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 the 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 then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the confer ence over to Mr. Shashank Ganesh from EY. Thank you. Over to you, sir.
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. It must be viewed in conjunction with the businesses that will 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. 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 if time permits. Having said that, I would like to hand over the call to Mr. Manoj Raghavan. Over to you, Manoj.
Thank you. 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 a healthy growth in revenues and net profit and improvement in our margins as compared to last quarter. Revenues from operation during the third quarter stood at INR 817.7 crore, 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 crore, growing by 9% quarter-on-quarter.
Our PAT for the quarter stood at INR 194.7 crores, growing 11.7% Q-o-Q. In constant currency terms, the company grew 3.5%. We continue to lead with design, with our industrial design business reporting a 19% Q-o-Q 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, you know, larger downstream development projects. SI business continues on its path of transformation and registered a healthy growth of 9.3% Q-o-Q in constant currency terms. It's building a foundation for, you know, what we call as a 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 they 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 that reported a 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 HGV program with a global OEM software organization and an offshore center of excellence for our EV systems leader from the U.S. market. Our media and telecom and healthcare business units saw some impact of furloughs and delayed decision-making. This being a seasonally weak and shorter quarter, there was some impact on our QOQ business growth.
In constant currency terms, the media communication business witnessed a decline of 2.6% QOQ basis, and the healthcare and medical devices business unit, revenues declined by 1.9% QOQ. 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 AdTech and healthcare platform development that underscores the differentiation we bring to the customers. On people front, we continue to do well with employee engagement and retention. Attrition declining for the third consecutive quarters to 18.4%.
Our investments in hiring and training large number of fresh engineers who joined us in the last quarter and before is actually starting to pay dividends as more and more of them are getting onboarded into customer projects. We'll continue to add fresh engineers over the next Q4 and laterals in key lead positions across delivery, you know, technology and sales. As we move to the last quarter of this financial year, at an overall company level, we have a strong, you know, order book and pretty healthy pipeline across key markets. Strongly believe that, you know, we have a good story here. I'll now hand over to the floor to Shashank for the Q&A session. Thank you.
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 touchtone telephone. If you wish to remove yourselves 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. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in the conference, please limit your questions to two per participant. Should you have a follow-up question, we would request you to rejoin the question queue. The first question is from the line of Bhavik Mehta from JPMorgan. Please go ahead.
Thank you, and a good set of results from Wipro Management. Two questions. Firstly, the weakness we saw in media and healthcare verticals, is this over or do you expect some follow through continuing into 4Q as well? What's the outlook on these two verticals going forward? Second question was on the wage cycle. If I remember correctly, last year we had wages in March and June quarter. How are we looking at the wage cycle this year? Thank you.
Yeah. So regarding both the media and communication and healthcare vertical, we believe it will continue to be soft, you know, for a quarter or two, especially the media and communication vertical. On the healthcare vertical, we are a lot more bullish. We should be able to recover much faster. And we are seeing deals coming back. I think, you know, we will wait and watch. Regarding the wage cycle, yeah, our next hike will be in Q1, and then we will, you know, based on, you know, how the deals flow in Q4, we'll take a decision. The wage hike is currently planned for Q1 next year.
Okay. Thank you. Just lastly, the ESOP plan volume introduced. Any early comments on how much impact will be there because of this on the margins?
No, I think there won't be very significant impact. We'll cover it up with our, you know, operational excellence. More details once we, you know, talk to the regulators and so on, we'll discuss a lot more, you know, in the coming days.
Okay. Thank you. That's it from my side.
Thank you. The next question is from the line of Apurva Prasad from HDFC Securities. Please go ahead.
Hi. Thanks for taking my question. Manoj, I had a question on the IDV business now. It seems nearly half the growth has come from IDV sequentially. Seems counterintuitive looking at its historical cyclicality and, you know, the current macro. Yeah, it'll be good to know what's driving growth here. Are there more synergy deals here with EPD or are these standalone deals, you know, outside the traditional transportation media verticals?
You know, you know, good question, Apurva Prasad. For folks who have been, you know, listening into our commentary, we have been restructuring our design business over the last Q4 , right? A lot of things that we have done to really scale that business. If you look at it, you know, you know, on, you know, if on a quarterly run rate basis as compared to maybe a couple of years ago, we have almost, it's almost like 2.5 times that, the numbers right now. Over the 2 years, we have really done a number of things to really grow that business. 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 helping us seeding larger, you know, development, you know, opportunities across the various verticals. I think, you know, it's not just, you know, 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, we also have IDV also has their own, you know, customers outside of these three verticals. That's something that definitely is positive.
A lot of focus and emphasis on also design, you know, when you say, you know, AR/VR related, you know, training related and worker productivity. There are a number of things that we are doing. That's also really, you know, combining the design capability along with the engineering capabilities that we have, right? Yes, you know, while you look at, you know, we have grown the breakup of our verticals, primarily for the EPD division. You know, IDV also contributes to the automotive media and the healthcare verticals.
At some point in time, we will take that decision of actually merging, you know, or actually from a catalyst perspective, showing the real, you know, picture of the total revenues, including EPD and IDV in each of these three verticals, right. That's something that we have not been doing, but we are really looking at 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 these three major verticals that we have.
Got that. My second question is on the top five, which was flat sequentially. Is the performance uniform across top five or is it more top client specific? If you could talk about what's the outlook and the funnel in this.
No, if you look at the top 5, it's not been flat. I mean, relatively, yes. If you look at it, we have definitely grown, but the growth has been slower than the next 5 and the next 20. The growth that we have shown in this quarter has primarily been driven by outside the top 5 customers, right? Top 5 has also grown. If you also note that our top 5 accounts are significant, large, you know, bringing large revenues to the organization. In a few cases, we have had furloughs, and impact of furloughs is also factored into this, you know, the revenues that we have shown. Right?
To that extent, yes, you must have seen some slowdowns and so on. Top five has grown. It's not, it's not flat. Okay, thanks. I'll get back in the queue.
Thank you. The next question is from the line of Vimal Goel from Alchemy Capital Management. Please go ahead.
Yeah, thank you, sir. Congratulations on a strong quarter in considerably challenging macros. Sir, my first question was on margins. Last quarter we had a fairly strong hiring, and the expectation was that there will be some of cost into this particular quarter. However, that has probably not happened if you look at, you know, the overall employee cost as a % of sales. Plus also there is a reduction in employee cost, given the fact that, you know, we were facing supply pressure, especially in the automotive piece. If you could just help us reconcile these, the, this piece. Also, I just wanted to check again on margins.
Would it be fair to say that our IDV business or our design pieces, the margins over there are slightly above company average? If it's different, if you can just highlight that. Thank you.
Yeah. The first question, right? I think I couldn't really hear a keyword that you said, you know, I'm not able to get the context of the question. Maybe you can repeat it. From an IDV, the second question, IDV margins and so on, I think we wouldn't want to disclose the margins at this point in time. you know, margins, it is deal to deal and, you know, it's a smaller business, so sometimes we take a, we are very, very aggressive really to get that business and build on it because not just the design business, but there is downstream engineering. we know that overall, as an overall entity, we can make, you know, better margins.
It'll be misleading if we really look at only IDV and say whether the margin is good or not, right? There are cases, standalone IDV deals, where margins are extremely good. It's a, it's a mixed bag, and it'll be misleading if I give you a commentary that margins are great and, you know, so on and so forth. We don't look at it in that way. We look at it in, as a combined entity, how IDV really helps EPD and EPD customers. Each account, if we look at it, we look at the account margins, not so much about whether IDV margin is better or EPD margin is better. The first question, coming back, I really couldn't get the context, if you could repeat that.
Yeah. I'll just repeat that. The question was on. The Q2 had very strong hiring, right? You can correct me on this. 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, you know, improve going forward.
Okay. Sure.
The improvement has just come, slightly better. What helped that? That's all.
Right. There are a few things here. I think you rightly mentioned that there is some tailwind from the past quarter hiring because we will have that full quarter kind impact in this in quarter three compared to quarter two for the, you know, both campus and the headcount that has been intake in quarter two. To offset that, I think we have a superior or, you know, top-line growth, and also that the campus and other, you know, people that we intake in the previous quarter, they started to, you know, improve our utilizations, and those people have, you know, have been put to the billable projects this quarter. Yeah. Apart from what Gaurav said, we've also had a reduction in more expensive consultants, right?
Yeah.
We I mean, because of the situation now in the market, we had contractors that we had hired. We've actually reduced the contractors' headcount, and we've moved, replaced them with our permanent employees at a lower cost. I think these factors helped us to, you know, show better margins.
Understood, sir. Thank you so much. All the very best.
Thank you. Thank you.
Thank you. The next question is from the line of Urmil Shah from Ageas Federal Life Insurance. Please go ahead.
Yeah, thanks, and congrats on a good quarter. My first question is, if you look at from a medium-term point of view and the transformation that you are undergoing on our SI business, should we look at from the perspective how IT services companies are looked at, wherein your SI business should enable or you drive cost saving for your clients, and that budget could be channelized towards the EPD business? If that is the case, which of the areas you are already seeing at least a discussion starting to happen?
Yeah. Maybe I'll take that, Urmil. This is Nitin here. If you think about what transformation we are driving with SI, we don't want it to be orthogonal in the sense that we do not want to try and grow it in a conventional IT services and professional services area. We are aligning it to the engine of EPD itself, which is if we are in product engineering and more and more products are now getting connected, therefore, the cycle of development is going to become a continuous integration and continuous deployment. In some sense, like your connected car platforms or digital health platforms or OT, OTT, where you have constant updates of the software and the product. We want to be able to not just deliver the product that is on the assembly line.
We also want to be able to manage the assembly line that is delivering it. To that extent, the DevOps engineers that are required below the plumbing and the infrastructure that is required to deliver this continuous integration is what we are focusing on. In that sense, we are aligning it very strongly to complete the story for product engineering. To say that, look, we are future-ready for products that are gonna be deployed and updated and managed continuously.
Sure. Thanks for the clarification. That was helpful. My second question was, you know, you sound quite positive on the IDV business. It should we understand it in a manner wherein the visibility which was there, let's say two years before, as compared to that, the visibility and the IDV business is much more, and that's why the growth over there should be relatively much more consistent as compared to what it was two years before?
That, the visibility is definitely better. The synergies are playing out better now between IDV and EPD, at the same time, I should warn you that it's still a small business, right? You should really not see it from a quarter-to-quarter basis. You should look at it from a financial year perspective, right? How have we performed versus last financial year versus this financial year? You have to look at it from a Q4 basis.
It'll be misleading if you really look at from a quarter- quarter because they still do a lot of project-based engagement, so there are deals that come in, and, you know, we, once the deals are closed, and then we deliver, and then before the next deal kicks in, sometimes there is delays and so on. To that extent, there is, there could still be a little bit of, you know, volatility and so on, but definitely we are much better as compared to 2 years ago.
Yeah.
Okay.
What Manoj said, I think I can just drive three directions, right? One is the synergy part, where we are saying, look, try to minimize standalone deals which do not lead to larger downstream. Align to the verticals that we are in. Let's scale in healthcare projects, in HMI and UX and car automotive projects. Let's focus on delivering engagement and UI and experience for OTT and for media. The point being that this, there is really a downstream play and there is a continuous play as you continue to work with these customers, even in deployment and downstream engineering. Part two. That's the synergy piece. Two is I think we are selectively scaling around set of customers.
While earlier we dealt with a whole number of customers, we're starting to cull the number of customers we work with and start to build a base of fairly dependable customers, even if not dependable, set of projects, right? There are two, three things that we're doing that help us mute the volatility while providing for scale. I think on the other hand, like Manoj said, yeah, there may be volatility at times.
Oh, sure. Thanks, Nithin and Manoj. All the best for Q4 and next year. Thank you.
Thank you.
Thank you.
Thank you. The next question is from the line of Naveen Bothra, an individual investor. Please go ahead.
Good evening, sir. Congratulations on good set of operating performance once again. Also congratulations to the management team for getting the board approval for the share-based incentive plans. Congratulations, sir. My first question is regarding the, our recent announcement that on our TETHER platform, Tata Motors 5 lakh vehicles has been achieved. To Mr. Nitin Pai, my question is, if you can throw some more light on it, from 5 lakh to we say 10 lakh, 15 lakh or 20 lakh vehicles on this TETHER platform growth, how this helps us Tata Elxsi in the revenue and the performance? If you can throw some more light on it will be quite helpful for us.
Yeah. Rather than Nithin, I'll take it.
Yeah.
Yes. I think it's what we have published is only the TML deal, right? There are other deals also that we have won on the platform. Each deal is different, right? Some deals are more, you know, NRE-focused, and then there is, you know, change requests and there are... As to scale up the platform to meet larger numbers, we go back and we do additional, you know, revenue streams come in and so on. Some of the deals are, you know, less of NRE and more of royalties per car and so on, right?
In those deals, as the volumes grow, definitely it is a nonlinear sort of a revenue stream that we get. We have a mix of that, right? Definitely as the installations, or as the number of cars increase, there'll be a lot more revenues, either because the platform itself needs to be scaled up, and there are changes that we need to undertake to address the larger numbers that they're onboarding. Or in some cases, plainly, it is a royalty per car sort of a deal. As the volume increase, the revenue is also increased.
Yeah. Maybe I'll just add to that.
Sure.
I think look at the press release as the indication and the declaration to the market that, one.
Yeah
We have reached a scale of half a million cars, which is very difficult to achieve in all markets, right? It demonstrates the power and the scalability of the platform. What is even more interesting is that we have now onboarded commercial vehicles, gasoline powered or IC engines, as well as pure EV vehicles onto the platform. What we're telling the market clearly is that across product types and product ranges, we are now able to handle any kind of connected vehicle, so not even connected cars, but a connected vehicle need. For us, the real benefits of the press release are gonna be the deals that we sign further rather than what we get from transporters themselves.
Yes, yes. Yes, that's quite clear, sir. Thank you for this one. The next question is to Mr. Gaurav regarding our overall human resource cost. The direct employee cost is direct line item. As in the earlier questions, Mr. Manoj said that we have replaced outside contractors' cost and with our own staff. If you can, Mr. Gaurav, can throw some more light on the consultant cost in other expenses to get the better understanding about overall the cost of employees and consultants in our sales and revenue mix. It will be quite helpful, sir.
Sure, sure. As I mentioned earlier and what Manoj also said that, you know, the people that we took in the previous quarter now are trained, and those people are put to the billable projects. With that, we were able to bring the contractor, replace those contractor with our own billable people. If you see that the employee cost, you know, is an equation of both, some of the tailwind from the previous quarter, some cost increase because of the, you know, the on-site resources because of the, you know, exchange increase in the currencies. Also it's a mix of the utilization improvement compared to the previous quarter.
So in a way-
If you see the employee cost plus the contractor cost, the tailwind is kind of getting offset with the utilization and the contractor re-reduction.
Okay. In the direct cost we are seeing in the TTM basis, more than 1% improvement is there in the employee cost. Since the cost of contractors and all the outsourcing agencies are in the other expenses, if you can throw a little bit more light, in financial terms, it will be quite helpful to.
Yeah, yeah. It will be about 50-60 basis point.
50-60 basis points.
Yeah.
Okay, sir. Thank you very much. Thank you again for the... Congratulations for the share-based incentive plan. Thank you. All the very best.
Thank you.
Thank you. The next question is from the line of Ravi Naredi from Naredi Investments. Please go ahead.
Hello. Manoj ji, again, congratulations for nice result. Sir, what is the utilization of cash plan with the fund line with the company?
Sorry, if you can come back on the question, it was not clear.
Utilization of fund line with the company, how we utilize them for organic, inorganic growth or distribute the dividend.
Basically, utilization is basically we do at the time of the quarter 4. That is when, you know, we come up with our, you know, policy. Typically what we have done in the previous quarter is that we have paid out the dividend. This time also, we will do internal discussion with the board and, in the due course, during the end of the last quarter of the year, we will get back as what would be the stand for this year.
Any inorganic growth, acquisition in plan right now?
Yeah. That option is always there. Again, just want to make it clear that, look, we will really go that route only if we are fully convinced that really helps us. You know, any of those inorganic activities should not decelerate our current performance. There are many consideration. There are many deals that come our way, but, we will look at those that really help us achieve our objectives, right? Yeah. We keep look on the lookout. There's nothing to report at this point in time.
Okay. Thank you very much. All the best.
Yeah. Thank you.
Thank you. The next question is from the line of Mayur Matani from Mahesh Kumar & Company. Please go ahead.
Yeah. Good evening, sir. Congratulations for the good set of numbers. I have two questions. One is regarding our employee addition. During the end of the Q1 , we had mentioned that we plan to hire about 4,000-5,000 employees in the current year. This quarter, we are seeing that the net employee addition is negative. I would like to know what are the plans for the employee additions in the next 3 months and the year going forward, because generally it is taken as a lead indicator as to what demand we foresee going ahead. Second is with regards to the geographic mix. As contrary to the expectations, the European region did better than the U.S. market.
Can you give some comments on that also? Thank you.
Sure. I think we have to be very pragmatic about employee additions. Yes, in Q1, we were in a good position. We really believe that we will be able to add, you know, 4,000 plus engineers and so on. As a result, if you look at it, in Q1 and Q2, we did add a significant number of employees, headcounts and so on. In Q3, we had to be a little careful because of the way the macroeconomic situation, the market, and also the fact that, you know, when you bring in so many employees, it's not a question of bringing in employees.
It's also a question of how do you train them, and how do you enable them to get, you know, to move in billable roles and so on, right? We had our hands full. We realized the numbers were pretty significant, and we really decided that we need to take a pause there in Q3. Having said that, from Q4 and the subsequent quarters, we will continue our hiring. Whatever we talked about, even from a fresher hiring perspective, we'll definitely add anywhere between 400 to 500 engineers per quarter over the next Q4 . Laterals we'll continue to add depending on the business. Yes, employee hiring will definitely continue.
From a geo mix perspective, yes, you know, Europe definitely did well. As you would guess, Europe is a lot more automotive for us. US is a lot more media and healthcare. So to that extent, if you look at it, the macroeconomic you know situation that is really working, I mean, affecting us in the MCV and HLS business, is more US-centric, right? As a result, the US growth is slightly lower as compared to EU growth.
Right. When do you see the recovery in media vertical? Because, right now also the situation is not that great. When do you see the pickup in the media vertical?
I think we are closely watching the media vertical. We believe there are no easy answers there. It'll take some more time. We are a lot more confident that the medical vertical will or the healthcare vertical will pick up faster. Maybe a couple of quarters more for the media vertical. We are on a wait and watch there.
Okay, sir. Thank you. Thanks a lot.
Thank you. The next question is from the line of Vimal Gohil from Alchemy Capital Management. Please go ahead.
Hi. This is Hiren here from Alchemy. At the outset, congratulations on a good set of numbers. My question is that we've had a very smart growth in the automotive vertical this quarter, which has kind of done the heavy lifting for the other two verticals. Do you expect to see the continued momentum in automotive like we've seen in Q3, while the other verticals take time to take off?
See that's the strength of Tata Elxsi, right, in a way. If you, maybe, you know, 1 year ago or 12 months ago, the situation was totally reversed, right? It was MCV and medical that was pulling up and the transportation business was going down, right? We strongly believe that, you know, having this a good portfolio of service offerings which are relevant for the market, right? There could be temporary issues for 1 quarter or 2 in some of these verticals.
Overall, we strongly believe that these three verticals, along with the strong design digital push that we have, gives us a lot of confidence that as an organization, we are well poised to really, you know, address the requirements of our customers. That is what we would really focus on. We are really not, you know, worried about these, you know, slowdown in... Due to other reasons, right. Due to not reasons because of Tata Elxsi, because of, you know, either the funding situation, the macroeconomic situation, the war, and so many other things that can happen, right. Overall, we still strongly believe in the relevance of our service offerings and, in our design digital positioning that we have, right.
We strongly believe that, look, it's a matter of time before, you know, we recover in both the medical and the media and communication business. I think, yes, overall, I still believe, yes, you talked about the transportation business. We do definitely see good, you know, good order book and, you know, good sort of a pipeline there. But at the same time, we also know that there are risks. You talked about Europe. You talked about the fact that, if anybody would guess about how this war would go, automotive business is heavily, you know, Europe-centric. That is also true.
At the same time, there are customers that are really spending, right? We don't see any immediate, you know, degrowth of anything happening there at this point in time. I think, yeah, we are confident that, look, we will continue our growth.
You know, my second question is that the benefits that we accrued from better utilization and, you know, moving some of our own employees versus contractors, do you think we still have some scope to squeeze efficiencies and margins for that in Q4 as well, or more or less whatever we had to had is already done in Q3?
Of course. Of course. you know, our utilization is still not as we want it to be. There are still operational parameters that we need to focus on. There is still more use that can extract. Definitely no, it's not as if that everything is done.
Okay, great. Thanks. Thanks so much and all the best.
Thank you, Harin.
Thank you. The next question is from the line of Akshay Ramnani from Axis Capital. Please go ahead.
Hi, congrats on a good quarter. My first question was on this software-defined vehicle deal which you have announced. Wanted to get some sense there. Is this engagement substantially larger than what we have been seeing historically, the typical deal sizes? Do we have similar deals which are floating in our pipeline? If you can just highlight about competitive intensity for such deals, and how is Tata Elxsi positioned to drive multiple deals of such kind.
Yeah. Akshay, this is Nitin here. Let me take that question. For us, this is a strategic entry rather than a size aspect. To that extent, we have been onboarded into the next generation software development platform that this particular OEM is developing. We have just been onboarded into a few modules. We already are looking at deals that are sitting in the pipeline from the same customer covering a lot more modules. To that extent, for us, what is happening is we made a start, we're already in some. It is just for us to continue to grow, right? The highlight is actually about the entry into that particular customer because we're not working with them in their software organization before. We see a long runway ahead.
As far as the question on other deals are concerned, the pipeline for auto business is very strong.
Got that. Got that. Another question was on margins. Last quarter, we saw frontloading of cost, which was led by some investments which we made in our talent, and which also impacted margin sharply. This quarter looks like we have stabilized on that investment and improved its quite a bit. Wanted to understand on an investment pipeline per se, do you have any investment pipeline over the next Q2-Q3 , which can impact margins? Or on an organic basis, excluding that, we should expect these operational efficiencies of increasing utilization to aid margins from here on. How should one think about the margin change actually going forward?
I think you should look at it when we hire, I mean, when, you know, when we hire freshers from the colleges, right? Typically, they would come in in large numbers either in Q2 or Q3, depending on the business needs and so on, right? That is when the impact of, you know, the large headcount will happen in our business, right? We have already done that for this financial year. Yes, if at all, it'll happen only again in the next financial year. That's a call that's a, that's a hit we need to take because that's how our business is and that's how we plan for resources and in Q1 we need to take that hit.
And we'll get the benefits of that over the subsequent few quarters, right? Apart from that, I don't think there is any. Gaurav, if you have any views on that?
I think that would be the investment we typically do every year in terms of the, you know, the intake of the campus and then train them. That is how the forward-looking investment is done from our side. Apart from that, I think we will continue to work on the operating lever to neutralize that impact of those, you know, cost intake that happens typically in the Q1 Q2 of the financial year, along with the growth that we will able to, you know, achieve with those billable people.
Got that. If I can squeeze one in for Gaurav. Our ATR has been hovering about this 19%-20% range for past Q3 . Is that a sustainable range going forward? Do you expect any of these ACZ benefits to reverse over the next year or 2? How should one think about that?
We have not done the assessment for the 2 years, but, for this year it would be, you know, the effective tax rate will continue to be in this range. Yes, in the coming year, there will be couple of SEZ unit that will be coming out of the first block of 100% exemption. At the same time we are looking at the business how to continue some of the expansion and the growth of the volume in some of the SEZ which will have still have a higher, you know, exemption limit of 100%. We have to do that modeling for the coming year, but that will be happen along with our business, you know, business units. That's all. I think that's what we can tell at this point of time. With, you know.
In the coming quarters we will let you know more on it.
Got that. Thank you.
Thank you.
Thank you. The next question is from the line of Karan Uppal from Phillip Capital. Please go ahead.
Yeah, thanks for the opportunity. Just one question for Manoj. In comms and media vertical, is the weakness concentrated to a few large accounts or is it broad-based across the customers? Also, I believe that our top line is from this vertical, what's happening in our top line? Is it also showing some weakness?
We did have some furlough impacts in the quarter from top customer. Yes.
Again, this impact is not only from the top customer perspective, it is at least the top 10 accounts we see. You know, we see a little bit of a. Deals are there. It's not as if the deals are not there, but we are not seeing the large opportunities moving forward. Rather, most of those deals are broken up into smaller deals, right? There is caution in the market, definitely. We used to have a lot more good, you know, order book visibility and so on in this business, but right now, we see that funnel, large funnel really breaking into smaller funnels, right? That's how, that's how it is. I think it's a question of a few quarters.
The relationships are still intact. The intent from customers is also there. I think the customers are just, especially with the sort of layoffs and sort of things happening, the customers are just waiting and watching, right? They don't want to take any large investment decisions at this point in time. I guess in a couple of quarters we'll get better clarity.
Okay. Thanks. Thanks for that clarity and all the best.
Thank you.
Thank you. Next question is from the line of Anika Mittal from Nuvama Research. Please go ahead.
Hello. Good evening, sir. Am I audible?
Yes, you are.
Yes, you are.
Sir, I just a simple question, on basically the demand outlook, in the medium term, across all the segments that we are currently operating in, sir.
See again, demand outlook is pretty strong if you look at the automotive business. If you look at our data design business and so on, we continue to see very strong order book and so on. Media and communication, it's a little muted. The medical business, you know, if I really look at it, if you look at medical is a or the healthcare business, is a long lead cycle business. Decisions are pretty slow. You need to, you know, it takes anywhere between, you know, Q3-Q4-Q6 before large deals are signed, right? So we're going through that process.
What has happened is if you look at the European market. A part of our, you know, services come from the regulatory services, and there is a regulatory service called EU MDR. EU MDR was mandated. All products has to be EU MDR certified by 2024. There was a deadline, and there was a rush by all companies to really get the product certified by 2024. What has happened is recently maybe just about a quarter ago, the commissioner there relaxed the deadline from 2024 to 2027 or 2028, right? 2027. They relaxed the timeline.
What has happened is a lot of these companies, because the timelines are relaxed, they, you know, what is supposed to be done in about 1.5 years can now be done over 4+ years, right? A lot of the companies then decided to sort of, you know, make use of that, take benefit of that. The TCVs are intact, but unfortunately revenues are now going to be spread out. Not all customers. A few customers have got into that, right? That has affected us a little, and that is why you look at it, our revenues have dipped a little bit.
The good part is now the budgets that are available with the customers, they can then use them for other activities, including new product development and, you know, other activities that are there. So that is something that we are hoping that in the subsequent quarters we'll be able to leverage this budget availability to really push for new product development sort of deals. As you know, we have been investing in the digital health platform for quite some time now. That is another thing, revenue stream that we are building up. We are, you know, engaging and having those discussions with customers. It does take some time to really, you know, sign deals there. That is...
All of that will happen over the next couple of quarters. That is where I'm a lot more confident that, you know, we'll be able to recover the situation in the healthcare business.
Okay. Okay. That's all from my side. Thank you.
Thank you. The next question is from the line of Tushar Bohra from MK Global. Please go ahead.
Yeah. Thanks for the opportunity. Congratulations to the management for a good set of numbers. Yeah. Just a couple of questions. First, you know, we've continued to report our business along three verticals as on date today. You know, transportation, media communications and healthcare. Over what period do you think that, you know, some of your initiatives in other sectors and subsegments would start to become fruitful so that you would, you know, maybe move on to reporting those segments separately? Does that happen in the near term?
That's a call that we need to take. Actually, if you look at it, the adjacencies that we called out are already, you know, pretty significant, if you look at the individual verticals, right? They are upwards of, you know, in some cases they are close to 10%. In some cases they're close to 15%-16%. That's something that is not out of focus.
Adjacencies definitely are doing pretty well, and we are really monitoring them. We will take a decision as to, you know, at appropriate time to disclose those numbers. New verticals, you know, I think we will continue to be cautious. We are incubating a few verticals and, you know, again, at an appropriate time, we will bring that in, right?
Just to clarify on this, is defense or related area also an opportunity for us in some way?
ve, you know, opportunity for us, though we are looking at the defense avionics side, and we do work with ISRO, and we do work with a few companies in India. But again, it's not a large business, and I don't think it will be a large business because you'd really need to cater to the U.S. defense industry or the European defense industry if you really want to make a big, you know, big splash. But unfortunately, those are. There are a lot of restrictions on. You need to have U.S. citizens and so on work. But there are a number of restrictions there that doesn't make it easy for us to enter that sector.
Sure. Second, just want to get some qualitative inputs on, you know, maybe how are IPs performing in terms of helping us win business, or, you know, also in terms of actual revenue contribution. Also some of the new work that we are doing. In the previous call, we highlighted about metaverse. This call, this presentation this time we mentioned about the AR/VR project, you know, and the software-defined vehicle. Just some inputs that help us understand the opportunity over, say, next 3 years or so in these areas.
Sure. If you look at it, our products, you know, we have done a lot of investments in the media and communication vertical from a product perspective. Whether it is, you know, you know, products like FalconEye, QoEtient, TEPlay. There's a number of ad-related, advertisement-related platforms. There are a number of things that we have done. If at this point in time, I would say, that is one area which is doing pretty well for us from a media and communication vertical perspective. Automotive, of course, we have done a lot of investments, including on the ADAS side, autonomous cars, AUTOSAR and so on. Of course, we are working a lot on the electric vehicles.
There are a lot of IPs and products that we are building from a validation perspective and so on. All of that is currently in the investment phase. We hope that we'll be able to really, you know, push that into the market and get revenues. From a medical, healthcare business, yeah, the investments that we've done on the digital health platform, right? That is a pretty significant investment and we hope in the next Q2-Q4 , that will start generating returns, you know, for us. So I think, as compared to a couple of years ago, number one, we have lot more products that are there in the market.
Number two, lot more products that are generating revenues for us. That is also a positive for us. I think, you know, this investment will continue because even though it is, the numbers are not very significant, but, from a Y-o-Y perspective, we are almost projecting internally, we are looking at a 100% sort of revenue growth from the products and product-led business, right? That's something that we will continue to focus on and continue to make those investments. I think at some point in time, it'll be significant, and we will, hopefully hit a goldmine somewhere. Yeah, we will continue to invest.
Great. Sir, if I may just squeeze a couple of very quickly. One is on, I know, in the TCS con call, management interestingly made a comment about ChatGPT, and obviously it's a rage right now for a lot of reasons. Just to understand some of these technologies, you know, could end up being disruptive on either side, positive or negative for us, and you know, for our peers. If you can maybe throw some comments on some such technologies which you hope, you know, to either avoid, being disrupted or leverage better to actually gain, you know, better business win. On a related area, in general, we've seen a lot of spending cuts or rather, you know, on the technology side, we've seen a lot of correction. Valuations have come down for a lot of companies globally.
Is there anything on the M&A side that you are starting to at least sense that, you know, things are coming close to your comfort in terms of valuations or, you know? You may look at an inorganic, not immediately, but definitely in the very near term.
Sure. We have our internal targets, we're looking at it, from an M&A perspective, right? Again, as I said, right, there's nothing to report at this point in time. Again, see, we are operating at, you know, 28.7% PBT and 30%+ EBITDA and so on. We have to be careful in terms of when we acquire, what is the impact on all of that, right? There are only a very few businesses out there that operate at that level. We don't want anything M&A to be disruptive to our own, you know, financials and so on. We'll be careful.
We'll look at it and, you know, we'll evaluate the synergies a lot more as compared to other companies, right. Because we are already operating at a very, very nice level. That's something that we'll be very cautious. On the first part, maybe I can respond.
Yeah.
In terms of ChatGPT, we're using that more as a as an anchor rather than as a specific point. I think the fundamental difference or the fundamental differentiation that we bring in the application of digital technologies, and I think we have said this more than once, is that we are not out to build a generalized AI platform like many of the large IT companies talk of. We are very clear that we will do very specific AI. So if you're doing AI, we'll do it in cars, which will enable autonomous driving. If we use it in media, we'll use it for personalization of content and for nothing else. If you're doing medical, it will be to improve the predictability and outcomes of the diagnostics that you're doing.
In that sense, if you look at it, these are not generalized AI problems, these are specific AI problems. To that extent, we are in a space which still continues to need what we do and the intelligence that we bring, right? As an intersection of domain and engineering. Equally, I think there are opportunities for us to use generalized AI technologies like ChatGPT. Especially as you move out of the product and then get into the cloud, I think there is a lot more potential in those areas. For us, I think we see it as an upside because it allows us to go into areas that we don't otherwise address in general. The same is true for others, by the way.
If you look at digitized technologies, if you really think of the deals that we called out, which is the use of AR/VR in worker and productivity training, it's actually the metaverse, except that we have applied the metaverse for industry and Industry 4.0. Again, there we are staying clear of general application of metaverse in gaming and in entertainment. We are looking at the application of the metaverse AR/VR in the context of either improving engagement or experiences within cars. We're looking at within factories and so on. Right. In general, I'll just put it this way. For us, what is important about digital is the intersection of that with a particular domain, and not digital for itself.
Sir. Thank you, sir. Thank you so much. I'll join back in queue.
Thank you.
Thank you. Ladies and gentlemen, please limit your questions to one per participant. Should you have a follow-up question, we would request you to rejoin the question queue. The next question is from the line of Akshay Ramnani from Axis Capital. Please go ahead.
Thanks for the follow-up. Manoj, last quarter you spoke about high on-site wage inflation. Wanted to get an update on that trend. Has that moderated? Also, the new center in Germany, is this a large one for us? A parallel thought that, should one expect any reversal in the offshoring trend, which is holding up quite well for us.
Okay. Your voice was echoing, so I heard the second question. I didn't hear the first question. Let me answer the second question, and then we can come back. Yes, I think we've recently opened a center in Frankfurt. You know, we believe it's a good location for us. You know, Of course, we get access to local talent there, and there are a few customer engagements that we are going to execute, you know, partly out of that facility, right? I think, we always had a smaller center. This time we really scaled it up to a significant, you know, a larger center.
So yeah, I think that's something. I don't think that our on-site offshore ratio is going to change drastically, you know, because of that. We still continue to be an offshore-centric, you know, organization, and if you look at the ratios also, I think we are more or less at the same level, you know, where we operate. I think that doesn't change. Coming back to your first question, can you repeat that question?
That was around on-site wage inflation. You had called out a high on-site wage inflation last quarter. I wanted to get an update on that trend. Has that moderated, or how are you seeing that?
wage inflation is still high. It's early to talk about, you know, all these layoffs and the impact of that on the on-site wage inflation. I think we will really wait and watch, but I think till last quarter, inflation continues to grow, right? Yeah. However, there is some softening in the market right now with all the layoffs and so on. It's too early to comment on that. We'll wait and watch for till the end of the quarter.
Thanks, Manoj.
Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Nitin Pai for closing comments.
Thank you. First of all, let me wish, all, the participants today a very happy New Year again. Thank you for joining us for this call. We look forward to meeting you again, in the following quarter. Of course, this time our results were delayed a little bit, not because we're not ready, but we had to enable the availability of the entire board, which was otherwise occupied. Hopefully, we'll have our numbers coming up early as usual in the following quarters. Thank you, and have a good day.