Tata Elxsi hosted a conference call on Jan 25, 2023. In the conference call, the company was represented by Mr Manoj Raghavan-CEO & MD, Mr Nitin Pai – Chief Marketing and Chief Strategy Officer, Mr Gaurav Bajaj – Chief Financial Officer and Ms Cauvery Sriram- Company Secretary.

Key Takeaways of the call

In a challenging macro-economic and business environment the company has reported a steady quarter with healthy growth in revenues and profitability and improvement in margins when compared to previous quarter.

Revenues:

In Q3FY2023, the company reported Rs 817.7cr of revenue from operations, a growth of 7.2% QoQ and 28.7% YoY. In constant currency terms the revenue growth was 3.5% QoQ.

All three segments of EPD, IDV and SIS delivered robust growth. The IDV division grew by 19.0% QoQ in CC terms. This division is helping the company to seed entry into customers and set the base for larger downstream projects. Majority of the growth is coming from IDV business as the company has restructured design business in the last 2 years.  The company has undertaken lot of initiatives in the last 2 years and the growth is on account of the same. There is better visibility in IDV business when compared to earlier. It is better to look at business verticals from financial year perspective than on quarter on quarter basis

The SIS delivered a steady performance with growth of 9.3% QoQ in CC terms. It is building a foundation of run services to help engineering teams develop and deploy products to the market. It includes support for some other products for platforms they have licensed.

EPD business grew 1.6% in CC terms QoQ. Within EPD, the company is witnessing sustained growth in transportation business which reported a strong growth of 7.3% QoQ in CC terms. This includes not only scaling with existing clients but also has won a strategic deal.

Media and Telecom and Healthcare had some impact of furloughs and delayed decisions in Q3. Also this being a seasonally week quarter there was some impact on QoQ growth . In CC terms Media and Communication witnessed a 2.6% decline in CC terms and Medical and Healthcare devices business revenues declined by 1.9% QoQ.

Top clients: Top 5 clients have grown but at rate slower than the next 5 and next 20 clients. Top 5 clients have been impacted in Q3 due to furloughs and lower working days. Top 5 clients are significantly bringing large revenues for the company.

From a geographic perspective Europe did well and was more of automotive deals. Media and communication and healthcare are more US centric and has slowed down due to macro- economic environment. With respect to growth the company is closely watching and expects media and communication to take 1-2 quarters before recovering. However, medical and healthcare will pickup faster.

Margins:

EBITDA for the quarter stood at Rs 246.9 cr with a growth of 9% QoQ.

Employee expenses as a % of revenue has declined on account of superior top line growth, intake of freshers in 1^st two quarters of the financial year have become billable and decrease in expensive consultants. The company has reduced contract employees who are been replaced by permanent employees of the company.

The company believes that employee utilization can further be optimized which will result in improved margins.

Positive impact on reduction of contractors is to the tune of 50-60 bps.

PAT stood at Rs 194.7 cr growing 11.7% QoQ.

Effective tax rate was around 19% and will be at similar levels in Q4FY2023.

Human resources:

The company has done well with employee engagement. The attrition declined for the 3^rd consecutive quarter for 18.4%.

The investments which the company made in hiring freshers in last 2 quarters has started yielding results with more and more getting deployed in customers projects.

The company had planned to hire 4000-5000 freshers in FY2023 and had hired aggressively in Q1 and Q2. However, it was cautious in hiring in Q3 on account of prevailing macroeconomic environment. But will go as per plan in Q4.

The company will continue to add freshers to the tune of 400-500 per quarter for the next 4 quarters and laterals across deliverables as per demand requirement.

The company will plan the wage hike based on deal flow but currently the next wage cycle is planned in Q1 of FY2024.

Wage inflation in Q3 was high. However it has eased currently but will be early to table out about layoffs.

Onsite offshore mix: The company will continue with the onsite offshore ratio and the company plans to remain offshore centric going forward.

Utilization of cash:

As earlier the company in consultation with the Board will declare dividend in Q4.

Acquisition: The option is always open for the company however, there is nothing to report for the company as of now.

Demand Outlook:

Overall at company level the company has strong  order book and good pipeline.

In medium term demand outlook for automotive is strong. Media and communications business  outlook is muted over medium term.

Medical and health care is a long lead cycle business where decisions will take 3-4 quarters and mostly comes from regulated services. EUMDR had mandated certain certifications to be taken before 2024 however the same has been extended to 2027. As such revenues will get distributed over 4 years’ times against earlier 1.5 years. However, the client may use the budgeted allocation available for other deals like product development.

Management commentary:

Commenting on the performance Mr Manoj Raghavan said ““We have delivered a quarter of steady growth in a seasonally weak and challenging quarter for the technology industry and macro-economic uncertainty in our key markets. We are seeing strong and sustained growth in the Automotive and adjacent segments in Transportation, led by ourdifferentiated EV and digital capabilities. We won multi-year deals in EV and Software Defined Vehicle architectures in the automotive space, and a strategic entry into a global OEM software organization.

Our Media & Telecom and Healthcare businesses saw some impact of delayed decision-making, furloughs and a short quarter. We have done well to protect our business and position ourselves strongly for upcoming strategic deals.

Our Design business continues to win Design Digital deals for the company across our key verticals and seed opportunities for larger development.

For us, this has been a quarter of focusing on positioning ourselves strongly for the future with our unique design-led capabilities, scaling across our customer base, and harnessing the exceptional investments in employee additions we have made in the last quarter and before.

We are entering the last quarter of the financial year with a strong order book and a healthy deal pipeline across key markets and industries, and a differentiated Design Digital positioning.”