Ladies and gentlemen, good day, and welcome to the Tata Elxsi Q3 FY24 Earnings Call. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference, 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.
Thank you very much. Good evening to all the participants in the call. Good morning, if you're logging in 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, must be viewed in conjunction with the business risk that could cause further result performance or achievements to 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 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. We would appreciate your cooperation in restricting yourself to two questions to allow participants an opportunity to interact. If you have any further questions, you may join the queue and we will be happy to respond to them as time permits. With that, I would like to hand the call over to Mr. Manoj Raghavan. Over to you, Manoj.
Thank you, Shashank, and good evening, everyone. At the outset, let me wish you all a happy, healthy, and prosperous New Year. Thank you for joining us for the third quarter's earnings call. I'm happy to report that our revenue from operations in the third quarter stood at INR 914.2 crores, which corresponds to a 3% quarter-on-quarter and 9.4% year-on-year in constant currency terms. We continue to maintain our EBITDA margin well above 29%, and for this quarter, it was reported at 29.5%. I'm also happy to report growth across our entire portfolio of customers, including and beyond the top 5 and top 10, which reflects the differentiated proposition that we bring to customers.
If you look at our split between different businesses, EPD came in at about 84.7%, IDV at 12.3%, and the system integration business at 3%. In terms of regions, Europe grew well at about 5% quarter-on-quarter. We also saw small growth in Japan and rest of the world, including some large deals and new customer wins, especially in automotive sector. If you look at our various businesses within the EPD, our transportation business grew at 1.9% quarter-on-quarter in constant currency terms. We had some delays in the ramp ups in this quarter due to the shorter quarter and year-end holidays.
We are in a good position to capture growth opportunities in the continued transformation of the automotive industry and the software-defined vehicle space with a strong deal pipeline. In the media and communication vertical, the business environment for the media, telecom, and technology industry is challenging. Our performance has been quite satisfactory overall. Our revenue from this business has declined marginally by 0.1% quarter-on-quarter in constant currency terms. We continue to engage with our key customers in helping them drive efficiencies in current operations and also help them create new revenue streams for their businesses. You will note that we have significant contribution from the U.S. for this vertical, and the media and technology sector was the most impacted in this region.
Healthcare and life sciences business performed strongly, registered a 3.9% quarter-over-quarter growth on a constant currency basis. During this quarter, we won some large deals, both in regulatory and new product engineering services. Our Design Digital strategy is continuing to drive differentiation and growth for us. The industrial design and visualization business grew by 11.7% constant quarter-over-quarter in constant currency terms. During this quarter, our design teams have executed some landmark projects that spans user research, design and implementation, and leading the way for our customers to transform consumer experiences across industries. I'd like to highlight the recognition of our Design Digital capabilities with the German Design Award 2024 for excellence in design.
This award for the Gen 3 Next-Gen Automotive HMI that we won, along with Tata Motors, truly showcases the power of design when aligned seamlessly with technology to elevate driving experiences for future cars and electric mobility. I'll now briefly discuss about our investments in people and capacity. Continue to invest in building a talent pipeline with a net add of 350 Elxsians in the quarter. This brings the total net addition to over 1,350 in the first three quarters of the financial year. Our employee engagement and talent retention strategies have contributed to attrition, further improving to 12.9%. We're also investing in building offerings in capacity for AI.
We're working with customers and executing some, you know, exciting internal projects to harness the power of AI and Gen AI, targeting to solve problems, drive efficiencies, and drive and deliver completely new value for our target industries. We expect to ramp up investments further in the coming quarters as we expand the purview of applications and offerings across industries, product life cycles and domains. As we move into the fourth quarter, we carry the confidence of a strong pipeline across our businesses and some great conversations going on with our key customers. I would now hand over the floor to Shashank from EY for the Q&A session. Over to you, Shashank.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Vimal Gohil from Alchemy Capital. Please go ahead.
Yes, thank you for the opportunity. I hope I'm audible?
You are audible, sir.
Thank you. Sir, my question is around transportation. You have been highlighting a strong deal pipeline fairly consistently, despite whatever macro-related uncertainties are ongoing. However, the strong deal pipeline doesn't seem to be sort of substantially leading to growth for us. Barring two things, we've seen soft revenue growth, as compared to years. So what explains that? That is point number one. The second point is, if you can just help us, you know, break what led to how much of our softness was led by shorter quarter, and how much was led by delay in the closure of products?
So we continue to, you know, be very, very, you know, you know, bullish about the deals that we're chasing in TBU. And in fact, in a transportation business, we have closed some significant deals in Q2 as well. But however, some of the ramp ups are taking some time, which was expected to ramp up in Q3. Part of that ramp up has been pushed out to Q4. So, I think, that's what we are seeing in the industry. I don't think it's something that is really, you know, bothering us at this point in time.
We continue to invest in our talent and get ready to execute those programs, as seen in the sort of strong, you know, hiring that is ongoing. So it's a question of, you know, some of these deals, you know, the start of these deals or some of the ramp ups of these deals getting pushed a little bit here and there, again, due to customer-related issues. And, you know, we've had some union problems and so on with our customers and so on. So some of those issues are getting sorted out, and, hopefully in Q4 and, subsequently in Q1 and so on, we will see, you know, a strong ramp up in these deals.
So, we're not, we're not worried so much about that. However, the fact is that we continue to invest in, you know, invest in talent, invest in our, you know, building up the sales pipeline and, we are still very, very confident about the transportation industry. The second question, I think, a lot of it, especially in the media and communication industry, what we've seen is, because of the, you know, shorter, you know, quarter that we have, and also we've seen an increased, you know, furloughs in that particular industry, especially in the U.S. geography.
That has also contributed to, you know, our, media and communication, you know, that business being pretty flat. We are taking, steps to see how we can, you know, build up, the funnel and, and pipeline there. But I think, definitely that industry is stressed and, you know, it will take, I would say, a couple of quarters more, before we get a clarity on. And there are a lot of changes happening. There are M&As happening, there are cost takeouts happening. So our focus is, a lot more on consolidation opportunity and trying to increase the wallet share, you know, within our customers.
And because we are, you know, a lot more offshore-driven, you know, execution and so on, we are bringing that efficiency to the customer and saying that, "Hey, given the situation you are in, doesn't it make a lot more sense for you to move a lot more work offshore and let us execute it?" And, you know, and then really take a lot more pie from our competition. So that's something that we are working on. So we will have a lot of consolidation and cost takeout deals, where we are focused on. So that's something that we will focus on, especially on the media and communication business.
Yeah, thanks, Manoj. One follow up there. In the transportation business, do you think there has been a higher contribution of short cycle deals leading to a lot of volatility in the quarterly performance?
No, no, no, absolutely not. There is, I mean, a lot of the deals are pretty long-term, you know, significant, large significant deals. Not so much, you know, you know, three years ago, four years ago, we used to have many of these short cycle deals, you know, two months... I mean, sorry, two quarters, three quarters for a deal. No, we have got out of that scenario. It's most of the deals are long-term deals, yeah.
All right. Thanks, Manoj. All the very best. Thank you.
Thank you. The next question is from the line of Karran Danthi from Jetha Global. Please go ahead.
Hi, can you hear me?
Yes, Karran, we can hear you.
Okay, great. Two questions. You know, the first is a little more high level. As we are primarily an offshore-driven business, does the advent of AI allow us to effectively move up the value chain? And are we seeing evidence of that, i.e., the quality of work that you can do offshore with some of these AI tools should be significantly enhanced. And I'm wondering if you're seeing augmentation for existing deals or perhaps even new deals where you're clearly doing higher value work. And if you could just speak to some of those AI deal sizes or examples of AI work, that'd be great. The second question would be on healthcare. You've shown a little bit of an acceleration, which is nice, versus the previous quarter. Can you keep going?
You know, can this vertical continue to accelerate as there are numerous other examples of you know, AI applications, both within medical devices, drug discovery, and other areas? It seems like it's an area that's ripe for you know, for AI to be used to bend the cost curve. So I'm just curious whether that vertical can perhaps make up for some of the weakness of media and comms.
Yeah, let me take the healthcare question, you know, first. Yes, healthcare has seen a good uptick in this quarter. And that's very satisfying for us because a lot of effort has been put in, you know, both from you know, new deal wins and really going after new logos and so on, right? That is definitely there. Plus, you know, we strategically, you know, really focus on a few top customers in our healthcare business and really, you know, deep dive in terms of farming deeper into those accounts and so on, taking new value propositions. You rightly talked about AI-led you know value propositions and so on.
So we've been successful to, I would say, enhance our overall market share, even in our existing customers, as well as win some new logos there. We hope to continue this, you know, continue this momentum that we have. However, it's pretty early, I mean, in the sense that, you know, we've had a situation, you know, last financial year with the overall MDR business falling off the cliffs and, you know... And I think we've done a significant piece of de-risking there and our ability to withstand that, you know, sort of a business situation and come out of it and really generate new revenue stream. I think it's...
I would like to give credit to the team who have done a fantastic job, both sales and the delivery organization, to really retarget our offerings and embrace, you know, some of these new paradigms, including AI and, you know, bring in new opportunities for us. So, but again, it's just a start. You know, we would definitely want to look at a few more quarters, you know, to really be confident that, look, this is a secular sort of growth that we can expect. In general, on the AI, maybe I request Nitin to address that.
Thanks, Manoj. So Karan, first of all, I don't think AI has a particular inclination towards offshore or onshore. I would rather align it to the nature of the work that you do and the ability for AI to bring in value there, whether it's of efficiency or of completely new KPIs and value. To that extent, I'll just state that AI has been part and parcel of what we do for many years now, right? So in AdTech and OTT, whether it's recommendation engines, dynamic pricing engines, all these are fundamentally AI-based. If you look at automotive, AI has been part and parcel of everything that we do in autonomous cars and ADAS features and so on. So to that extent, there is progression even in that part of AI. We continue to work on that.
Gen AI, I think, is a new paradigm, where you're now able to capture learning, capture organizational learning and knowledge, and then reflect it back into either faster time to market, better code, or hopefully also discovering completely new application. I think for us, AI is and continues to be part and parcel of what we do. Gen AI and how to use that to drive efficiency or to create completely new revenue streams, I think, is a new journey that we are on. And you will see that we're actually starting to make fairly significant investments, both in terms of new people, ramping up and training and retraining existing people, as well as infrastructure and related investments that we are making in-house. To that extent, I think, in our deal announcements, you've actually seen AI reflected in two slightly different contexts.
In one context, it's about not only delivering consolidation in the media and telecom industry with a particular customer, but doing it on the back of offshoring, ownership, and AI. While in the second deal, where it is to do with healthcare, we're actually making AI part of the process of automation and speed in order to bring that value to customers. So we're actually seeing that already reflect in the nature of the deals that we are winning and we are building. So that's where I would put it, Karan. Gen AI is still early, but we're already seeing some use cases we're able to leverage it. But for us, AI is well beyond Gen AI.
... Thank you.
Thank you. The next question is from the line of Akshay Ramnani , from Axis Capital. Please go ahead.
Hi. Thanks for taking my question. So first question is, a follow-up to the question which previous participant asked on the transportation segment. So, if I look at the transportation growth on a YoY basis, it has moderated substantially what we were growing in, say, FY 2022 and 2023. So on a nine-month basis, leaving this quarter aside, even on a nine-month basis, we would be at closer to about 16% growth versus what we were delivering at about 30% growth in FY 2022 and 2023. Now, this is compared to other peers who have either seen a steady or an increasing growth rate in automotive year-end. So wanted to understand what is leading to us seeing a slowdown or a deceleration, despite us having strong capabilities and a conducive market conditions.
If you can touch upon the aspect of how we are seeing a different trend versus other peers.
I'm not sure about other peers. We can only talk about Tata Elxsi, and I think year-on-year 16% growth in this market is pretty creditable, I would say. And as I said, right, we have accelerated this growth a lot more because there are deals that are there in the bag. We've not been able to, you know, turn on the tap fully on resourcing because of certain constraints at our customers' end. And it's a matter of time that those constraints are removed. And if those situation at the customers' end, you know, open up, we will be able to accelerate.
And that's what we are looking at both in Q4 and subsequently in Q1. And we're pretty confident, and that's why we are also investing in the resources and ramp ups. We are having all those conversations. Yes, you know, one part of the business is we are winning a lot of OEM opportunities, right? And that's a good part of our business. The other large part of our business is also the work that we do for Tier 1.
Unfortunately, you know that the Tier 1 situation, you know, you have a lot of consolidation happening, and you know, Tier 1s are also their business is also getting affected because OEMs are taking more and more ownership and more and more responsibility. At the same time, the Tier 1s are also setting a lot of captive centers in India and so on. So there are some amount of, I would say, attrition in our Tier 1 business that that gives you an impression that we are slowing down. But in reality, our push and focus towards the OEMs is still pretty strong, and that is really propelling our business forward.
The relative, you know, slowness, I would say, is attributed to the part of the Tier 1 business coming under stress, either due to Tier 1 themselves, you know, losing business from the OEMs and so on, because of what the OEMs are going through, as well as the Tier 1s deciding to set up, you know, their own captives in India, and thus moving business away in some sense from us. But however, you know, we have a long tier of customers, and our focus is to really focus on some of the large, you know, Tier 1 who have been our customers for the last 10 years, 15 years, and go back to them with the consolidation proposals and pitches.
And our focus is not to really focus on the entire landscape, given the fact that, you know, that market is going to be very difficult, moving forward. We are putting all our energies on some of our top customers there and consolidating business and winning market share, and that's something that we are working on. I hope that answers-
Got it. Yes, yes, yes. But, extending that discussion forward to the geographies part. So if I again look at the incremental growth, majority or most of it has come from Europe over the past nine months, while Americas is flat. And I understand media and communications has a role to play, but even if I try to adjust for that, America even looks weak on an adjusted basis. So if you can help us understand, is there some particular weakness on the transportation side as well as on North America, which may be impacting growth there? How should one read this?
So exactly the same answer that I told you, right? A lot of our North American business has been driven by our Tier 1, our supplier business. The OEMs there have been very, very competitive from a, you know, pricing perspective, as well as for some of the terms and conditions of doing business, has been very difficult, right? It's very difficult for us to accept some of those terms and conditions. And so we have been generally very careful with some of the North American OEMs, including, you know, unlimited liabilities and so on, which we know some of our competition has accepted. But these are things that we are very careful about and so our focus has been a lot more on the supplier side of the business.
Given the fact that, you know, we are having those situations with the suppliers, that's why, that's why you would see some of the slowness in our North America business also. Having said that, yes, there are a set of, you know, OEM customers that we are engaged with in North America as well, especially on the new age OEMs and so on. Plus, we've also been, you know, shortlisted by one of large OEMs, you know, for a SDV program there. So I think we are, you know, it's not as if everything is going down there.
We are carefully managing our business without adding risks to our overall portfolio, without really decelerating too much, but at the same time, focusing our energies on where we see maximum, you know, growth happening and where we see, you know, maximum returns for the investments that we're making. At this point in time, both Europe and APAC in general, right, including Japan, we're seeing very, very good traction. Especially, I'm happy to report, you know, APAC region recovering very significantly for us in the automotive side, and I think that gives us great confidence. We will be cautious on the U.S. business, but it's not as if that, you know, we are giving up on that.
We have strategies in place to address that particular business. But yeah, it is a tough business, and we need to navigate that very carefully.
That's very clear, Manoj. Just one for Gaurav, if you can share the margin work for the quarter, please.
Sure. Okay. Yeah, so actually, I think, our EBIT margin, operating margin came 30 basis point lower compared to the last quarter. I think most of those investment and the cost cut that has been done is well calibrated, and investment has been made, you know, keeping the long-term view of the organization in terms of the capability, building, development of the infrastructure and other talent management. The most of the expenses has increased in the other expense bucket. You know, 70-75 basis point increase, you know, towards the travel and the visa expenses in the quarter because there was a lot of sales pursuit, sales promotion activities and other events that has happened during the quarter. Which was well known, you know, in terms of the investment that has to be done in this quarter for us.
It also includes some of the training that we do for the campus batch that we have been taking over the last few quarters. So that is one. Second, I think we have talked about in some of the earlier questions that we are, you know, making a little bit of green shoots and early shoots into the AI kind of investments, you know, involved in capability building, infrastructure development, and training and retraining of our, you know, available talent in the organizations. So we have started to make a well, you know, educated investment into those AI related investment into the option that is, you know, more relatable to the sectors and industry where we operate, which, you know, add another 40 basis points. So that both put together is about 115 basis points.
People cost was mainly in line with the volume increase, you know, and the revenue growth that we have registered on a quarter-to-quarter basis. So it's hardly 10 basis points, you know, I would say on a quarter-to-quarter kind of an impact, from quarter two to quarter three. So overall, people plus other costs increased by 125 basis points. At the same time, you will see that our cost of sales has gone down by 55 basis points. It is again, you know, completely related to the project and the cost undertaken under those projects. Last quarter, we had significant cost towards the, some of the product base revenue, including tools, hardware and software. This time I think the revenue has been more from the people-related effort and less on the, you know, hardware and the software.
So that, you know, gave you a 55 basis point, kind of a tip, you know, if you have to do a comparative analysis from a quarter-to-quarter basis point. And overall cost increased by 80 basis point, and with the exchange benefit of 50 basis point, the EBIT, you know, has been down by 30 basis point. And I think it has been within our, you know, range that we have narrated, you know, over the last few quarters, that we like to operate in a range of, you know, 30 or 30-40 basis point in and around 27% on a EBIT basis.
But if you see on a PBT basis, we have a slightly better other income, due to the, you know, interest earn on our investments and the foreign surplus available to us and also on the exchange side, and we able to recoup, you know, some of the loss basis, you know, on the EBIT side. But at the PBT side, if you see, we are, you know, similar and at the same level of 28.9% compared to the last quarter.
Thanks for the answer.
Thank you. The next question is from the line of Bhavik Mehta from J.P. Morgan. Please go ahead.
Thank you. So a couple of questions. Firstly, on the transportation business, you highlighted that the U.S. OEMs are being quite competitive on pricing, and you are being cautious over there. So can you just explain to us what is driving this price competitiveness from the OEMs in the U.S.? The second question is, I understand that 3Q was impacted by delay in the ramp-ups in the transportation vertical, but going ahead, should we see ramp-ups normalize, or it will be more of a gradual recovery over 4Q and 1Q? And lastly, on media communication, I understand it's been quite weak over the past few quarters, but what are you hearing from clients? Is the worst behind?
Are we seeing any green shoots at all, or do we still have to wait, you know, for a few more months before some clarity emerges? Thank you.
I'll go with the easiest question first. Yes, the media and communication vertical is still, you know, pretty weak. I think we don't have full clarity yet in terms of how next financial year is going to look like. We are having discussions with our customers, and again, we, at this point in time, it's very difficult to say that, look, you know, we see- we are seeing some green shoots and so on.
So I think we would wait for, you know, one more quarter to see how some of the, you know, moves in the industry, right, including M&As and, including, you know, the cost pressures that are there on some of our customers due to their own revenue situation, revenue growth situation, and so on, right? So, so I would say still, that industry is under a lot of stress. And so the only option, you know, for us is to really stay relevant, and see how we can gain market share and, in a situation where the overall pie could remain stationary or even could decrease, right? Could come down.
How do we stay relevant and how do we—what is the value that we can contribute so that we can take a larger pie of that business, right? So that's where we are looking at from a vehicle communication business. Transportation business, I think I discussed in detail where we are and so on. We are hoping that, you know, Q4, some of those, you know, deals, you know, ramp ups would pick up, and, and, you know, we can definitely look at the end of this quarter, Q4, the situation and then, you know, assess further, right, what we need to do. Was that the first question?
I think it was just about the ramp ups and transportation.
Okay. I hope I've answered,
Yeah. So the first question was, what is driving the price competitiveness in the U.S. OEM, where we are being cautious and not participating there to the extent we would have liked?
Yeah, some of the deals are, you know, you have four, five vendors, you know, bidding together and, you know, prices driven down, you know, drastically and also, you know, terms, right? Terms of, one is, you know, one is price alone, commercials alone, other is the terms that come with those commercials, right? You know, if you put all of that together, and when we are getting, you know, better deals in other parts of the world, right? So somewhere, subconsciously, the teams tend to really move in those directions.
But, but for us, the focus of U.S. is a large market and you cannot ignore it and so on. So, so we are being very selective in the type of deals that, that we are picking up. We are playing to our strength and, and really not going after all the deals that are there, which could be either margin dilutive or which could create issues for us at a future point in time. So some amount of discretion, some amount of caution we are, we are looking at there.
Okay, thank you. That's all.
Thank you. The next question is from the line of Omkar Sawant from Marcellus Investment Managers. Please go ahead.
Hi, am I audible?
Yes, sir, you are audible. Please go ahead.
Yeah. Manish, I had a question on the Design Digital strategy. So, one of the key deals that you have mentioned on infotainment and in-cockpit, that looks to me similar to what the deals we have won so far. So can you elaborate more on the Design Digital strategy and how exactly is it different from the business that you have won so far? Maybe some other example.
Yeah. So, this is Nitin here. Maybe I can take that, Omkar. I think,
Yeah.
For us, Design Digital is where while design stays a constant, what we're looking at is the part of digital which is ever changing. So if you look at four, five years back, you would. And I'm just taking automotive itself. The only interface available was really about touch, and that was the only thing that was digital about the infotainment system. You look at what is happening now, you have touch, you have haptics, where you have certain surfaces that vibrate or so on and so forth, so that you can better inform and better engage with the drivers and make sure that there's no driver distraction. And most importantly, there is also the interface of voice, where voice is now taking over certain functionality.
So when you think of design and digital, remember the design has to now adapt continuously to what digital can offer. So if you now have voice interfaces, how does your interface, how does your design incorporate voice interface as one mechanism of interacting with the car? If you now have haptics, where is haptics best delivered? And at the same time, you also have to make sure that you're not ballooning up costs. Because remember, each of these interfaces are very expensive. To incorporate sensors, whether it's of cameras, whether it's of touch or of haptics, is a very expensive proposition. So how do you drive the right balance of sensors that will deliver you the additional sensory inputs or output?
How do you balance that with the design, which has to guarantee that the driver is not distracted, it is something that is intuitive enough for him to use? I think that is the moving target, and that is the holy grail for all designers. And I think that is where we really, truly excel, because we bring that deep understanding of how technology works, our absolutely fantastic knowledge of embedded, technologies, coupled with design.
How exactly are we capturing downstream value here?
Yeah. So the downstream value is really the implementation of the HMI itself. The hardware and systems that now have to change in order to bring in these kind of sensory inputs and outputs to the embedded software that has to implement the HMI on the infotainment systems. And if it is a connected car, how do you reflect some of this back in the app that the consumer uses, too? So in some sense, there is a downstream chain that is affected by what design proposes first as the method of interaction. So what you would see as a new screen is not just a new screen. And it's very simple to think of it as, here is a new web page. But remember, it's not a static web page. It is an interaction screen that is now being...
Behind it is a lot of code that is now actually implementing what you want to do with it.
Okay, and-
... And would we also take over the support of such systems?
That's correct. So for us, I think the longer product life cycle, opportunity is that especially with connected cars, HMIs are not going to be constant. You will see updates every once in a quarter, if not more often, in terms of sprint cycles of agile design. So the intent is to support two parts. One, the maintaining of the code in terms of DevOps cycle, CI/CD and so on. The second is in terms of the actual incremental implementation that happens quarter- on- quarter, sprint cycle by sprint cycle. So I think that is where we are starting to see that sustainability and stability of design and system integration business, which is coming from the fact that there is a tail of revenues that follows any project and is no longer project all by itself.
Okay. Okay. And this is primarily in automotive, right?
No. So this is true for media and telecom. Why? Because all our work that we do in OTT, again, you'll find that whatever you're talking about in automotive is true in OTT, because if you think about your search that's happening in your smart TVs or your OTT apps, you're using voice as much as you're using touch.
Oh, okay. Got it. Thanks. Thanks, Nitin.
Yes. Thank you.
Thank you. The next question is from the line of Kireet, from Jetha Global. Please go ahead.
Hi. Thanks for the opportunity. Am I audible?
Yes, sir. Go ahead.
Yeah, thanks. So the first question is regarding the transportation vertical. You've kind of alluded to how you plan to increase wallet share among existing clients. Can you maybe give us a sense of what the incremental opportunities are in terms of scope of work? It'd be good to understand what incremental, I guess, what the scope of work would be and how much further and deeper you could go, for example, in the SDV vertical. And the second question is relating to healthcare. So you talked about retargeting new opportunities and, and how the sales team has done a commendable job there. So can you share some color on what these opportunities essentially entail and what the margin profile for these projects will be? Thanks.
Hi, Kireet. This is Nitin here. So maybe I'll take the first one. I just want to clarify that Manoj's point about the consolidation et cetera was predominantly in the Tier 1 of the supplier business. So I think suppliers are starting to see some amount of consolidation within themselves. You'll also see that some suppliers are shedding parts of their business which are not attractive anymore, and you have a lot of the Asian suppliers who are now buying out those businesses, which are more commodity, while they retain only the very high value, high-end electronics and software business. So his comment was in response to the point that we are seeing significant shift of our revenues and very strategic to us, intentionally, from what was supplier-dominated earlier to more OEM-dominated now.
So the OEMs is a pure growth story and participation in SDV and all, all the deals that we are getting into are strategic because we don't want to be tactical or marginal to any of the OEMs that we work with, right? And that's why you'll find a lot of the commentary in the U.S. is about that, that it's possible to win deals, but there's no interest in being marginal or tactical. It has to be strategic, and that's why the quality of revenues matters. The consolidation part is where we are saying, look, instead of working with many, many suppliers, which for us, the universe is open because of our capabilities, we are taking selective bets on a few. And what we want to do is to make sure that we grow very well and very sustainably with those few.
Right. On the healthcare vertical, you know, as stated, we had a huge exposure on the MDR piece, regulatory piece. So we have successfully retargeted, you know, all of those skills into other regulatory aspects of the business. So our overall MDR, you know, dependencies on our regulatory business, we are hoping to bring it to, you know, less than 25%. It was at one point in time, you know, about 70-80% of our regulatory business used to come from MDR, and we have been able to successfully retarget to other areas, and you know, that's been done, you know, pretty successfully. We've re...
I mean, we've also focused a lot on new product development, and that cycle has started. I think during COVID, some of the, you know, new product development, you know, businesses, that's sort of put on hold and we see that, that cycle, you know, coming back. So that's something that we are focusing on. And of course, digital is now a focus area for us, including in the medical space. And we are spending a lot of, you know, we are winning deals on the digital domains there, and that's another area for us that we would focus on.
So, yeah, I think that's from a margin profile, I think healthcare does, you know, provide, I would say, reasonable margin for us. We don't give out the details, but I think it's pretty satisfactory margins as far as we are concerned. And, you know, we definitely want healthcare growth to lead the organization, you know, especially in the next financial year and so on. A lot of investments that we are making in that business. Yeah, so pretty bullish in terms of how that business will span over the next four to six quarters.
Thank you.
And I think we've talked about, you know, this business to achieve about 20% of the overall revenues of the company by 2026. I think we are on track there. That's helpful. Thank you.
Thank you. The next question is from the line of Ravi Naredi from Naredi Investments. Please go ahead.
Thank you very much to give me opportunity. Sir, I am listening your call. You are giving answer of all questions. Can you give what is our order book?
No, we don't give out those details, right, at this point in time. We don't talk about, you know, the order book. So far we will not be able to share the details with you.
Okay. Yeah, can you give how many quarters order book we are having like this in, in software?
Not really, Ravi. I'm so sorry, but-
No, no, no, no. No need of sorry, it is our system, and you should not break for me. Second, our employees cost are higher in this quarter than, year to year last year quarters. I think it was 50.5%, and it is now 54.5%.
Yes, I think the investments that we have made and so on, right? So I think it's a temporary scenario. And if you look at it, you know, if you look at all the companies, they have only been decreasing the headcount, right? I think we are one of the few companies that are adding headcount at this point in time. So I think we will be a little cautious this quarter and the next quarter in terms of you know... And you know, we have a healthy bench, right? So there is no need to keep adding resources.
I think we've reached a point. We have you know focused or we have planned for all the orders that we have won, and I think we are in a healthy position to be able to extinguish that bench as the utilization you know picks up. I think as the business volumes you know grow back, I think we'll get back to our older ratios of employee costs. It's a temporary situation, and we will keep a close watch on this in Q4 as well as in Q1 to see that you know we don't add too many resources because we have already have a pretty healthy bench.
Okay. Thank you.
Just to add to that, the only thing was, I think during the COVID, the onsite profile also went down a little bit. Now it has come back to the, you know, more stable level of 25%.
Right.
So that's also, you know, another factor that add to it. But I think we have been managing this at very stable level for last, you know, few quarters now, six to eight quarters.
Okay. Okay. Thank you.
Thank you, Ravi.
Thank you. The next question is from the line of Sulabh Govila from Morgan Stanley. Sulabh, please go ahead.
Yeah, hi. Thanks for the opportunity. My first question is more of a clarification on the comments made earlier. So on the healthcare piece, if I heard it correctly, you mentioned that it might take a few more quarters able to say whether this growth is secular in nature. If, if that's, that is correct understanding, so just wanted to understand whether the growth visibility for the next one to quarters, how is that?
No, so, you know, let me, let me clarify that, right. Yes, you know, we've seen a pretty good growth that is a deal pipeline that is available. So, we are hoping to continue this growth path, right, given the deal pipeline that we see. But however, since, you know, we've had a few tough quarters earlier, and we have sort of, you know, broken out of that tough quarters, and we're able to show some decent growth, I just want to be cautious that, look, give us one more quarter whether we can confidently say whether this will move forward in the right direction or not. We are confident that we are on a growth path. I'm just being extra cautious here. I hope that's understood.
Yeah. Okay, understood. Very clear. And second bit is, on the last call, we had sort of indicated that we will try to do better in H2 versus H1. And given that now, at least on a YoY basis, we are tracking below in the third quarter versus 1H, does that aspiration still hold? Because the uptick for 4Q then becomes a little high.
Yeah, I think, you know, we were really hoping for revival of our media and communication business. You know, and unfortunately, that, you know, we are hoping that, you know, at least in Q4, which is for most customers, it is a Q1, right? Yeah, many customers in the media and communication have a Jan to December cycle. And we were hoping budgets to be opened up in the Jan to December cycle. Unfortunately, that clarity is still not there, and that's why we are being a little cautious about that business. So, having said that, you know, we're still focusing on, you know, our transportation business, healthcare business.
If you have seen that we have significantly grown our industrial design business. So a lot of these businesses are actually helping to you know show the growth even though our media and communication business is muted. So yeah, I think that is the real situation that we have. And I don't you know have that data immediately with me to say over H1 whether how much we'll grow and so on. But it's our focus to really you know see how we can you know grow the overall portfolio over H1. So-
... we have some setback. I would not call it a setback in terms of from our media and communication vertical. We're not seeing that, you know, green shoots yet. If we had seen those green shoots, we would have been a lot more confident. But having said that, all other businesses are tracking reasonable growth.
Understood, sir. One last bit, if I may. Just wanted to, you know, extend that discussion on the headcount addition. Given that we are sitting at healthy levels today, just wanted to understand how much room or leeway we have on the utilization bit to inch up in the next couple of quarters?
Yeah, we—I think from a utilization perspective, definitely we can move you know. I think we have all, I mean... Okay, let me answer it in this way. You know, we talked about all the deal wins that we have won over you know the last quarter and the previous quarters. So we have provided for all of the expansion for all of those you know deal wins that we have. If the ramp-up happens as per you know as per our expectation you know without adding additional headcount, we'll be able to increase our revenue because all of those we have planned for.
Resourcing is already planned for. I'm not giving you a number, you know, of that, but yeah, from a perspective of, you know, addressing all the deals that we have won, we are ready. We have trained people, we are ready. We should be able to pick it up.
Understood, sir. Thank you for taking my question.
Thank you. The next question is from the line of Amit Ashok Thawani from Clear Blue Capital Advisors. Please go ahead.
Thank you. Thank you, Manoj. Thank you, Nitin, for taking my call. My first question is, it seems to me at least, super, I mean, from top, that media and communication are underinvesting in technology, or they are, like, behind the curve. Is that a fair comment, or are they doing the technology investment in-house?
Yeah. So, Amit, maybe I'll take that. This is Nitin here. There are two parts here. So there is CapEx investments that have been significantly done over the last two to three years, especially in 5G. When you look at operators across the world, there are certain operators who are continuing to do it. So if you look at India, we are in the middle of the cycle, right? So there is CapEx investments. These are, these are fairly large and fairly long-term. I think the bigger problem the telcos are facing is, where is the money that is coming back to them in terms of subscriber increase, ARPU increases, premium value? So that, I think, is the problem. There is a gap between CapEx and expected returns, and the actual uptick in terms of subscribers or per-subscriber revenue.
Two, there has been a global slowdown in terms of OTT uptake. So all through COVID, not only were consumers subscribing to three or four services, but it looked like they would be happy to consume more and more, both in terms of time and cost. I think, one, the fact that a lot of people are now returning back to offices, life is getting back to normal and not, not so much COVID. There is inflation across multiple regions, part of it, quite severe, especially in Europe. I think it's all leading to consumer spend, especially discretionary, impacting the amount of subscription and the money that they spend on entertainment.
So you'll see that the noise is being made right from the likes of Netflix, to others who are saying now, "Maybe we should be thinking of ad-based revenues because subscription is not good enough." So fundamentally, Amit, the point I'm trying to make is, it's not that there is no CapEx spend, it's not that there is no investments. There are investments, there are committed investments. The big question is, are they bringing back money? And therefore-
Got it.
Yeah. Therefore, a large part of what we are doing actually is driving two tracks, and you would, you would have heard this on previous calls. Efficiency parts, which are... Look, if you're gonna be, if you're gonna be pressured on bottom line and how do you improve your own margins, then definitely on the engineering side, we represent a fantastic value proposition of offshore and responsibility and ownership. If you're looking at growth, we are building very specific offerings around growth alone, right from AdTech to others.
Mm-hmm.
The big question is, how much money are telcos and media operators and so on, willing to spend at this time? Because you have to also remember, like Manoj mentioned, there's a lot of M&A and consolidation that's been happening there. In certain cases, M&A and consolidation that is unraveling too, as you would see in India and what is happening with Sony and Zee. But you are also seeing that industry being pressured into all of this, too. So that is why I think we are being cautious. We would like to say many things, but I think at this time, I think it's best to exercise caution in terms of outlook.
Understood. Understood. This... The other question I had is that traditionally, we've had a tailwind of currency apprecia-- U.S. dollar appreciation, but we may now be in a different era of maybe lesser depreciation of the rupee. How do we plan to kind of come back or, you know... How do we plan to address that?
Amit, there is nothing that we can do about the currency movement. I mean, I think only thing what we can do is that we can focus to remain strong on our business and, you know, do the execution and the delivery of the projects, you know, what we undertake. I think for the currency management, we have a very robust, you know, hedging policy internally in the company, and we continue to monitor the currency on a daily basis and take the right hedge in terms of the exposure that is there in the, you know, organization. So that is how, you know, we are well managing within the SOPs and the policy governance under the board of the company.
I think we have been doing fairly well in terms of the stabilizing by any impact or the negative adverse impact from the currency movement for the last few quarters.
Thank you. Thank you, Gaurav. My last question is, Manoj mentioned that some of our customers are getting acquired by OEM, and then the OEMs are doing the ER&D in-house. Can you maybe elaborate on that? And is that something to be concerned about as a broader trend?
Yeah, Amit, maybe, listen again, maybe I'll explain a little more clearly. I think the reference that Manoj made was to suppliers. What we are seeing is that suppliers who otherwise were tasked with and delivered full systems or subsystems to OEMs, and OEMs were very light on engineering. They typically focused on specifications, making sure that suppliers understood the specifications, find the right suppliers, ring the right price out of them, and make sure that they supply, and integrating everything that came back from suppliers into the vehicles to make sure that the vehicle works, and they meet all the required safety and regulatory requirements. This was predominantly the domain of OEMs, barring a few areas that they would directly invest into, including powertrain and engines and so on.
I think with software-defined vehicles, you are seeing OEMs taking a little more central role in the software that goes into cars, not necessarily hardware. They still depend on Tier 1s for hardware, but there is less dependency on full systems. I think that is the part we are talking about.
Got it. Got it, Nitin. Thank you. Thank you for your reply.
Thank you. We have no further questions, ladies and gentlemen. I would now like to hand the conference over to the management for closing comments. Over to you, Sir.
Thank you, Shashank, and thank you to all the investors, you know, for patiently hearing us out and hearing our, you know, answers. We definitely look forward, you know, to a good Q4 and another session of, you know, really good conversation. You know, business is so dynamic, and I really hope, you know, whatever we talked about today, we'll be able to talk with a lot more confidence in the next quarter. Yeah, so look forward to, you know, talking to you, you know, over this period and all of you take care and, you know, hope this new year is good for all of us. Thank you so much.
Thank you. On behalf of Tata Elxsi, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.