Ladies and gentlemen, good day, welcome to Tata Elxsi Limited Q1 FY 2024 earnings conference call. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this 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 conference over to Mr. Shashank Ganesh from EY. Thank you. Over to you, Mr. Ganesh.
Thank you very much. Good evening to all the participants on the call. Good morning, if you're logging in from the Western side. Before we proceed to the call, let me remind you that the discussion may contain forward-looking statements that may involve known or unknown risks, uncertainties and other factors. It must be viewed in conjunction with the business risks that could 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 yourselves to 2 questions to allow participants an opportunity to interact. If you have any further questions, you may join the queue, and we will be happy to respond to them as time permits. With that, I would like to hand over the call to Mr. Manoj Raghavan. Over to you, Manoj.
Thank you, Shashank. A very good evening to everyone. Thank you all for joining us this evening for the earnings call. We are happy to report a healthy operating revenue growth of 17.1% year-on-year in the current macroeconomic environment, while delivering an EBITDA margin of 29.6%. In constant currency terms, our revenue grew by 1.2% quarter-on-quarter and 11.9% year-on-year. During the quarter, our healthcare and life sciences business reported a healthy quarter-on-quarter growth of 3.2% in constant currency terms, which is a significant improvement over the performance during the earlier two quarters. This vertical also reported new product development deal wins for medical diagnostics and smart hospital equipment.
In the transportation business, we continue to see good traction and a strong deal pipeline, especially in software-defined vehicles and electric vehicles. The transportation business grew by 1.8% quarter-on-quarter and 17% year-on-year in constant currency terms. While some deal closures were delayed in this quarter, we won new deals, including a strategic multi-year, multimillion-dollar SDV deal with a leading Asian OEM for the SDV platform and software development. We also won a multicurrency licensing and deployment of a connected vehicle platform deal with a global top five OEM. Our media and communication business performed creditably to retain and grow market share, even though absolute revenue growth was muted. The quarter-on-quarter revenue growth was at 0.2% in constant currency terms.
We won our first multi-year deal for our 5G network orchestration and automation suite with a leading telecom operator. This is an important milestone for the renewed portfolio we are building for this industry vertical. The media, telecom, and technology sector is still soft globally, and we remain cautious on the short-term growth in this sector while staying close to our key customers and focusing on intelligent AI-powered solutions and technologies that will drive the next wave of transformation in this industry. I am delighted by the all-round customer excellence demonstrated by Elxsians that has allowed us to grow strongly with our key customers and position us well for competitive differentiation and new project considerations around our customer base.
Our successes in growing our business with our large accounts resulted in the share of revenue from our top five accounts increasing from 39.8% in the previous quarter to 42% in the Q1 of FY 2024. Our revenue share from top 10 accounts grew from 49.4% in Q4 of the previous financial year to 51.9% in Q1 of this financial year. On the people front, we continue to invest in our talent base with a net add of 422 Elxsians in this quarter. The Elxsi family is now 12,000 plus strong, with attrition dropping further to 15.6%. We have driven strong operational excellence across the organization and protected our EBITDA margins despite wage hikes and strong employee additions in the quarter.
Our effective tax rate in this quarter has increased on account of lower tax exemption due to the completion of five years for a couple of our SEZ units, impacting our PAT margins. Our PAT margin for the quarter stood at 21.6%. It's a matter of great pride for all of us at Tata Elxsi to partner with ISRO and play a role in the Gaganyaan project. This collaboration will help push the boundaries of technology and provide us a unique opportunity to advance our capabilities while strengthening India's space mission. We wish ISRO the very best as it progresses further in the ambitious human space flight mission.
As we step into the Q2 of this financial year, the confidence of our customers in our differentiated design, digital proposition, and delivery excellence, and a strong deal pipeline, especially in automotive, healthcare, and design businesses, provide us the confidence and foundation for accelerating our growth throughout the year. With this, I will hand over the floor to Shashank for the Q&A session.
Shashank, before you go, this is Nitin Pai here.
... brief update for the entire audience who's joining us today. We moved to a new fact sheet format, and my apologies, because I think we missed the reporting the constant currency growth for the overall company. The intent, of course, was to move to a new format to make it more readable, more user-friendly, but I believe that we had a lapse on that front. That will be corrected. You will continue to see the constant currency report at the company level, too. My bad on that. Thanks.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question, may press star and one on their touch-tone telephone. If you wish to 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, you may press star and one to ask a question. The first question is from the line of Bhavik Mehta from J.P. Morgan. Please go ahead.
Thank you. Couple of questions. Firstly, one was on the transportation vertical. Obviously, you mentioned that the deal closures are delayed, but have you also seen, deal conversions getting pushed out, you know, because of the macro and, you know, clients being a bit cautious? You know, because the growth has been a bit soft over the last two quarters in a row now. You know, what's the outlook over there going forward? Secondly, to Gaurav, if you can give us the margin walk for this quarter and, you know, are the wage hikes, completely done in one quarter, or can you expect some part of the wage hike to come into Q1? Thank you.
Sure. Regarding the transportation business, yes, you're right. I think, some of the deals, you know, closure is taking time. However, you know, I think the deal pipeline is still pretty strong. There are, you know, large opportunities that we are chasing, and we are really hopeful that we will have those closures in Q2 and the subsequent quarters. Yeah, to that extent, I think, you know, that, you know, lack of conversion is really reflecting in the sort of soft, you know, revenue growth. I think, we're pretty confident that come Q2 and Q3, we will see accelerated, you know, pipeline closures. Yeah. Gaurav?
Hi, Bhavik. On the margin, our EBITDA is 20 basis points lower compared to the last quarter, in spite of the wage hike that has been rolled out during the quarter for the significant amount of the Tata Elxsi employees. In terms of the brief margin walk, we have an impact of 140 basis points from the salary hikes, plus the piece of cost that we have taken for 1 month in this quarter, because as we mentioned in the last quarter, that we went ahead and we got an approval for the employee stock option plan. That has been rolled out and communicated to the employee in this quarter. Their cost for 1 month has come in, including both wage hike and the ESOP, the impact is about 140 basis points.
We continue to, you know, reduce our contractors, since we have, you know, better bench strength and the trained campuses available to us, so that provides us a leverage of about 40-50 basis point to do that reduction and roll over from the TPC contractors to our own employees. We have an exchange movement gain of about 20 odd basis point onto the margin walk, and, you know, another 50 basis point coming from the other operating leverage in terms of the pyramid rationalizations and improvement in the utilizations with the volume growth and the scale. That, you know, makes a total of 20 basis point impact on a quarter-to-quarter sequential basis on our operating margins.
Thank you. That's very helpful.
Thank you. Participants, you may press star and one to ask a question. Next question is from the line of Vimal Gohil from Alchemy Capital Management. Please go ahead.
Yes, sir. Thank you for the opportunity. My question is again on automotive. Sir, how should we read our performance in the last 2 quarters versus what we are experiencing and reading about in the overall automotive industry? Given the fact that, you know, most of the OEMs are, and of course, tier 1, tier 2 suppliers are also talking of areas where we are heavily invested in. These are high growth areas, and there is an urgency of investments over there being spoken about by our potential and existing customers. How should we reconcile our relatively softer performance there? What, you know, what gives us the confidence that, you know, Q2 should be much better? Is it all related to macro?
Macro clearly tells us that things are moving probably faster than what, you know, we expected in the automotive space, especially. Thanks.
Yeah, I think I've answered that question. I mean, just to repeat, right, so, you know, the deal pipeline is pretty strong. We still, you know, have, you know, pretty large opportunities that we have placed bids on. You know, what is supposed to be, you know, closed in early part of Q1 is still open. Customers are definitely taking their time to... especially on large bids and so on. I think it is natural, given the current, you know, macroeconomic situation. Customers are being careful before they roll out, especially the large deals and so on.
I think the fact that we have a good pipeline and we see closures happening in Q2 is the discussion we’ve had with a number of our customers. We really hope that, you know, additional revenues will kick in in Q2. That’s the confidence that we have.
Understood. Sir, in within broadcast and comms, have we essentially bottomed out or still things will continue to remain soft for the entire year? Lastly, just one point on transportation as well. Given our last 2 quarters of performance, do we expect FY 2024 growth rates in transportation to be lower than what we had in, let's say, 2023? Would that be a fair assessment? Yeah, thanks. That's all from my side.
We wouldn't want to call out anything at this point in time, given that we are only in the Q1 of the financial year. I think we would definitely want to wait and see, you know, at least a quarter or more, right, to make that sort of a conclusion. We still remain, you know, pretty confident that, you know, we are on a good wicket as far as transportation or automotive business. Regarding the media and communication business, you know, it's not just us, it's the entire industry that, I mean, you see multiple of our competition has also shown, you know, either degrowth or significant degrowth in that business.
Thankfully for us, we have held our ground, even though we have not grown, you know, significantly, but I think we have done a very good creditable, you know, effort to maintain our business as that it is. Especially, if you look at our top 5, top 10 customers, I think we've actually, you know, even won deals and improved our market share, you know, as compared to, you know, our competition. I think, but having said that, the media and communication industry is still pretty soft. I wouldn't want to call it a washout for the full financial year.
I think we would want to wait and watch and see how Q2, how the deal closures happen in Q2, and then take a call on how the industry is.
Thank you, sir, and wishing you all the very best. Thank you.
Thank you. Participants, you may press star 1 to ask a question. The next question is from the line of Anika Mittal from NVEST Analytics. Please go ahead.
Hello. good evening, sir. Am I audible? Hello.
Yeah, you are.
Okay. sir, my question is from the healthcare segment side. What is your near-term outlook on this particular segment for FY 2024 sir?
I think over the last 2 quarters, we've had some, I think the healthcare and life sciences business did not show the growth that we were expecting, but I'm happy to. I think that is also because of the transition in the EU MDR activities and that has taken us a couple of quarter to get over that. I think this quarter we've demonstrated good new deals and good product wins there. That has really helped us to show a good growth.
We are pretty optimistic that we will be able to show this continued growth in the subsequent quarters also. Yeah, you know, I will not be able to give you a number for the financial year. We don't give that predictions. I think we are on the recovery path, and we hope to grow back to our earlier growth rates in this business pretty soon.
That's it from my side. Thank you.
Thank you. Next question is from the line of Bhavik Mehta from JP Morgan. Please go ahead.
Thank you once again. Sort of just on the margin bit, is wage hikes done for large part of the employees, or should we expect some wage hikes to come in 2Q as well? Secondly, your net employee addition has seen an uptick this quarter. How should we read that? I mean, is this a sign of improving demand you see going forward, or is this a way to optimize the cost by reducing the dependent of subcontractor, and, you know, you want your own employees to be utilized more on the projects?
Yeah, I'll answer that. I think we have given, you know, wage hikes in Q1 for all our junior staff. I think almost 70% of the headcount, we have given the wage hikes. For the senior staff, the wage hikes would come in this quarter from July first onwards. Right? The new hires that we have been doing, I think it's something that we continue to do, looking at the. I mean, we're not looking at a quarter-on-quarter basis to really, you know, squeeze the hiring. These are offers that we have made, and we continue to, you know, honor all the offers that we have made.
We strongly believe that we need to build our resource pipeline for the future quarters. I think this is an ongoing. I mean, we're not really diluting that focus of, you know, stopping hiring and so on. We continue to hire at our normal rate. That's also because of the confidence that we strongly believe that the industry will recover and the bench that we built today will be useful for us, you know, moving forward. We are not taking a very short-termish, you know, approach here.
I think we have since we have maintained our EBITDA margins and we are doing reasonably well, that also gives us a cushion to really go ahead and not, you know, not take those knee-jerk reactions.
Okay, got it. Just lastly, you know, on generative AI, how should we look at the impact of generative AI on the engineering services business? You know, any color over there would be very helpful.
Yeah, this is Nitin here. Bhavik, maybe I'll take that. The way we see it is twofold, right? On one hand, in products per se, especially because of the fact that we deal with physical products, whether it's a car, whether it's network equipment, boxes and services or medical equipment, the direct impact of generative AI on such products is very limited. Why? Because they all deal with, if I may use the word, specific AI. Therefore, the kind of training that you do, the kind of models that you build, the kind of algorithms that power an autonomous car or a medical diagnosis or a recommendation engine, are quite different from what you would classically use ChatGPT or generative AI for.
To that extent, AI becomes more and more relevant, AI becomes more and more predominant within the portfolio of customers, but it's not coming from generative AI per se, right? In our view, generative AI has some impact on product development to the extent that we are working on how can you, how can you aid coding, especially as a starting point rather than starting from scratch? How can you improve testing using generative AI, especially where you have to spend time on creating test cases, describing use case scenarios? There are certain benefits to using generative AI, which are already in the works for us in each of our segments. But the overarching comment would be that in the product engineering business, it has lesser impact.
It has far greater impact when you talk of areas like marketing, customer experience, customer care, and so on. These are typical BPO, KPO activities. You can sort of imagine that the impact there is far, far higher. We have no play in those.
Okay. That's very helpful. Thank you.
Thank you. Next question is from the line of Rohan Nagpal from Helios Capital. Please go ahead.
Hi, thank you. Could you talk a little bit about the demand trends that you're seeing across North America and Europe? I see a decline in the revenue mix coming from the US and an increase in Europe. Could you give some color on the differential demand that you're seeing?
Yeah, I think, I think, you know, just, based on one quarter's data, it's very difficult to make that, to make any, you know, very clear, you know, reasons as to why, you know, demand is lower in one region or another. If you look at it maybe a couple of quarters ago, I think our demand from North America was fairly strong and so on. That keeps happening. In general, let me tell you, a lot of our Europe revenue is, you know, transportation, led, whereas a lot of our North America is media and communication, led.
To that extent, the relative, you know, slowing down in media and communication vertical can be directly correlated to the North America market. Having said that, the medical business is also pretty strong in North America. We are really hopeful that, you know, that piece will pick up. We look at it, both North America and Europe, as very, very key strategic, you know, geographies for us, and we continue to invest in those geographies. You would have seen the press releases, as well as our, you know, we talked about opening a new office in Troy.
we continue to invest in these, you know, geographies, and we are hopeful that growth will return eventually.
Got it. That's helpful. Thank you.
Thank you. Next question is from the line of Arun, from Shubhlaxmi Research. Please go ahead.
Thanks for the opportunity, sir. First of all, congratulations to the management team for continuing with the steady, good set of performance in tough economic environment.
Arun, your voice is not coming clearly.
Yeah, am I audible now?
Yes.
Yeah, better.
First of all, congratulations to the management team for continuing with the steady, good set of opportunity performance in tough macroeconomy. My question is to Mr. Gaurav Bajaj. In current quarter's financials, we can see in both the segments, especially in the software development segment, our absolute profit has increased much more than the revenue. But some unallocated expenses have impacted our overall profitability. If you can share some more detail on the increase in unallocated expenses, that will be quite helpful, sir. The second question is this quarter, our effective tax rate has increased due to tax holiday period completed in two of SEZ.
Can you guide for this financial year as a whole, whether this will be the benchmark rate, or do you see any further changes in effective tax rate? Thank you, sir.
Okay. Hey, Arun. On your first question on the segment results, I think you are bringing it from the segment results. On the segment, since we embark on the digital transformation, so we did little bit of reclassification, internal, you know, internal changes in the methodology of the allocation and the non-unallocated expenses. To that extent, you see that there is a difference from the quarter to quarter. What we have published in the quarter one would be the basis, you know, to go forward in the future. You should do the benchmarking and comparative on the quarter one basis going forward.
On your second question on the effective tax rate, I think we have been highlighting in the last couple of quarters that, we will be coming out of, you know, couple of undertaking, under in the SEZ, where our, you know, tax bracket will move, exemption will move from 100% to 50%. You see the impact of the same coming in this financial year. Whatever is the EPS for the current quarter years, would be the threshold and the range for the tax rate, going forward in this financial year.
Thank you.
Thank you. Next question is from Satadru Chakraborty from Chakraborty Family Office. Please go ahead.
Yeah. Hello, good evening. Congratulations on a fair and decent set of numbers. I basically have a bit, not really a lot of finance-related questions, but a bit more on the macro side. The first question maybe is on the transportation vertical per se. The question is really around software-defined vehicles, because I see a lot of tier one, tier two OEMs going from a product to a solution side. A lot of them are now trying to sell SaaS solutions. My question really was, how do you guys see all of this integration into the global master, let's say, bus going ahead? Because it seems to me that the market is just not having a lot of standardization.
If you have a brake supplier, if you have a battery supplier, if you have an engine component producer doing their own solutions, how easy or difficult it is to integrate all of these in a digital stack, and then give this out as a, as a package, if you will, to an OEM client?
Hi, Satadru. This is Nitin Pai here. Maybe I'll take that. On one hand, if you look at software-defined vehicles, I think it's fundamentally driven by OEMs, and it has been driven precisely with that point in mind, which is that ultimately the car is an amalgamation of software, hardware, and mechanical elements coming from thousands of suppliers. A lot of these are black boxes, and therefore, if you're trying to drive performance out of all of those, if you're trying to speeden up or create agility out of how you update functionality and features in the car, you not only have to work with, again, the same thousands of suppliers, but each of those changes cost you money, and each of those changes require you to go through a full validation and certification cycle.
To that extent, I think the, it reminds of SDV itself exactly that, but there are two opportunities. One, the opportunity to create agility in the features and functionality of the vehicle, both what is going to be delivered and produced newly, but also what is available already in the field through software updates. That's part one. I think part two, which is more interesting, is equally the monetization opportunity, that now that you have a connection to the consumer directly, which was otherwise not available to OEMs, they were only connected through dealers. It's only dealers who had a relationship. Does that relationship now create opportunities to monetize? That monetization can take completely different paths, right? From subscription-based features to over-the-top services that you can deliver and so on, so forth.
I think the point remains that software-defined vehicles are here to stay. The level of software-defined is always a question. I'll just call it software centric. The different OEMs will require and can afford different levels of ownership. In some cases, it may not even be necessary to try and own everything. You may just choose to take a selective view on what software you own and what software you run. I think the premise is very clear, agility and monetization. That's, I think, a one-way street. You will see that change. I hope I have kind of addressed what you wanted to understand.
Yes, absolutely. That's very helpful. A similar sort of question on the healthcare and life sciences space. I was struggling even more. I just had a very generic question on how do you guys see this, the greatness of this space going ahead? I know that gross profit margins are high, and I know that there are a lot of definitions happening in the net devices space, a lot of connected devices, IoT, and then running analytics. Just give me, how do you see the overall market getting better, or how are you guys planning to play in this market, basically, setting up yourself for the future?
Sure, Satadru. This is Nitin again, so I'll take that. If you look at the premise on which we are, and which we in fact even built a focus around medical devices, healthcare industry, it was based on the fundamental, that in general, the healthcare industry has been fairly conservative. Product life cycles are very like the devices that were designed 15, 20, 25 years back, but continue to run. The advent of cloud, AI, connected devices, essentially means that you can actually afford to deliver a far more superior customer experience, far more data-led effect, patient outcomes and health. Therefore, it is essential that all products actually pivot to, in some sense, the equivalent of a car. You need to be connected, you need to be automated. I'll not call it autonomous.
You definitely need to look at electronification, because a lot of the previous generation medical devices were electromechanical rather than electronics. That's the premise on which we've built the business, and you'll see that over the last 5 years, from the time we started, we moved from 0 revenue to about 15%, right? That's been a business that's grown almost 10% quarter-on-quarter for a few years to go. To that extent, I think there is confidence that an industry is actually behind the automotive industry in terms of the transition that it needs to make, even though there are no regulations that are driving it, unlike in the automotive industry, where you have sustainability. You have ESG concerns that are put stakes in the ground as far as countries are concerned.
This is really an opportunity to change because that is what will sell in the future, that is what will create monetization in the future. To that extent, I think there is great confidence that that pivot has to continue. Software, cloud, IoT, connected devices, intelligence, that is an inexorable path for medical devices. All of them have to get there. The pharma industry has to adopt it to some extent, too, in the sense that as pharma industry moves from prescription-based billing to outcome-based billing, you will need to then monitor patient vitals. You will need to provide for patient tracking, and so on. All these are devices that will do it. Because the drugs will be then decided based on the markers, and that will be personalized based on the actual patient profile.
In our view, I think the fundamentals of electronics and software becoming the dominant part of what medical devices companies need to do is a given. The rate that we'll do it at is not driven at the same rate as automotive, because automotive has priorities coming from regulatory and regional or country-based decisions that have been made on when they will stop or turn off ICE, and so on. The medical device industry does not have that trigger, but it has a trigger of: How do I make money in the future? That is what creates absolute confidence, and I think this is at the start of that. We know it's a conservative industry. It's difficult to get in. There are barriers of entry, but we have a marquee set of logos that we work with.
We are quite confident of our of our ability to stay incredibly relevant to these companies.
Very helpful.
Yes.
Maybe just one last question from my side. This is, let's say, a mix of talent management slash the sector that you guys play in. You know, it always fascinates me how a company can play in these three diverse EPD verticals and still be successful. I know the broad-based argument that if one sector doesn't go good, then you can diversify and so on and so forth. You know, If I look at the big outsourcing players, the Accenture, the Capgemini, or even a big brother like TCS, so for them, that makes sense. I'm always curious how you guys think of talent, because these three are so diverse verticals, that, let's say, the domain knowledge is very different. The software standards are so different.
Apart from the fact that, of course, you can have some basic level of integration, how do you guys just, you know, manage talent and just see these three very diverse verticals sustaining? Because I'll be very frank, I haven't seen another company like Tata Elxsi doing so diverse verticals and still having so great returns over so many years. How do you guys look at talent management and these three diverse verticals in general?
Sure, Satadru. Nitin, again, just like Coke or KFC, I'm not gonna reveal all our secrets. Having said that, maybe I'll start with the fundamental point, right? That when you have been doing this for 25 years or more, and this is the only business that you do, believe me, there's a whole lot of ingrained company knowledge that reflects in its processes, in its quality systems, in the way we both hire and manage talent. That's the first fundamental building block that we build on.
Equally, we also acknowledge the fact that these three industries are so different that the domain knowledge, especially as you move quickly up the seniority and experience levels, demands that you have training programs, you have training methodologies, you have quality systems, you have everything that is different for each of these verticals. To our advantage, I think that's also a core competency. That's also what makes it very difficult for a generic IT player who depend on fungibility, who depend on training that is industrialized. I mean, you would have trainings that people take just for 15 days, one month, and then they are ready for billing. For us, it's nowhere close to that. For us, it's multiples of that timeline to get people ready. I think those are...
That's the way we do business, and hopefully that's the secret sauce that we bring.
Very helpful. Thank you, gentlemen, and all the very best.
Thank you. Thank you. Take care.
Thank you. Next question is from the line of Chirag from Ashika Institutional Equities. Please go ahead.
Hi, I want to understand, like, whatever the development is happening in the India, across the sector, like EMS, defense, automotive, and rail and et cetera. Order bidding is going to the global players, which are, some of them are our clients. I want to understand our relationship with them, that how are we going to benefit by taking orders from the global names, which are, you know, fueling the growth of the Indian economy for the diverse sectors? Yeah.
Yeah, maybe, I can take that. Very quick view is, we definitely have access for multiple sectors, whether it's automotive or whether it is rail and other sectors. Where there are programs that are won by suppliers or suppliers to supply to OEMs in or to dams in India, including rail, we find that, we are supporting those programs. Our relevance becomes even higher, especially if you're competing with regional or overseas-based competition. To that extent, the fact that we are in India, giving proximity, understanding of those customers, ease of communication, ease of coordination, I think only adds to our attractiveness, but please note.
Having said that, any program in India obviously comes of the equations that are quite different from, let's say, doing the same projects for a deal in Spain or a deal in the U.S., and so on. You also have to live with that challenge, which is that you will have that much more of a pressure on the pricing and the deal value. It's a conscious balance that we have to strike in terms of what is right for us, what is relevant, despite the fact that we can win almost anything that we bid for.
How is the supply side scenario situation in Europe and the USA for manpower and other related stuff?
I think, you know, as you know, you know, we are 90% of our resources are based in India. It's only 10% that are based, you know, overseas. To that extent, I think we are less dependent on resources, you know, in the overseas market. Having said that, I think the resource situation definitely has become a lot more easier. We are able to hire, you know, resources on need basis. But, but in general, as Gaurav said, we are, you know, we are reducing the dependency on third-party, you know, contractors and filling positions using our own internal resources, you know, for better margins and so on, right? That we will continue that approach.
Okay. Thank you so much, sir, and all the very best.
Thank you.
Thank you. Participants, you may press star and 1 to ask a question. Next question is from Akshay Ramnani from Axis Capital. Please go ahead.
Hi, thanks for taking my question. First question, for Manoj. You said that the deal pipeline gives you the confidence of growth acceleration going through FY 2024. Now, this is despite another comment, of a soft media and communication, at least in the near term. Just want to understand that, is the strength of transportation and medical enough to power that growth acceleration going forward? While you're talking about demand, if you can also talk about how do you see the IDV business going forward?
Sure. I think, yes, you know, as I said, you know, growth has come back in our medical business, and we definitely hope that we will see some acceleration in our transportation business, you know, moving forward. Media and communication, we are still hopeful, though it's very difficult to give a comment in terms of, you know, how much of recovery will happen. Definitely, as compared to a lot of our peers and other global players, we still continue to, you know, deliver value to our customers and at least not degrow in that, you know, media and communication business. That's something that we will, you know, constantly keep a watch on.
Regarding the industrial design business, as I said, it's a smaller business. It's a very, very critical business for us. You know, that business also has grown as compared to last financial year, it has grown significantly. However, on a quarter-to-quarter basis, we see some amount of flatness or some amount of ups and downs. We are still it's still in the early stages to see how we can, you know, have a steady quarter-on-quarter growth there, but that's something that we are working on. We are, we definitely are hopeful that, you know, the industrial design business will also continue to grow significantly, you know, over the next three quarters for the financial year.
I think all of that gives us a confidence that in spite of the media and communication business being little soft, the other businesses that we have should definitely be able to continue the growth path and, you know, essentially, you know, help us to show a decent growth in the financial year.
Right. On IDV business, over the past two quarters, we've seen a flattish performance. Is this more to do with standalone IDV customers, or is it some EPD vertical specific customers where we have seen some softness on the IDV side?
It is a combination of both, right? You know, IDV also does a lot of work for the media and communication business, that part of the business is a little slow, as, you know, similar to what our EPD business is then. However, you know, IDV also have their own independent customers, then we are really focusing on that to see how we can grow that business.
Got it. Got it. Our next question is for Gaurav. Gaurav, you talked about one month of ESOP cost impacting this quarter. When I look at the release, the release shows that about INR 40 lakh of ESOP cost was recognized in Q1. Even for one month, that number appears quite low. If you can, please help me understand this quarter's ESOP expenses, and how do you see the sustainable cost which we should think about going forward?
The first month, the cost is low. It depends upon the number of the grants unit that has been communicated to the employees. There is still some communication which is left to be done, which will be done in the quarter two. What we talked about in the previous quarter earning call also, that going forward, the impact for the PSOP grants, once done completely to all the employees, would be about 0.4%-0.5%.
Got it. Got it. Since you have also rolled out the wage hikes for the rest 30% employees, so, what kind of margin impact would that have in Q2?
We have not yet, we are in the, still in the progress, you know, process of working out, you know, rate hikes and the impact for the remaining employees, which will happen effective Q2 . I think with the scale and the growth that we expect to have in the quarter, you know, in the next quarter also, we don't see any significant impact. Yes, there will be some wage hike impact, but at the same time, we feel that can be, you know, compensated with the other operating leverage and the, you know, the growth in the volumes, total volumes.
Got it. Coming to the utilization part. If you can just touch upon what level of utilization are we operating at, and what's the sustainable level which you think is good for the company? Thanks.
I think, currently we are, we are operating, you know, 72%, 72.5% , as a utilization. Yes i think, it is also because of the facts that the number of pr essure, in years that they'll be of high and come out o f their training period and down they are on the bench right so, the good part for us is we have and predict good bench. As the business picks up all the training in expence in all the hiring in expence of their will be able to use them and grow revenues.
For us, you know, we would be really comfortable, you know, to see how we can push this utilization from 72% or 72.5% over a period of time to somewhere closer to 80% or so, right? That will be something we are aiming for. As you see, we have enough headroom and leeway to utilize these trained resources, and that's something that we will focus on in the next few quarters.
Thanks for answering my questions.
Thank you. Participants, you may press star and one to ask a question. The next question is from the line of Nitin Gupta, individual investor. Please go ahead. Nitin Gupta, unmute your line. Go ahead.
Am I audible?
Yes, you are.
My question is with respect to the hiring.
Niten, sorry, but we are losing your audio in between.
Hello. Is it better now?
Yes.
Yeah. My question is with respect to the hiring of, like, what are the plans for the complete financial year?
For the complete financial year, if you look at, uh, uh, hiring of freshers, uh, we would be hiring around, uh, anywhere between 1,800 to 2,000, uh, engineers. Of course, depending on the joining, you know, ratios and so on. Lateral hiring will be always need-based, uh, based on, uh, you know, specific projects or, uh, or engagements. But, uh, given the fact that we have, uh, enough, uh, bench strength, uh, I, I, I think we will first focus on utilizing the bench strength before going out and, uh, you know, hiring, uh, you know, laterals.
Okay, thank you for that. The last question would be, like, can we expect this kind of margins going ahead for the full financial year?
We don't give, you know, margin guidelines, and, you know, you must look at our track record over the last 8 to 12 quarters, right? You'll get the answers for your question.
Okay, that would be it from my end. Thank you.
Thank you. Next question is from the line of Rajakumar, individual investor. Please go ahead.
Yeah. Good evening. Just two, three macro questions I have. The first one is on the ADAS technology. I just want to know, given that, you know, we are part of the Tata Group, so how do we make insights with other vendors, you know, given our exposure to JLR and others? I just want to know, like, competition, like, with Samsung, you know, they are better placed compared to Tata Elxsi. How do we overcome this?
Yeah. Maybe I'll take that. Technically, we don't compete with Samsung. We are a potential supplier to Samsung, right? When you say Samsung, I presume you mean it in the context of-
HARMAN.
HARMAN, which is the company that is acquired in the group. To that extent, HARMAN would be a potential customer.
It is a customer.
It is a customer rather than a competitor. In that sense, there is no conflict of interest, and it's not to do with whether we work with Tata Motors or JLR or other or not. The question is, do we have capabilities on the software side that add to what they are trying to do in terms of product engineering and product development? To that extent, we're incredibly relevant.
Okay. Okay, got it. Yeah, second thing, are we developing any robots, you know, linked to the da Vinci, you know, more on the medical side? Because I've seen your website, it talks about the industrial robotics. Just want to know what work we are doing on the medical side.
That is automation. I'll not call it fully robotized surgery or fully automated surgery, but there is a fair amount of work that we're doing, both with AI as well as robotics, that are to do with automating and bringing in precision, surgery. At this time, that is all that I can tell you.
Okay, because currently that is the only US FDA-approved, robotic system, right?
That's right. To that extent, that's why I'm hesitant to say that we are working with fully robotic systems. There is some level of automation and precision surgery that happens in multiple other spaces. I mean, think about eye care, for example. You'll see that there are laser-guided surgeries that work on cataracts and so on. It's not that there is no robotic surgery in other areas. If you look at cancer, there is equally guided robotic treatments that happen for chemo, radiation, and so on. All I would encourage you to look at is the fact that robotics and automation applies in many levels. Just like in cars, we are from level one to level five.
Okay. Okay, no, my question is more from a strategic standpoint. like, in a 3-5-year standpoint, will we be challenging da Vinci system?
Oh, no. Please note again, like we made the comment on Samsung and so on, we would hope that we work with da Vincis and create many more da Vincis by supporting them.
Okay, got it. Sir, lastly, how about the opportunity from the in-flight entertainment, and given that Air India is now part of the Tata Group, and, you know, there's a lot of, you know, things happening on the aviation here, are we going to leverage any of this and get more work on this space?
Yeah, in-flight entertainment is a very niche area, and I think there is just a couple of companies that work on it. The opportunity is not very big, in that sense.
Okay.
However, as you rightly said, Air India definitely I know is a group company, and there are a lot of other opportunities that we are working with Air India and supporting them not necessarily on the in-flight entertainment. Yes, if there is an opportunity, we would definitely get involved, because we bring in enough competencies on audio, video, you know, the playout, the entire, you know, video capabilities that we have in the media and communication business is fully relevant to this use case. There are definitely a lot of regulation, safety, and number of standards that we need to understand.
To that extent, yes, the opportunity is not as big to really focus and go after that. The number of players are also very, very limited. But we are in discussions with Air India for a lot of other opportunities, and yeah, we will leverage that Air India to see what we can do in the avionics or airline industry.
Okay.
Yeah.
Thanks a lot, sir. Thanks for answering the questions.
Thank you. Next question is from the line of Rohan Nagpal from Helios Capital. Please go ahead.
Thanks for the follow-up. You break out your vertical exposure for the embedded product design segment, and you briefly touched on the vertical exposure for the IDV segment. Could you flesh out the vertical exposure in the IDV and SI segments as well?
IDV, definitely, you know, I think about 3 to 4 years ago, IDV had its own set of customers, and they used to go around, but we consciously took a decision to focus IDV capabilities around the same three verticals that we have, which is transportation, media and communication, and healthcare. Today, if you, if you ask me, a majority of our revenues in the IDV space come from these three verticals. Of course, there are a number of other verticals that we go after, that EPD doesn't service, right? Yes, there is a lot of effort and focus that we have brought in, including from a sales perspective, to really cross-sell IDV into all our EPD customers, right?
That's something that we continue. SI is a totally different, you know, business. SI is primarily business-based out of India. We, it provides system integration services to a different set of, you know, customers, not necessarily the three verticals. That's that's something, I think we would be a little more opportunistic and. Then, of course, even in SI, what we're trying to do is to see how we can leverage the SI capabilities to address the three, you know, verticals in EPD. It's at a early stage. IDV has progressed a lot, but SI is still a very early stage.
However, in, and especially on the, you know, as we look at building our own products and so on, SI plays a very, very key role on the run management, part, right? That's something, especially on the cloud and, data center and so on, that is where we intend to use their capabilities. Again, as I said, it is still pretty early stage there.
Got it. Thank you.
I'll just add one comment. At this time, the fact that IDV is a little volatile, it's not exactly a constant number quarter on quarter, does not allow us to publish mix, because you'll not read very much from it. I think if you give us a few quarters, and that's something that we're consciously deciding, we'll be able to draw a clear signature to say, okay, this much % you can trust to come from automotive, this much you can trust to come from media. We have a certain amount of sustainability, or rather, lack of volatility, that makes it meaningful to publish the breakdown. I just noted. That's what.
That's awesome. Thank you.
Thank you very much. Ladies and gentlemen, we'll take the last question from the line of Satadru Chakraborty from Chakraborty Family Office. Please go ahead.
Yes, thank you. Just one final follow-up question. Yeah, and maybe feel free to answer it as you see fit or not. This is really around the IP of Tata Technologies, which is coming out. Maybe my preliminary observation is very bad, but I do see there are a lot of similarities. I mean, from the very quantitative stuff I have seen, there are related party transactions happened in 20, in 21 and 22. Just help me understand, why should we treat it as two different companies, and what is really the strategic differentiation within the Tata organization that we have to really differentiate between the two? I know the history and the corporate structure, and Tata Motors wants to spin this off, but just what is your two cents on this, what an external investor looks at?
Yeah. As you rightly pointed out, Tata Technologies is a subsidiary of Tata Motors, right? They also have a significant portion of their revenues coming in from group companies, which is Tata Motors and JLR and so on. They primarily play in the, if you ask me, I would say the mechanical, you know, engineering space. There are some, you know, they do work on ERP, which is SAP and so on. Recently, they have built capabilities in the avionics, in industry with Airbus and so on, right? That is what Tata Technologies stands for. Tata Elxsi, on the other hand, is a full-fledged, you know, product engineering, what do you say?
you know, a majority of our business comes from electronics and embedded software domain. We work across, you know, three different verticals, right? Automotive, healthcare, and media and communication. To that extent, if you look at it, if you, if you look at the automotive industry, it might seem as if there is a clash or a conflict situation, but actually, we are pretty orthogonal, and, you know, the service offerings are pretty orthogonal, so in, and there are customer places where we work together, and provide the services and solutions to the customer. To that extent, I would say, we definitely can continue to coexist as two different companies.
All right. Thank you.
Thank you.
Thank you very much. I now hand the conference over to management for closing comments.
Yeah. Thank you all for taking the time out for this Q1 conference call. We definitely hope to see you again in the Q2 conference. Definitely, you know, there is a lot of commitment from our side, from our employees to ensure that, you know, we deliver, you know, good results, you know, in the coming quarters, right? That's something that we are very much aware of, and we continue to pursue these large strategic deals that will really help, you know, to show consistent quarter-on-quarter growth. That's something that definitely we will stay focused on.
Thank you so much once again, and look forward to seeing you again, next quarter.
Thank you very much. On behalf of Tata Elxsi Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.