Tata Elxsi : Financial Reporting Document

Q3 FY22 Earnings Conference Call

January 19, 2022 | 15:00 hrs IST

Moderator:Ladies and Gentlemen, Good Day and Welcome to Tata Elxsi Limited Q3 FY '22 Earnings Conference Call. As a reminder, all participants' 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 '*' and then '0' on your touchtone phone. Please note that this conference is being recorded.

I now hand the conference over to Mr. Diwakar Pingle from Christensen Advisory. Thank you, and over to you, Mr. Pingle.

Diwakar Pingle:Thank you very much Nirav. Good Afternoon to all the participants on the call, Good Morning if you are logging in from the Western side.

Before we proceed to the call, let me remind you that the discussion may contain forward‐ looking statements that may involve known or unknown risks, uncertainties, and other factors. Therefore, it must be viewed in conjunction with the business risk that could cause further result performance or achievements to differ significantly from what is expressed or implied by such forward‐looking statements.

To take us through the results and answer your questions today, we have 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 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 yourself to two questions to

Page 1 of 18

Q3 FY22 Earnings Conference Call

January 19, 2022 | 15:00 hrs IST

allow participants an opportunity to interact. If you have any further questions, you may join the queue, and we would be happy to respond to them if time permits.

Having said that, I would like to hand over the call to Mr. Manoj Raghavan. Over to you, Manoj.

Manoj Raghavan: Thank you, Diwakar. Good Afternoon everyone. Thank you for joining us today for the Q3 earnings call. At the outset, let me wish you and your family a safe, healthy, and a very Happy New Year to you.

I am pleased to report that we have delivered another quarter of consistently strong growth. Our revenue from operations in the quarter gone by was Rs, 635.4 crores registering a growth of 6.7% quarter‐on‐quarter and 33.2% year‐on‐year. The growth was almost entirely volume‐ led, reflecting our constant currency revenue growth of 6.5% quarter‐on‐quarter and 32.7% year‐on‐year.

On the bottom line, we have delivered another quarter of industry‐leading performance. Our PBT grew by 17.1% quarter‐on‐quarter and 36.9% year‐on‐year to 200.3 crores, and the company's net profit for the quarter stood at 151 crores, reporting a growth of 20.4% quarter‐ on‐quarter and 43.5% year‐on‐year.

We have crossed the 200 crores PBT and 150 crores PAT milestones for the first time in our history. The company's growth continues to be powered by our largest division, the embedded product design division, EPD. EPD grew by 9.6% quarter‐on‐quarter and 35.4% year‐on‐year in constant currency terms, and if you note, I think this is the second quarter that we are showing almost 10% quarter‐on‐quarter growth for EPD. Within EPD, the growth was broad‐based across verticals. The transportation business posted third‐quarter strong growth of 9.7% quarter‐on‐quarter and 30.9% year‐on‐year.

Media and Communications delivered another quarter of consistent growth with 6.5% quarter‐ on‐quarter and 31.1% year‐on‐year growth, respectively.

Healthcare continued to grow faster than the rest and posted a growth of 22% quarter‐on‐ quarter and 73.4% year‐on‐year.

As you would have seen in our factsheets, we continue to add new marquee logos to our customer base and win new strategic deals across key growth areas in all these three verticals. We are focusing on building a base of customers in each vertical and segment that can drive consistent growth for us. You will find this reflected in our overall performance across industry and regions beyond the top 10 customers.

Our design‐led offerings are powering differentiations and deal wins for us with customers and provide a force multiplier with downstream development and integration. This also helps with

Page 2 of 18

Q3 FY22 Earnings Conference Call

January 19, 2022 | 15:00 hrs IST

	improved margins as we increase the overall competition of software work in the design digital
	deals. In the last earnings call, I had mentioned an existing top‐end customer where a large
	design digital deal was put on hold, which affected Q2 and the full Q3 numbers for our
	Industrial Design business. However, the IDV business posted a growth of 61.7% on a year‐to‐
	date basis even with this impact, so we are confident that we will resume this project in the
	coming quarters.
	We have been steadily adding our talent base throughout last year and the last three quarters
	with lateral and fresher hiring. In Q2, we added almost 500 fresh engineers, while we added
	about 150 fresh engineers in Q3. We are selective in fresh engineer hiring, and we will invest
	further in bringing in a large number of fresh engineers over the next three quarters.
	I am especially delighted with the industry recognition from analysts and awards for innovation
	and technology. The safety center for Tata Steel uses augmented and virtual reality to deliver
	experiential safety training to 45,000 workers, the first time this is done anywhere in the world.
	'The Videotech Award' for the 'Most Innovative OTT Technology of The Year' was won against
	some of the leading product companies across the world in the OTT space, again underlines
	our product and solution‐led capabilities.
	In summary, it has been an excellent Q3 with superior top‐line and bottom‐line performance
	supported by industry‐leading operational excellence and talent retention. We continue to
	execute strongly on all our key strategies, driving growth across our three primary industry
	verticals and regions and building software and digital product engineering capabilities. We are
	also entering the fourth quarter with a strong order book and a healthy deal pipeline across
	our key markets and industries.
	With that, I would hand it over for the Q&A session. Thank you.
Moderator:	Thank you very much. We will now begin the question and answer session. Anyone who wishes
	to ask a question may press * and 1 on your touchphone. The participants are requested to use
	the handset while asking the question. The first question is from the line of Bharat Seth from
	Quest Investments Advisors. Please go ahead.
Bharat Seth:	Hi Manoj and Nitin, congratulations on an excellent performance. Since FY '20‐21 as well as in
	these two quarters, we are talking of everything, our growth is volume‐led growth, so to
	understand what is driving our margins at one lever, you said it was because of this designing
	led, but what are other levers that are helping us because when we are doing more of an
	advanced work or advanced technology, so are we getting some price increase or not if you
	can give some color on that part?
Gaurav Bajaj:	Hi Bharath, I will take that question, and maybe Nitin and Manoj can add. A few things are very
	important to us regarding the margin, and we are constantly focusing on this. I think the first

Page 3 of 18

Q3 FY22 Earnings Conference Call

January 19, 2022 | 15:00 hrs IST

	and foremost, as you also rightly said, is the business growth and consistent business growth,
	and if you see that all our business verticals are doing well. For the past few quarters, we have
	given very sustained and healthy quarter‐on‐quarter and year‐on‐year growth at an overall
	company level, so of course, those scales and economies always help to foray your margin and
	bottom‐line expansion. In the second, I think what we prioritize and strategize, you know at
	the start of this year‐end, two years back is the quality of the revenue mix, so we always
	strategize that we want to prioritize the value of the offering the better margin deals. We have
	been finding a few sizeable deals and a multi‐year contract, and these are at terms where we
	feel very satisfied and happy. Those strategies are working for us, which also adds to the better
	margin profile at a company level. The third probably is on the cost side, which is your operating
	leverage and arbitrage. Our internal focus is always the disciplined execution and operational
	efficiency, so if you see our utilization, our utilization has been at an all‐time high. Earlier, we
	used to be in the band of 73 to 75, now that utilization is almost 80% up, it is almost 83%. In
	fact, the pyramid is the other sector where we can achieve a certain kind of leverage, and then
	the last probably is the offshore and onsite arbitrage. We have always had an offshore‐centric
	approach and our customers also always accepted that. Still, during these pandemic times, it
	also further cemented that kind of approach with the customer, so that is also kind of helping
	us. Earlier it was, you know pre‐pandemic level our onsite mix was about 35%‐36% odd, now it
	is almost 23‐24, so our offshore the revenue mix has improved in the overall business which is
	helping our margin, so probably it is a combination of both top‐line growth, quality of earning,
	and operating leverage and arbitrage.
Bharat Seth:	Sir, it is a fair point, but we are reaching almost a full kind of operating leverage that we are
	enjoying, and now if we keep on adding lateral hires, and if volume continues, from a margin
	perspective, are we getting some better pricing or how long this kind of a trend will continue
	on the margin trajectory side. I am not looking at one quarter or two quarters, but more a
	medium‐term perspective if you can give some more color?
Gaurav Bajaj:	We do not make any forward‐looking statements on margins, but having said that see, we
	believe and are pretty confident we will continue to deliver one of the industry‐leading margins
	and better to do on most of the parameters. As you know, in the current scenario and situation,
	everyone in the industry is kind of benefitted from some kind of suppressed SG&A and some
	discretionary spending. We believe that some of that will come back once things open up, but
	we do not know. Of course, that will not be immediate, but that would always be over a period,
	and we believe that it will never be to 100% level of the pre‐pandemic level; it would be some
	percentage of it. Today, it would be tough to say when, how much it will come back. On the
	other side, if you see, with our growth and we believe that our overall pipeline and funnel and
	a robust mix of the demand for this industry, I think the growth will always be there and with
	our other operating levers along with our growth, I think with execution, strategies, and all
	those things, we will continue to drive and offset some of those parameters. We have set

Page 4 of 18

	Q3 FY22 Earnings Conference Call
	January 19, 2022 | 15:00 hrs IST
	ourselves some aspiration margin band, and we are pretty confident that I think we will
	continue to deliver one of the better margins of the industry.
Moderator:	Thank you very much. The next question is from the line of Hiren Ved from Alchemy Capital.
	Please go ahead.
Hiren Ved:	Hi Manoj and Nitin, congratulations on fantastic execution quarter after quarter.
Manoj Raghavan:	Thank you, Hiren.
Hiren Ved:	My question is that you mentioned that you are seeing growth back in the transportation
	vertical. You also had initiatives of essentially tapping into other adjacencies like off‐road
	railways. Could you tell us if you have made any headway and what kind of progress you are
	seeing in the non‐traditional transportation that we are already very strong in? That is question
	one? Second, given that skill sets in this area are still relatively few, are you able to get a pricing
	uptick on the services you are delivering with the customers?
Manoj Raghavan:	On our transportation business, if you look at it, primarily a lot of our business used to come
	from passenger car vehicles, but over the last, I would say six to eight quarters, we have
	diversified our revenue profile to include commercial vehicles as well as off‐road farm
	equipment and the rail segment. It has been steady progress. We won some excellent deals on
	the commercial vehicle base in the last quarter, which has helped us grow this piece of revenue.
	Our rail business is also growing steadily. Our focus is over the next three years that 20% of the
	revenues in the transportation business should come from these adjacencies that we called
	out. We are working towards that, so I do not see any concerns, and I believe we will achieve
	our objectives there. Skillset, as you rightly said, is enormous pressure on skill sets. These are
	not run‐of‐the‐mill skill sets; you cannot use fresh engineers here. You need experienced
	people, so all of that is applicable. But, yes, we have been able to negotiate better terms with
	customers, which definitely helps us in our overall business growth.
Hiren Ved:	One last question also I think this quarter as well your healthcare vertical has grown very well;
	do you believe that this vertical will lead in terms of quarter‐on‐quarter growth even in the
	future, considering the base is still small?
Manoj Raghavan:	Yes, the base is small, but again the problem with some of these smaller businesses is that you
	can always have one bad quarter here and there, so while I would want to say that yes, growth
	is going to be indefinite, but I cannot predict the future right. Both quarter‐on‐quarter and
	year‐on‐year, we have been having a pretty decent growth in the healthcare business. Our
	long‐term, three‐year roadmap that we put forward talks about the 40:40:20 ratio between
	automotive, media and communication, and the healthcare business, so we are moving in that
	direction. If you look at the factsheet that we laid out, we are moving in that direction. I would
	focus on the, I think last year is when we laid out so we are one year into that and the next two

Page 5 of 18