Ladies and gentlemen, good day, and welcome to the Q4 FY 2021 Investors conference call for Tata Elxsi. 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 touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Lokesh Pareek from Christensen Investor Relations. Thank you, and over to you, sir.
Thank you, Lizann. Good afternoon, all the participants on this call. 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 our businesses that could cause future result performance or achievements to differ significantly from what is assessed 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, MD & CEO; Mr. Muralidharan H.V., Chief Financial Officer; Mr. Nitin Pai, Chief Marketing and Chief Strategy Officer; and Mr. G. Vaidyanathan, Chief Investor Relations Officer. 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 your questions to two questions per participant to allow other participants an opportunity to interact too. If you do have further questions, do join the queue, and we would be happy to respond to them if time permits. I now hand over the call to Mr. Manoj Raghavan. Over to you, sir.
Thank you, Lokesh. Good afternoon, everyone. Thank you for joining the call today, and hope you and your families are safe. At the outset, I would like to thank the entire team, the employees of Tata Elxsi. It's been a great performance in an extraordinary year, and with the COVID posing huge challenges to maintaining our business continuity and customer centricity, while at the same time ensuring the safety and well-being of our employees across the world. The entire team has demonstrated great commitment and passion to ensure that we stay focused on our customers' needs and focus on delivery excellence, customer delight, and really look at opportunities for growth. Coming to the quarter, it is definitely a very satisfying quarter with continued growth across our offerings, industries, and geographies. To wrap up a remarkable year for us.
Of course, our revenues from operations for the quarter were INR 518.4 crores, translating to a growth of 8.7% quarter-on-quarter and about 18% year-on-year. As you may have noticed, the growth was almost entirely volume-led, with a constant currency growth of 9.1%. Our PBT for the quarter was INR 161.7 crores, again, registering a growth of 10.6% quarter-on-quarter and 47.2% year-on-year. Net profit stood at INR 115.2 crores, reporting a growth of 9.5% quarter-on-quarter and 40.3% year-on-year. Indeed, it was a very satisfying quarter with great top-line and bottom-line performance. The top-line growth was driven by strong performance in both our key divisions, Embedded Product Design division, which is the largest division. It grew by 5% quarter-on-quarter and 15.5% year-on-year. Industrial Design and Visualization, the IDV division also had a very smart growth. They grew by 40.1% quarter-on-quarter and 39.2% year-on-year.
Our design business continues to grow strongly with improved deal flows and deal sizes, as well as cross-selling into our existing customers for our upstream and design-led work. Our system integration business also grew by 21.2% quarter-on-quarter in Q4. All of you who have been following our results for many years know that Q4 is typically a good quarter for our SI business, as our customers spend their residual infrastructure budget for the fiscal year, as it's also the year-end for them. The margins are significantly higher this time, though, due to a higher proportion of services involved in one of the large projects that we bagged in the quarter and that we commissioned in the quarter. That's the reason for pretty good performance in our SI business.
Also, if you look at the SI business at the beginning of the year, because of COVID and so on, a lot of the deals were really put off, and many of those deals fructified in the last two quarters. That's also a reason why that business showed a good growth. Within EPD, again, it was a broad-based growth across verticals. We had growth in the transportation business. Media and communication business also grew. Transportation grew by about 3.2% quarter-on-quarter, and media and communication grew 5.8% quarter-on-quarter. Healthcare continued to accelerate faster than the rest at 11.8% quarter-on-quarter. For the full year ending March 31st, 2021, revenues from operations grew by 13.4% year-on-year. Both EPD and IDV grew by 14.6% and 9.1% year-on-year respectively. All in all, in a very tough year, this is a very credible performance from the entire team.
From where we started in Q1 last year with so many uncertainties, I'm very pleased to end the year on a high note. Delighted to exit FY 2021 with an all-round growth in revenues, margins, and customer additions. Gives us great confidence going forward into a new fiscal year, and I'd like to thank our customers for their continued confidence in our differentiated capabilities in technology, design, and digital. Finally, I would like to also thank all the shareholders, and I'm happy to announce that the board has approved a final dividend of 240% for the year, along with a one-time special dividend, again at 240%, translating to a total dividend of INR 48 per share. Of course, this is subject to approval of shareholders at the forthcoming AGM.
When you look at the overall situation in the country with COVID and so on, and what we have noticed is, over the last close to 24 months, the number of retail shareholders or individual shareholders has increased significantly. Given the situation with COVID and the economy and so on, since we have done well, the board decided to really give a good bonus so that all individual shareholders and all the investors in the company benefit from the returns that we give. With that, I would like to hand over to the Q&A session. Thank you for your time.
Thank you. Ladies and gentlemen, we will now begin with the question-and-answer session. Anyone wishing to ask a question may please press star and one on your touchtone telephone. If you wish to remove 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. Participants, in order to ensure that the management is able to address questions from all participants in this conference, we request you to limit your questions to two per participant only. The first question is to the line of Ikshit Naredi from Naredi Investments. Please go ahead.
Hi. Congratulations on the good set of numbers. I have a first question regarding the sensors technology. As sensor technology is increasing, so are we aggressive on the segment or this is not your cup of tea?
Sensors, when you say, sensors are used in multiple places, including in IoT. Whether it is automotive, whether it is media communication, whether it's healthcare, sensor and sensor technology plays a very important role. A lot of the products that we work on have different types of sensors. It's very much an integrated part of our service offerings that we have had for the last more than 15, 20 years. That's what we do. Yes, it's very important for us.
Okay. My second question is, in life sciences business, is that story long-term, and how many months visibility you are having right now? Please share a vis on that.
How many months? Sorry, could you repeat the question?
In life sciences business, is that story long-term, and how many months visibility you are having right now?
Yes. Instead of calling it life sciences, we call it healthcare and medical business.
Yeah.
That business, we have been investing over the last five years. Yes, indeed, it's a long-term story. People who have been following our stock know that we have been aggressively growing that part of the business. Even in this quarter, we have had a pretty good growth. Definitely, there's a good long-term visibility over multiple years. We have no concerns there.
Okay. My one last question is, I heard about the VR technologies, it's a very vast industry and growing very fast. Can you please tell something about it, like are you working on this segment or something like that?
Hi. This is Nitin here. If I can take that. Yes, we do. I think we have a play in two, three directions. One, our system integration business helps integrate and sell VR gear for corporates where they're setting up large enterprise visualization setups and so on. In fact, even in the last quarter, we've actually had some deals on that front. That's one hand. On the development and design side, VR is becoming an integrated part of how you sell and market new products and services, including automotive. We are working in such areas where you use VR both for education, for training, as well as in some cases for product development itself.
Okay. Do we see the great margin in this segment?
The margins are not exceptional, and I think the business is just about ramping up. We are, in that sense, I would call it, are still riding the hype cycle. We'll have to give it some time to really settle down into large-scale use cases, widespread usage.
Thank you. The next question from the line of Vimal Gohil from Union AMC. Please go ahead.
Yes, sir. Thank you for the opportunity. I hope I'm audible. Sir, I have two questions. One was firstly, on the balance sheet. Just wanted a clarification on the INR 102 crore line item that is there. What would that be related to? It's in the other section, other assets.
Just a minute. That is the fixed deposits, having a maturity beyond one-year period.
Got it, sir. Okay. It will be considered as cash, right? You just said these are fixed deposits having maturity of over and above one year, which is why they are not in the current liabilities.
Yes. These are all bank balances. The Ind AS requires us to categorize it differently this year.
Fair enough, sir. Now on the margins. 30% EBIT margins is sort of unheard of in the Indian IT services industry. Sir, how sustainable are these margins? I also do note that there is a fair bit of offshoring pickup that has also happened. If you could please break us the margin improvement, what you're seeing this year into how much has come from offshoring and how much has come from utilization uptick, and is it possible that utilization levels are still sort of undershooting? Do you still have room for growth?
No. There are many levers for margin improvements. One is, of course, increased offshoring. One is more long-term projects, more longer-term engagements and so on. Of course, better realizations and so on, more complex projects, more realization and so on. Definitely, this year has been very different, primarily because of COVID and a lot of expenses, including travel, even nominal expenses, employee-related expenses, celebrations. None of that has actually happened. It is a one-off sort of a situation. We don't want to leave an impression that these high margins will continue. As and when the economy recovers and as and when travel picks up, we will go back to our original margin profile that we have been talking about. Having said that, yes, we have been riding the wave and if we can improve the margin, then of course, we will try to improve the margin.
No issue is there. Whether this will continue or there's no way that I can say that, "Hey, we will continue these high margins.
Right. Sir, what should be the reason behind coming to the gross margins? Your gross margins have seen a sequential uptick of almost 260 basis points to 43%. Clearly seems to be that employee productivity has improved quite sharply this quarter. Is there any IP-led revenue that has been included here? How should we read that?
No. There is IP-led revenue also. More important than that, there are certain new business models that we have gone into and that is really not linked to number of employees that we work on the projects and so on. We have been very innovative in the way we handle our customers and so on. There are certain things that we've done well and over the last two, three quarters, and that's actually resulted in improving our margins.
Sir, does that mean at least if not the EBIT margin, the gross margins would be. Sir, that's all from my side. Last one.
Cool. Thank you.
Thank you. We'll move on to the next question. That is on the line of Ashish Agarwal from Principal India. Please go ahead.
Yes, thank you. Just couple of things from my side. On the industrial design business. Last two, three quarters has been very strong in this business. How should we look at the growth in this business? Though last two, three quarters has been great. If we look at last three years, the revenue has been flattish. Should we consider that this business can grow at high double digits, or how should we look at this business growth and the profitability in this business? Secondly, on the overall profitability, you said that once the travel returns to normalcy, we will go back to our preferred range. Earlier, your preferred range was 22%-24% EBITDA margin. Are we looking at those type of range once the normalcy returns, sir?
Yes. As I've been talking about our industrial design business, yes, we have been underperforming for the last many years. We did do a number of things, including changing leadership and so on. This is a business that is immensely scalable and I strongly believe that design is a very key differentiator for us. We have done certain things, including on the front-end sales, including in the back-end, including in the type of deals that we go after and also how we integrate our EPD offerings as well as our design offerings together. We have done a number of things while we were all stuck with COVID and so on.
There has been a lot of transformation initiatives in that particular direction that we have embarked on. I'm happy to say that whatever we've built over the last four quarters has really resulted in this sort of dramatic return of growth into that business. Even though we have grown very significantly, 30%-40% growth and so on, you look at the year-over-year, we are still about 9%. We have grown at 9%. I think that is also because Q1, that particular business was deeply hit because of COVID and related things. Q1, and to an extent even in Q2, we were sort of down. However, there was a very, very smart recovery in Q3 and Q4, and that is how we are able to really show that 9% growth. We are definitely bullish on that particular business.
We would see definitely much more accelerated growth as compared to the previous year in the coming financial year. That is a key differentiator for us, and that will really drive our business. That is what we are also pushing. You talked about?
Margins.
Margins. Yeah, see. Yes, whatever margins profile we've been talking of, over the long term, right? Now, you don't ask me what is long term in the current scenario, I don't know. Over the long term, definitely that is what the margins are. We continue to have that position. However, in the short term, because of all these savings that we have and other expenses and so on, margins will definitely be on the higher side. It will taper off eventually as the economy recovers.
Last thing, sir, any issues on the supply side that you're facing?
Yes. Supply side is getting into a little tight situation, to be frank, especially among the senior management or the senior leadership roles and so on, because we have been growing significantly over the last three quarters. Quarter- on- quarter, we have been growing and so on. Yes, we are stretched at this point in time, and we are actively hiring. That is why if you look at the numbers that we've added in this quarter, will give you an idea of we're really going out and hiring people. Yes, we need to add a lot more people, and with the situation in the industry everybody's hiring, and salaries are shooting up. We have all those issues, but we still hope to attract people because of the brand that we carry and the type of work that we do.
We are hopeful that we'll be able to address that situation.
The next round of salary hike will be again in Q2 or?
Sorry?
The salary hikes. FY 2022 will have a normal salary hike here where you generally give it in Q2?
Yes, we will have a salary hike from July.
Okay. Got it. Thanks.
Thank you. Ladies and gentlemen, in order to ensure that the management will be able to address questions from all participants in this conference, we request you to limit your questions to two per participant only. The next question is on the line of Mayank Babla from Dalal & Broacha. Please go ahead.
Good evening, sir. Thank you for taking my question. Congratulations on a great set of numbers. My first question pertains to the transportation segment. Sir, as it's reported, we've seen that the performance has been a big rollercoaster over the last two years. Going ahead, what can be the sustainable sort of growth that is visible in this segment?
This segment is most affected due to COVID and so on, right? Even now, if you look at the second wave is coming in India, automotive companies are back to closing factories and so on. It's very difficult for me to give any position on the sector within short term or midterm. However, over the long term, yes, whatever trends that we're talking about, whether it is electrification, whether it's autonomous, whether it's connected car, all of those trends would continue. We don't have an issue in the long-term perspective. Short-term to midterm, definitely there will be some amount of stress, and we'll have to navigate that cycle.
Sure. Sir, my second question is on the healthcare and medical devices segment. Sir, could you throw some light as to what is driving this phenomenal growth? If some examples of some projects that we are executing that is differentiating us from the peers. Thank you.
Yeah. As I said, right, we have been investing in this business for more than five years now. We have a very, very clear-cut strategy, and we are executing on that strategy. We work on the extremely good end product development on different medical equipment devices, diagnostic devices, point-of-care devices, a number of things that we are doing. We have very strong capabilities on the regulatory aspect, and that is another area where we have built our own frameworks, IPs, that really helps us differentiate from any other service provider and really show tremendous value to the customer. See, the only reason why customers will continue to give us work is, and at these rates, at the growth rates that we're showing is, are we adding value to them or not? Are we solving the important customer problems that they have?
If we are adding value, if we are solving the problem, the business will continue. We are sort of focused on a few problems that the industry has, few problems that the customer has, and we are attacking that. We are building intellectual property, we are building frameworks. We are going with that, and we have a differentiated play in this as compared to competition. That's the reason why we are growing.
Thank you. The next question from the line of Hiren Ved from Alchemy Capital. Please go ahead.
Yeah. Hi, Manoj and Nitin.
Hi, Hiren.
Hi, congratulations for very good set of numbers. I think this is top-notch execution and needs to be lauded.
Thank you.
It's pretty much the same question that I had last time also, is that what are we doing to maintain or increase the pace of the opportunity set that we go after across the three verticals? Obviously, for whatever extraneous reasons, partly because of that, and partly obviously because of the new way of doing business, our EBITDA margins are very healthy. What are we doing to reinvest? While I'm very happy with the EBITDA margins, I think I'm more interested in increasing the opportunity size for our company, so that we can grow to a billion-dollar revenue size company quickly. What are some of the steps that we are taking to reinvest some of that margins or even otherwise to increase the opportunity size?
Yeah. If you look at it, there are two routes, right? One is, of course, organic and one is inorganic route. From an organic side perspective, we have been investing a huge portion in our front-end sales, in consultants, in industry experts, and that process continues. We have not stopped that investment. We are continuing. That is the way we are opening up new accounts, new logos. Also within our existing large accounts, we have been mining them well. If you look at our top three, top five, top 10 accounts, you'll see that they've all been growing, right? That is because of all the investments that we have been making in mining those accounts and taking them forward. At the same time, there are a number of initiatives that we have also started. We talked about adjacencies, we talked about growth initiatives.
We are investing in all of those areas, whether it is healthcare, digital health, whether it is on the rail segment, whether it is on the OTT space, the product development that we are going on. All of those investments are ongoing at this point in time, and the hope is all of these investments over the next 6 to 18 months will give us those multipliers, will give us those weapons to go after and increase our business. That is one part of it. Of course, the second part is the inorganic route. We have already identified areas that we need to strengthen, and we are targeting companies. We are in discussions with different companies. The only thing is that good companies' valuations are very expensive even at this point in time.
Those that we believe that will add value to us comes at a premium. There is that sort of evaluation happening at this point in time as to how these companies can help us. Hopefully, when things solidify, you will hear some news there.
Sure. Just one more question from my side. While traditionally we have been working with the top automotive companies who are trying to move into more connected cars, autonomous cars, et cetera, and build those technologies in their platforms. I think last quarter, and I think even this quarter, you mentioned that you acquired one North American EV player. How serious is the opportunity amongst these new-age EV players, or do they have a concept of tier one like you have in a typical automotive environment? Do you see a large opportunity to work with some of those players as well?
Yeah. I'll have Nitin answer that.
Yeah. Hi, Hiren. Yeah. The answer there is a yes and a no, in the sense that new-age OEMs on one hand represent the ability to work ground up to participate in absolutely cutting-edge ways of doing things because they tend to innovate. On the other hand, they also represent risk, simply because they're as good as their funding in many cases. Therefore they have, in some cases, fairly bright but short lives, if I may put it that way. In terms of funding, in terms of R&D budgets, how they want to get things done, and so on. I think at this time, we are taking a very judicious call on who do we want to work with, one, and how much of effort and time we want to invest with those, as against the traditional OEMs who have to pivot to the new tool.
Right.
I think at this time, I think we are just taking a balanced view.
Got it. Thank you for the special dividend. I hope it is not a one-time dividend. We continue to give that unless obviously we go ahead and make an acquisition. Congratulations to the team again. I think this is fantastic work, and all I can say is, I'm a happy shareholder.
Thank you so much, Hiren.
Thank you. The next question is from the line of Bharat Sheth from Quest Investments. Please go ahead.
Hi, Manoj and Nitin.
Manoj here. How are you?
Fine, sir. Thank you. Really both of you, I mean, deserve a lot apart from the whole company teamwork. I mean, Manoj, you have given a very good color that how we are moving from, say, onshore to offshoring, then complex deal long-term, whether it be short-term duration contract. What kind of opportunities still we have in each of the now and all these four vertical, I would say, three in services and apart from that, industrial designing? All are now showing a good growth traction. How really we look at, I mean, sustainability, whether it is offshoring, because despite offshoring, I mean, we have grown, I mean, substantially in value term?
Sure. Sitting out here, I'm pretty confident of the short to mid-term prospects of the company.
Okay.
Long-term, we never know. Hopefully long-term also, we should not have any issues, right? All our segments are fairing very well. Yes, transportation is a little slow, but I'm sure as the situation in the economy and the COVID and all this improve, I am pretty confident that segment will also pick up rapidly, right? The good thing is we have invested appropriately in various new initiatives, in adjacencies, so that even during COVID, even when other companies and other industries and even customers were struggling, we were able to figure out areas of growth, areas of opportunities, and really ensure that the company grows. We don't stagnate. As a result, we reward our investors and our employees also accordingly.
Okay. This, I mean, I believe margin is short of, I mean, not as in long-term may come down little, but not earlier what, because of more offshoring complex deal, so higher realization and all these things. Plus industrial design also started, I mean, contributing. That is one thing. Second thing, earlier we had, I mean, of course, ambition of growing, I mean, say 8% to 9% to or 10% QOQ. In that journey, where do we really see? How is the deal win that we have currently and deal pipeline also fair?
Yeah. The last quarter was very good. I think consecutively, even during the peak of COVID, I think the last three quarters, we have definitely closed a lot more than in the previous years and so on, right?
Correct.
It is only possible, this growth, 8% or 9% quarter-over-quarter growth that you see, is only possible if you close those large deals and if you are able to ramp up and execute and deliver, right?
Right.
That discipline has been there. Teams have been extremely disciplined. We have kept our customers happy, and we have really delivered value when, in fact, our customers were unable to work and they were having furloughs and they were closed.
Right.
It is our engineers who really helped them, supported them, and helped keep their business running. To that extent, I think we've done an extremely good job. Many of our engineers have put in many hours per day, right? Many hours per week, solving customer issues and problems and so on. A lot of appreciation from customers for the efforts that they put in. I think all of this will really hold us in good stead, right? Especially when things return to normal and so on. Most of the customers will hopefully realize the value that we have delivered to them and continue the business with us.
Coming to your escalation of 8%-9% kind of a QOQ growth. Just a last question, sorry.
Mr. Sheth, can we request that you return to the question queue?
Sure.
There are participants waiting for their turn. Thank you. The next question is from the line of Dipesh Mehta from Emkay Global. Please go ahead.
Yeah. Thanks for the opportunity. I have a couple of questions, I think partly addressed, but considering our focus on three verticals over medium term, if you can help us sub-segment our sub-vertical where we are investing to fuel our growth over medium term. If you can provide some perspective, transportation, communication, healthcare, which are the sub-verticals which we have identified to drive future revenue growth? Second question is, can you share the utilization of where we are in Q4? Thank you.
Hi, this is Nitin here. Maybe I'll take that. In some sense, the sub-segments are reasonably clear, right? If you look at automotive, it really carves out into connected, autonomous, shared, and mobility. Shared is, in some sense, a secondary derivative of connected and autonomous and electric. To that extent, we clearly are investing in all three. We're growing capabilities and capacities in all three, right? I think all of them are trending towards digital technology. It's not just about what is in the car, but what's also in the cloud and how do you optimize and manage and run both the cloud and the in-vehicle piece better. As far as media and communications is concerned, I think we're very clear. On one hand, you have the device companies, whether it is boxes, network equipment and so on. That's traditional. You have the operators who form the second wave.
When they started to take control of software, then when they wanted to innovate faster and not be tied down to black boxes supplied by the device companies. I think the third layer that is coming in now is the new media companies, who don't necessarily need any infrastructure or CapEx to run services. Their asset light in some sense, though content, et cetera, can be quite asset heavy. These are broadcasters, media studios, content owners, aggregators who can now deliver services directly. These are the key segments in the media and communication side. In healthcare, we started with medical devices. We have now expanded to pharma and to digital health. In that sense, these are new sub-segments that we are both investing in and building on.
In addition to all of this, I think, rail and off-road vehicles, you can call off-road automotive, but it's really not automotive. It uses the same skills, technologies, but in a different way. Off-road and rail for us are, in some sense, B2B or B2G kind of businesses, which are not directly dependent on consumer sentiment. Broadly, I would call this out as the entire segmentation. On the utilization rate, it has improved further to we are, I think, at about 77% now for the quarter. We still have room to go. As like, I think Manoj said, I'm just making this point for everybody. There are levers. There is still room in the levers. Unwinding of these levers will take time. It's not that there's going to be a sudden change or drop in margins and so on. Having said that, yes, 77% is where we are on utilization.
Sure. Last related question, do we say, let's say breakup, you said auto, we have said mobility, connected vehicle, electrification? Do we say size and scale of, let's say, each sub-segment in some way?
No, at this time we don't, because we believe.
So much of it has to do with.
Exactly.
No, it is. Thank you.
It's really complex, right? It's not that you do only autonomous or either no connected and autonomous or there is no digital and electric. It's, I think, sometimes impractical to even try and bucket it.
Understood. Thank you.
Thank you. The next question is on the line of Madan Babu from Canara HSBC. Please go ahead.
Yeah. Hi, sir. Sir, earlier we used to have some volatility in revenues. I think that over the last three quarters it has stabilized, and we are doing very well. Going into next year, do you see any softness in 1Q or any volatility on the revenue trajectory, or we are confident considering the deal pipeline?
Deal pipeline is good. I don't see such issues happening at this point in time. All said and done, our business depends on our customers' budgets. Can I say that there will not be any further customers dropping their budget and so on? At this point in time, we can't make that assumption. What I can tell you is, even if one or a couple of customers pull the plug or they have some budget issues, Tata Elxsi is resilient enough to overcome that, and we have proved that. We have shown it multiple times. We will be able to recover and grow. Our basket of customers will improve. The size and scope of business that we deliver to our customers will also increase. We are fairly confident and believe that we have a resilient business model.
Just one more, sir. Of the 7,300 employees, how many are in the onsite in Europe and U.S.? Can you give the exact number?
Onsite is a smaller number. Exact number, I think it should be around 700 or so. I don't have exact number, but ballpark it is around 700, 710 or so.
Okay. 10% of your headcount. Okay. Thanks, sir.
Thank you. The next question is from the line of Hussain, an individual investor. Please go ahead.
Hello. First of all, sir, congratulations on the good set of numbers. Sir, our question is, where do we see ourselves in the medical space due to the uncertainty in COVID-19 scenario right now?
I think medical business continues to grow for us. I don't think because of COVID we have had any issue in our healthcare and medical devices space. That business continues to accelerate. As long as there are no massive lockdowns. The only problem that will happen is how medical companies, they make money is through these elective surgeries. When the elective surgeries come down, the medical companies don't make money. As long as, for example, abroad in U.S. and Europe and so on, things are returning back to normal. Of course, in some countries, they still have COVID-related issues. World over, most countries are coming back and vaccination, many countries have vaccinated more than 50% of their population and so on. Things are returning back to normal. Elective surgeries are happening. Medical companies are making money, so that business will continue.
Okay. Sir, the second question is regarding the shortage of semiconductor which is accelerated a lot. Will there be any kind of opportunity in this segment?
We don't see an opportunity in semiconductor shortage. We don't make chips or we don't. It's not an opportunity. It's sometimes a risk if some of the key markets, like automotive markets, there's a shortage, then car makers are not able to sell their cars. As a result of which, they decide to slash their budgets and so on and so forth. However, that's a very small risk. We don't see the semiconductor shortage as either an opportunity or a risk for us at this point.
Okay. Thank you. Thank you very much.
Thank you. The next question is from the line of Rohan Doshi from Finvest Advisor. Please go ahead.
Hello.
Yeah.
Yeah. Can you hear me?
Yes.
Yeah. I have two questions. My one question is this, certain to shortage of chips only, will it affect only the automotive industry, or it can affect even the medical devices or even the communication devices, et cetera? What is your take? Like, any of your clients have suffered problem because of the shortage of chips? Like in today's newspaper, it has come that JLR production may be affected because of the chip shortage.
Sure. As far as we hear, we hear automotive companies being affected, but it has not affected any of our business so far. We don't see an effect of it on communication or on the healthcare or medical devices so far. We've not heard anything from our customers.
Okay. Do you think it can affect us in future?
Yeah. Maybe I'll answer that, right? The semiconductor shortage is fundamentally a disruption of the supply chain, right? Some extraordinary events.
Yeah.
Fire in a factory in Taiwan or, sorry, floods in Taiwan. Water shortage in Taiwan, fire in some factory somewhere else is also. If you think about it, these are one-time disruptions, extraordinary events. The industry is reworking the supply chain and already investing in additional capacity in plants. Yes, for the next six months, nine months, you will find disruptions. Disruptions will be in certain segments, certain types of chips, and so on. My view, I think the industry in that sense is quite resilient to work around. Answers will not be a quarter or two quarters, but I think the impact also is not going to be so bad for a quarter or two quarters.
Okay. We are not getting affected.
No.
Yeah. Okay. Now my second question is, in the earlier conference call you said that because government has not announced its export incentive rates, you have not accrued any income. What is the position as of now?
Same position. We have not taken any. The government till now has not announced anything.
Okay. Fine. Thank you very much. Wish you all the best.
Thank you.
Thank you. We move on to the next question. That is from the line of Apurva Prasad from HDFC Securities. Please go ahead.
Thanks for taking my question. I have two. Congratulations on the numbers. Manoj, looking at the acceleration in top 2 to 10, can you say that is the visibility also higher as the pipeline driver appears to be more from larger accounts? Related to that, based on your comments on addition of customers and large deals across the industry segments, is the trajectory of 5%+ QoQ sustainable?
Yeah. Especially visibility in the top five, top 10 customers is pretty good for us. The order book and the deal pipeline is good. I think we have spent a lot of bandwidth in mining these accounts. I think we are in a good position, especially with respect to top 10 customers. At the same time, as we've announced, we've also won some new deals, and these are all again, good logos that will eventually help us in over the six months, 12 months to really ramp up our business. Yes, we are in a good position, and unless something happens in industry or any particular customer decides to pull the plug in any which way, we should be able to show healthy growth.
Right. That sounds good. On the margins, while we spoke about this earlier, but this is more from a near-term perspective, do you see any near-term headwinds to the margins, so be it offshore coming down from the current levels or supply side impacting your attrition levels? Also if you can talk about the hiring plans for the fiscal year.
I think margins, we are pretty comfortable. As I said, in the near term, yes, the only issue or not issue, the only thing is that we will have a salary hike again. It's not just salary hike, because our employees have really put in all the hard work and supported our customers, and the remote working has taken a toll and so on. We've also rewarded our employees with, apart from the normal salary hike, we have also given them a one-month bonus. That has also been, we will roll it out. There'll be an impact of both salary hike and the bonuses. To that extent, our margins may dip a little bit. I think over the next four quarters, we hopefully will be around the same margins as in the last fiscal.
All right. Just to clarify, you mentioned one-month bonus, which will be given out in the first quarter and the wage hike that happens in the second quarter.
Yeah. We will not give the entire thing in the first quarter. We'll divide it between the first and the third quarter.
Great. Thank you, and all the best.
Thank you.
Thank you. The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund. Please go ahead.
Yeah. Hi, sir. Good afternoon. Thanks for taking the question. Very strong performance, both from a revenue perspective as well as the operational perspective. I think just one main question. You've been highlighting our approach to increase our project more from a project base to a more annuity based kind of a structure, which will give you more visibility and margin levers, let's say. If you can give some perspective on how your average deal duration for the new deal wins that has happened in, say, in this year. How has that been? Are these all multi-year deals that we have won in FY 2021? That is the first part of the question. Secondly, given that we make such high gross margins, are these new deals priced more aggressively by sharing some of these efficiency gains, let's say? If you can give some perspective on that as well.
Yeah. I would say at least the large deals that we have been closing are definitely multi-year deals. We have closed three-year deals, five-year deals, and so on. Definitely, that's part of it. At the same time, it's not that all the deals that we have are these multi-year deals. We also have six months, 12 months deals, and so on. Again, it depends on customers and the area of work. What I would definitely want to say here is the number of large deals that we are chasing is definitely much higher than the previous year, and so on. To that extent, yes, there is this movement towards large multi-year deals. Pricing wise, I think pricing is a function of the area that you are operating in, the value that you bring in, the type of deals that are there.
For example, digital or AI-based, or we talked about virtual reality and all the new skills. Depending on the area that we operate in and the capability that we bring in, whether we have intellectual property, whether we have accelerators that we bring in. The pricing is not a straight fit. It's not like an IT company where we just price based on so many dollars per hour. Based on the junior resources we bring in. That we try and avoid such a pricing scenario. We bundle value and price customers according to the value that we deliver. Yeah, it is not a straightforward answer, but yes, that's how we do it.
Sure. That's very helpful. When you spoke about the inorganic way of growing, you spoke about specific capabilities that we may want to acquire. Which are some white spaces that we would like to strengthen ourselves from a capability perspective? Is it more in the India OTT segment? Is it more on the medical equipment side or on the automotive ADAS side? If you can give some perspective on what are some of your top three focus areas when you look for acquisition purposes. What is the kind of deal sizes you look at? Thank you.
Yeah. No, at this point of time, we don't want to talk about all these white spaces. This is something that we're working on, and it's confidential to the organization. I'm sure you can guess. We've actually talked about some of those areas in the past also regarding adjacencies and so on. Those are areas that we are really focusing on in terms of looking at inorganic. At the right time, we will update you as and when we see some traction there and when we take some decisions, then we'll let you know.
Thank you. The next question is from the line of Harish Kawalkar, an individual investor. Please go ahead.
Sir, good afternoon. My very much heartfelt congratulations to you in navigating this COVID-19 situation and delivering outstanding results. I have two questions, sir. First one is regarding the special dividend. I think you have ROC of around 35%-40% and return on return, that is ROE of around 15%. You have reserve around INR 1,200 crores. You declared INR 149 crore, around 10% of reserve. I think if you have that money, then it has a chance to grow at more percentage point than giving it to the retail investor. I'm a retail investor. I don't have any issues with that. That might be my personal opinion. If the amount remains in the company, it will help to grow company in the future. What is your take on that, sir?
Yeah. As you said, it has been a tough year for many people. There are many people, and as a group, as a Tata Group, we felt that we have to really give back to the society, especially in a tough year. That is the reason why the board decided to give a special dividend because people are struggling, people are suffering. It will help them. That is the only logic where we decided that, okay, this year, let us be liberal with returning the money to stakeholders, and that's why we took this decision.
Okay, sir. Sure. My second question regarding the transportation vertical. Other than COVID situation, you have identified any risk over there in transportation why it is not growing other than COVID situation?
Yeah. There's a lesson here. I think we've talked about this in the past. The point is that the industry is also undergoing some structural changes because of the fact that EVs mean that you do not need the kind of structures and people and skills that you had in traditional OEMs. The manufacturing methods are different. The decisions on what you need to own versus what you could afford to get supplied by third-party suppliers is also changing. Software is becoming very important. Earlier, OEMs did not have to worry about software. It came in a box, you gave it, sold it, and you didn't have to worry about it. Now, software has to change over the air. You get your infotainment system gets updated, your ECUs get updated inside the car. I think there are structural changes that go beyond COVID, right?
COVID only worsened the situation by making it even more difficult to spare R&D budget on all these things that you need to do. Right? We believe in some sense, technology will continue to accelerate in the automotive space. Electronics and software and digital is what will drive the industry. I think our capabilities are very aligned to those areas. That is where I think we are quite confident in the long term. In the short term, yes, we'll have to deal with the dual problem of structural changes and COVID and revenue, and stagnation in the industry in terms of sales.
Thank you. We'll move on to the next question. That is on the line of Raj Rishi, a private investor. Please go ahead.
Yeah, hi. Would like to know what's your plan for the education sector. Are you making a foray in the education sector also?
Yeah. Definitely we work with two large players in this segment. Our design team, the industrial design and visualization team, does a lot of work in the education sector, especially around the graphics, using various tools like AR, VR, and all of that, right? How to make it interesting for kids and so on. We have a very serious play in that sector.
Can that become another pillar, like your automotive broadcasting or the medical devices and adjacency?
I'm not sure whether it can be a pillar as such, but definitely it can be a good sub-segment within the industrial design business.
Okay. It'll be part of the industrial design business.
Yes.
Okay.
Of course, software team is also there, so we cross-leverage capabilities from other teams like the media and communication and so on.
Okay.
It's driven by the industrial design business.
Okay. Given my understanding of the areas which you are trying to address, the scale of the opportunity seems to be such that the present turnover of, say, Tata Elxsi, the revenue which you are generating around not even INR 2,000 crores, many times that is possible. I am sure given the optimism which you have, generally when I have heard you have some internal assessment as to where you can reach in three to five years. Can that be a multi-billion dollar possibility, Mr. Manoj?
There is a huge opportunity, no doubt, right? We are in the midst of a huge market which is growing and exploding. Technology use is really exploding. Yes, I guess I can say yes, that there's a multi-billion dollar opportunity and we will be there. Yes, definitely we have our own plans and these are significant large, what we call, right, large, hairy goal that we have. Yes, it is a large goal that we're taking in the next three to five years, and we're working on it. It can be a large opportunity, no doubt about it.
Thank you. A reminder to the participants. In order to ensure that the management will be able to address questions from all participants, we kindly request you to limit your questions to one per participant only. The next question is from the line of Ravi Naredi from Naredi Investments. Please go ahead.
Really, Manoj, it is a very fantastic result. I am shareholder since a very long year, and it is a surprise to know you have given a fantastic return. Sir, in this 3D printing is doing well. Are we planning anything big in this segment?
Yeah. This is Nitin here. There's no direct plan for us in the 3D printing segment. Why? Technology is fairly stable there. It is just that 3D printing kicked off big time after the patent's expiration.
Okay.
Held by one or two companies. Therefore, it was not available for the rest of the market. Once the patents opened up after 20 years of a closed kingdom, that is where 3D printing has taken off globally because economies of scale have kicked in. Everybody can produce at actual cost rather than what came with royalties and so on. In that sense, I think it's a transformative opportunity for certain sectors like very complex engineering, footwear, personal goods and so on. Design will benefit greatly. From a software development etc., I don't think there is too much to count on. By the way, our system integration business does sell and service and support 3D printing technology for very specific sectors. They are starting to see some business there.
Okay. Thank you.
Thank you.
Thank you. The next question is from the line of Nitin Shakdher from Green Capital Single Family Office. Please go ahead.
Hi. Good afternoon to Manoj and Nitin, and congratulations on the efficient execution of your annual plans. My question is more specific to looking at the geography of Japan and looking at the business update on the health and life sciences segments there. Can the management give a small business update on that segment and geography, both in terms of outsourcing and design and development? We understand Japanese people to be more using their workforce rather than outsourcing, so a bit of comment on that. Any opportunities which have come directly or indirectly to the company in the upcoming Olympics or companies that you would be working with or customers that you would be working with. Thank you.
Yeah. Tata Elxsi has been working with Japanese companies for the last 25 years. Since 1996, we have been operating in Japan. We have a pretty strong and stable customer base there. Yeah, you rightly said, Japanese companies, typically, there are issues. There are cultural issues. There are language issues. They typically tend to work with their own subsidiary companies and so on. Outsourcing is not an easy decision for many Japanese companies. Having said that, I think from Tata Elxsi perspective, we have What percentage, Nitin?
Yeah. It's around 8%-10%.
About 8%-9% of our revenues come from Japan. It's been relatively stable. It's been growing, but not at a very accelerated growth rate. A lot of our businesses there comes from automotive companies right now because, as you know, Japan, there are leading both OEMs and tier one there.
In general, the automotive industry is also, because of all these issues, outsourcing is not growing that rapidly. Having said that, yes, we have been winning projects, and especially for Japanese companies, when they win projects overseas, whether in Europe or U.S., it's very difficult for them to manage those projects because of the language and so on. That is when companies like us, they tie up with us and then, we support them in their customer communication and really understanding what the end customer needs and how to deliver that value to them. Yes, Japan is an important market, a steady market, and we get good projects from there. We get good technology-related projects. These are typically long-term customers also.
Regarding the healthcare and medical devices business, yes, and as we have already stated in the press release and so on, it's been growing pretty well. It's in fact the fastest growing business for us. I think year-on-year, we grew upwards of 60% in that business. We see a lot of headwinds there, mainly in U.S. and Europe. We are expanding that to other areas, including India and Japan. It will take some more time. However, that business has been growing pretty well for us, and we hope to continue that growth in the near-term to mid-term.
Thank you. The next question is on the line of Naveen Bothra, an individual investor. Please go ahead.
Congratulations for industry-leading excellent performance for the continuous third quarter in a row. If we leave out the first quarter, which I think the last five, six quarters, we are performing excellently. Congratulations to the all management team and team Tata Elxsi. First of all, I would like to appreciate you have already appreciate the thing about the capital allocation almost delivered on that promise done earlier in the last two, three calls. We appreciate that very much because all the free cash flow generated this year has almost been distributed. Congratulations for that one. Appreciate. One question is regarding the hiring plan targets. What are our hiring plan targets in view of the large multi-year deals we have won in all the three verticals? In this year, we have hired around 11%-12% net addition.
Going ahead, this year's target, if you can throw some more light on this one, it will be helpful, sir. To Manoj, sir.
Yes, definitely. Thank you, Naveen . Yes, we have been growing pretty well, and our utilization is also going up. Definitely, as you have seen in the last 12 months, we have hired a number of people, and our plan is twofold. One is, yes, we would be hiring people from colleges, fresh grads and so on. Approximately maybe 700 or so engineers we'll be hiring from the colleges. On top of it, yes, even we will have an accelerated hiring from lateral pool because of the opportunities and the projects that we have bagged, and we really need to execute. We will be hiring maybe an equal number or even slightly more, depending on how the deal pipeline and the closures happen and so on. Hiring will definitely be accelerated this year to meet the requirements of deals and so on.
If I can understand right, sir, it will be 700 plus 700 lateral hirings.
At a minimum.
At the minimum. Okay, sir. That will be better. Okay. Second question is just regarding pharma business unit, sir. What do you mean by pharma in the health and medical devices space? We have entered into pharma space, so what do you mean by pharma? Are we hiring scientists and all these things in this vertical?
No. Let's see, Bothra, maybe I'll take that question. In pharma, we see three different types of pieces. Two of them are skills that we carry on from the medical device space. Because a lot of pharma companies also provide for drug delivery devices. Their drugs are delivered through insulin pens, through single-dose pens, through very specific kind of delivery devices. Just like we do with medical devices, there's work to do with pharma on drug delivery. Two, there is work to be done on packaging, labeling, regulatory, and related work, which has similar skills as what we do in medical devices. Of course, we need to bring in domain experience, core teams, and so on, but lower-level skills are the same.
What is the only thing that is absolutely different would be in drug discovery and so on, which at this time we are not focusing on. We are really trying to build on adjacent skill sets, but applying to the pharma industry.
Thank you. The next question is from the line of Ankit Shah from White Equity. Please go ahead.
Thank you for taking my question. Can you share your thoughts on onsite-offshore mix, let's say for next two, three quarters? What could be a sustainable mix over the medium term? Thank you.
I think the onsite-offshore mix over the next three quarters will continue to hover around the same, because most countries have already started stopping Indian engineers from traveling. There's no flights now and so on. For at least one, two quarters, I don't think the situation will improve. Also, customers have got used to this offshoring and delivering value from offshore. I think we may never go back to those earlier days, wherein 50% used to be on-site and 50% used to be offshore. Even after three, four quarters, maybe we should be in the same, maybe 30%-35% or 35%-65%, that range.
Got it. Thank you. That is it from my side.
Thank you.
Thank you. The next question is from the line of Rudresh Kalyani, an individual investor. Please go ahead.
Hello, sir. Am I audible?
Yes, you are.
Yeah. Okay. When the work from home is ending, I got to know that we expanded.
Mr. Kalyani, sir, we are able to hear you, but your voice is not clear. Can you use the handset mode while speaking?
Yeah.
Thank you.
Yeah. Okay. What I want to ask is, when the ending is work from home. I got to know that we expanded our office premises. What is the reason behind that?
We have expanded on office spaces? Okay. I'm not sure what you're picking up on, we have definitely looked at expanding capacity, especially in the SEZs and so on. That is more to take benefit from what we do as overseas work. Otherwise, we have been careful about expanding office space.
Okay. One more thing is, can you give me a broad-based growth guidance at least for next three to five years?
We don't do that as a rule, so I don't think we'll change that for the next three to five years. I think you can look at our growth trajectory, and I'm sure you'll be able to plot it yourself.
Thank you. The next question is from the line of Nemish Shah from Emkay Investment Managers. Please go ahead.
Yes, thanks for this opportunity. Congratulations for a great set of numbers. Most of my questions have been answered. Just one data point. What will be our effective tax rate going forward?
Tax rate, I think we should be about 25%, 26%, in that range. What we are doing is also, in this year, we will expand our SEZ capacity also. We will have a lot more of our business coming under SEZ. They will be tax-free. We will have an opportunity to reduce the tax rate.
Thank you. The next question is from the line of Sanjaya Satapathy from Ampersand Capital. Please go ahead.
Yeah. Hi, sir. Can you hear me?
Sorry to interrupt, Mr. Satapathy. We are not able to hear you.
Sir, can you hear me now?
Much better. Thank you.
Yeah. Thanks, sir. It's a fantastic set of results. In fact, I can see that most of the people have not been able to digest t he pace of growth that you have shown in last couple of quarters, you yourself are appearing to be a bit shy of accepting that as a tremendous achievement. 8%-9% quarter on quarter growth seems to be too strong or too good to be true. The way I just want to frame my question is that, of course, there has been tremendous amount of operating leverage benefit, et cetera, which has happened. On, let's say, the kind of domain that you are addressing, is it suffice to say that you are unlike typical IT companies who are in that 8%-10% kind of growth industry, you are in 20%-30% kind of growth industry? That is what if you can just make us understand.
Yeah. Maybe I can take that. The answer is not a simple dimension of saying, are we in an area of service which is growing at 30% vis-a-vis are IT companies in an area of service which is growing at 10%? I think the answer will be multidimensional. One part of the dimension is industries that we operate in and their growth rate. Two is the areas that we operate in terms of what are we doing in terms of technologies and so on, and what is that adoption going to be? For example, autonomous or electric or connected car may be growing at completely different rates than the automobile industry itself, which technically at this time is stagnant. Right. The third dimension, I think, also comes from within engineering, what do we do? We traditionally have been always focused on electronics, software, and digital.
I think that by itself has higher growth and adoption and spend in relative budgets of customers than in all other areas. I think if you think about it, you should actually multiply all these factors and not look at it purely as one single dimension of, are we in a growth industry or not? That would be my suggestion.
Yeah. I really appreciate this kind of a bit of a subjective understanding. Since we don't have the data, can we really summarize it by saying that you are essentially catering to a much higher growth industry than the plain vanilla IT services company?
Absolutely. That can be a trade-off assumption you can make.
Yeah. Thank you, sir.
Thank you.
Thank you. The next question is from the line of Arjun, an individual investor. Please go ahead.
Hi, thanks for giving this opportunity. First question is, can I know a bit more about the multimillion connected car opportunity that you have declared in your results? What is the nature of the opportunity?
Yeah. I presume you're referring to the deal announcement that we made.
Yes.
Yeah, right. If you look at it, we have built an in-house platform for IoT that is tuned to deliver connected car services for customers. This is predominantly meant for OEMs who want to deploy their own platforms, want control over software and so on. It works on the cloud, but it is fundamentally delivering software ownership to OEMs. Tata Motors, by the way, was our first customer, and that we went public with last year. We've now won another OEM who's global, and they have selected us for a specific market. That'll be the first market that we launch in. It's a multi-year program, obviously. Because we'll have to work with them not just by licensing the platform, but also helping them integrate it, implement it, and run it.
We believe that, one, the deal itself is multi-year and multi-million, but we're also hoping that there's an upside of being able to address other regions by demonstrating the capability and the power of the platform that we're deploying.
Okay, thank you. My second and last question is, our industry is full of disruption. Which disruption worries you the most?
I always look forward to disruption. Disruption doesn't worry us at all. We have seen so many disruptions in my career, and disruptions have always been positive for us, so it's good. Let it come on.
Thank you. The next question is from the line of Munil Bhandari from Valin Capital. Please go ahead.
Hi, good afternoon and thank you for this wonderful set of results. I have two questions. My first question is regarding the deal announcement, what you have done, and one of the deal announcement is about the cybersecurity services. I just wanted to know, is this a new, very strategic area for us, something similar to what it was the healthcare some time back?
Yeah. Maybe I'll take this again. For us, cybersecurity is more of a horizontal. While healthcare technically is an industry vertical by itself, we see cybersecurity as becoming important topic for all our customers across industries. Now we have to note that we are not dealing with enterprise security. We are not here to be a McAfee or equivalent. We are looking at the context of what does cybersecurity mean for the kind of devices we work on. What does it mean for gateways? What does it mean for cars? Where are the ways to enter these devices? How do you protect them? What do you need to do from system software, both in the device and in the cloud?
I think we are coming from our domain and our deep understanding of these devices and these industries, and then trying to address the cybersecurity issue. I hope that clarifies.
Is that a consulting assignment for individual clients?
No. It tends to be both. There is some amount of consulting and, let's say, like you would have a design project, you will have to think of cybersecurity in the design stage itself. It becomes just another dimension of what you need to design and develop for. Then there are also services where once products are deployed, that you continue to monitor and make sure that there are no further risks occurring.
Sure. My last question is regarding the exchange gains. Do you have anything in this quarter to report? Gains or loss?
Murali, are you there to handle that?
Yes, Manoj. I am there on the call. Let me handle it. Yes. We do have a loss from the exchange gain in this quarter.
Loss from exchange gain means it's a loss. How much is the loss from exchange currency fluctuation?
Yeah. It's the currency fluctuation because we had some forward covers booked in advance, so that and the currency movement went in the other way, and the collections did not materialize as we thought, and so we had a loss there.
How much? Can you quantify the number?
It's INR 4 crores.
It is disclosed in the results, in the page. It is INR 4 crores.
INR 4 crores. Okay. Thank you.
Thank you.
Thank you. Ladies and gentlemen, that is the last question. I now hand the conference over to the management for the closing comments.
Thank you, everybody, for the call, and look forward to seeing you again on the next quarter.
Thank you. Ladies and gentlemen, on behalf of Tata Elxsi, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.