.2% and a Y-o-Y growth of 28.7%. Our EBITDA for the quarter was at INR

246.9 crores, growing by 9% quarter-on-quarter. Our PAT for the quarter stood at INR 194.7 crores, growing 11.7% Q-on-Q. In constant currency terms, the company grew 3.5%.

We continue to lead design with our industrial design business, reporting a 19% quarter-on- quarter growth in constant currencies. This business continues to help us differentiate our offerings, seed entries into new projects and customers and set the foundation for larger downstream development projects.

SI business continues on its path of transformation and registered a healthy growth of 9.3% quarter-on-quarter in constant currency terms. It's building the foundation for what we call the run services, including tools, infrastructure and operation support, to help engineering teams develop and deploy products into the market. This includes support for some of the platforms that we have built and licensed.

EPD division grew by 1.6% quarter-on-quarter in constant currency terms. Within EPD, if you look at it, we are witnessing sustained growth momentum in our transportation segment which reported strong growth of 7.3% quarter-on-quarter in constant currency terms. During the quarter, we not only continued to scale with our existing customers but also won some strategic multi-year deals, including an STB program with a global OEM software organization and an offshore center of excellence for an EV systems leader from the US market.

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	Tata Elxsi Limited
	January 25, 2023
	Our Media and Telecom and Healthcare business units saw some impact of furloughs and
	delayed edition making. Also, this being a seasonally weak and shorter quarter, there was some
	impact on our Q-o-Q business growth. In constant currency terms, the Media Communication
	business witnessed a decline of 2.6% Q-o-Q basis.
	Our Healthcare and Medical Devices business unit revenues declined by 1.9% Q-o-Q, but
	overall, in both of these businesses, we have done well to protect our business and position
	ourselves strongly for upcoming deals. We have also won key deals in strategic areas such as
	ad-tech and healthcare platform development that underscores the differentiation we bring to the
	customers.
	On the people front, we continue to do well with employee engagement and retention, with
	attrition declining for the third consecutive quarter to 18.4%. Our investments in hiring and
	training a large number of fresh engineers who joined us in the last quarter and before are
	actually starting to pay dividends as more and more of them are getting onboarded into customer
	projects. We will continue to add fresh engineers over the next four quarters and laterals in key
	lead portions across deliveries, technology and sales.
	As we move to the last quarter of this financial year, at an overall company level, we have a
	strong order book and a pretty healthy pipeline across key markets. So I strongly believe that we
	have a good story here. I'll now hand over the floor to Shashank for the Q&A session. Thank
	you.
Moderator:	The first question is from the line of Bhavik Mehta from JPMorgan.
Bhavik Mehta:	Good set of results and congratulations to the management. Two questions. Firstly, the
	weakness, you saw in media and health care verticals, is this over? Or do you expect some
	furloughs to continue into 4Q as well? So what's the outlook on these two verticals going
	forward? And the second question was on the wage cycle. If I remember correctly, last year we
	had wages in March and June quarters. So how are we looking at a wage cycle this year?
Manoj Raghavan:	So regarding both the Media and Communication and healthcare verticals. We believe it will
	continue to be soft for a quarter or two, especially the Media and Communication vertical. In the
	healthcare vertical, we are a lot more bullish, we should be able to recover much faster. And we
	are seeing deals coming back. So I think we'll wait and watch. Regarding the wage cycle, our
	next hike will be in Q1 and then based on how the deals flow in Q4, we'll take a decision, but
	the wage hike is currently planned for Q1 next year.
Bhavik Mehta:	And lastly, the ESOP plan volume introduced, any early comments on how much impact this
	will make on the margins?
Manoj Raghavan:	No, I think there won't be a very significant impact. We'll cover it up with our operational
	excellence. Once we talk to regulators, we will be able to disclose a lot more in the coming days.
Moderator:	The next question is from the line of Apurva Prasad from HDFC Securities.
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Tata Elxsi Limited

January 25, 2023

Apurva Prasad: Manoj, I had a question on the IDV business. Now it seems that nearly half the growth has come from IDV sequentially. It seems counterintuitive looking at its historical cyclicality and the current macro. So it'll be good to know what's driving growth here. Are there more synergy deals here with EPD? Or are these standalone deals outside the traditional transportation/media verticals?

Manoj Raghavan: Good question, Apurva, and for folks who have been listening to our commentary, we have been restructuring our design business over the last four quarters. We have done a lot of things to really scale that business. If you look at it on a quarterly run rate basis as compared to maybe a couple of years ago, we have almost gone up 2.5x, so over the two years, we have really done a number of things to really grow that business.

And whatever we are seeing now is a result of all those initiatives that we have taken. Design business continues to win design digital deals for the company across our key verticals and also helps us seed larger development opportunities across the various verticals. So I think definitely, there is a lot of cross synergies with our current verticals.

We are pushing a lot more design digital deals in the three major EPD verticals. Of course, IDV also has their own customers outside of these three verticals. So that's something that definitely is positive. There is a lot of focus and emphasis on design aspects that are AR/VR-related,training-related and worker productivity, along with a number of other things that we are doing that is really combining the design capability along with the engineering capabilities that we have.

So yes, we have grown the breakup of our verticals, primarily for the EPD division. IDV also contributes to the automotive, media and to healthcare verticals. So, at some point in time, we will take the decision of showing the real picture of the total revenues, including EPD and IDV in each of these three verticals. That's something that we have not been doing, but we are really looking at it. Now that IDV is scaling, I think it makes sense at some point in time to really show the overall revenues, both EPD and IDV, put together for the three major verticals that we have.

Apurva Prasad: And my second question is on the top 5, which was flat sequentially. So is the performance uniform across the top 5? Or is it more top-client-specific? And if you could talk about what's the outlook and the funnel in this?

Manoj Raghavan: No. If you look at the top 5, it's not been flat. While the top 5 has grown, the growth has been slower than the next 5 and the next 20. So the growth that we have shown in this quarter has primarily been driven by customers outside the top 5. But the top 5 have also grown. You should also note that our top 5 accounts are bringing large revenues to the organization. And in a few cases, we have had furloughs and the impact of furloughs is also factored into the revenues that we have shown. So, to that extent, yes, you must have seen some slowdowns and so on. But the top 5 has grown. It's not flat.

Moderator:

The next question is from the line of Vimal Gohil from Alchemy Capital Management.

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Tata Elxsi Limited

January 25, 2023

Vimal Gohil:Congratulations on a strong quarter in considerably challenging macros. Sir, my first question was on margins. So last quarter, we had a fairly strong hiring. And the expectation was that there will be some cost effect into this particular quarter. However, that has not really happened, if you look at the overall employee cost as a percentage of sales.

Also, there is a reduction in employee costs given the fact that we were facing supply pressure, especially in the automotive piece. So if you could just help us reconcile this. And also, I just wanted to check, again on margins, would it be fair to say that our IDV business, the margins over there are slightly above company average?

Manoj Raghavan: The second question, is about IDV margins. I think we wouldn't want to disclose the margins at this point in time. Margins vary from deal to deal and IDV is a smaller business, so sometimes we are very aggressive to get that business and then build on it because it is not just the design business, but also downstream engineering. So we know that as an overall entity, we can make better margins. So it will be misleading if we really look at only IDV and say whether the margin is good or not. There are cases of standalone IDV deals where margins are extremely good.

So it's a mixed bag, and it will be misleading if I give you a commentary that margins are great. But we don't look at it in that way. We look at it as a combined entity, how IDV really helps EPD and EPD customers and we look at account margins, not so much about whether IDV margin is better or EPD margin is better. But the first question coming back, I really couldn't get the context, if you could repeat that?

Vimal Gohil:I'll just repeat that. The question was that the second quarter had very strong hiring. So the expectation was that there will be some costs that will pass through in this quarter; and there could be some pressure on margins before the margins improve going forward. But improvement has just come slightly better. So what helped that?

Gaurav Bajaj:So there are a few things there. I think you rightly mentioned that there is some tailwind from the past quarter's hiring because we will have that full quarter impact of this in quarter 3 compared to quarter 2 for both campuses along with the intake in quarter 2. But to offset that, I think we have superior topline growth and the people that we brought in across the previous quarter, have started to improve our utilization and those people have been put into the billable projects this quarter.

Manoj Raghavan: Yes. And apart from what Gaurav said, we've also had a reduction in more expensive consultants. Because of the situation in the market, we had contractors that we had hired. So we've actually reduced the contractor's headcount, and we've replaced them with our permanent employees at a lower cost. So I think these factors helped us to show better margins.

Moderator:The next question is from the line of Urmil Shah from Aegis Federal Life Insurance.

Urmil Shah:Congrats on a good quarter. So my first question is, if we look at the business from a medium- term point of view with the transformation that we are undergoing on our SI business, should we look at it from the perspective of IT services companies wherein our SI business should

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