Tata Elxsi : Financial Reporting Document

"Tata Elxsi Limited

Q4 and Annual Audited Financial Results for FY '24

Earnings Conference Call"

April 23, 2024

MANAGEMENT: MR. MANOJ RAGHAVAN - MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER - TATA ELXSI LIMITED MR. NITIN PAI - CHIEF MARKETING AND CHIEF STRATEGY OFFICER - TATA ELXSI LIMITED

MR. GAURAV BAJAJ - CHIEF FINANCIAL OFFICER - TATA ELXSI LIMITED

MS. CAUVERI SRIRAM - COMPANY SECRETARY - TATA ELXSI LIMITED

MODERATOR: MR. SHASHANK GANESH - ERNST & YOUNG

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Moderator: Ladies and gentlemen, good day, and welcome to Tata Elxsi's Q4 and Annual Audited Financial Results for FY '24 Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the 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, and over to you, sir.

Shashank Ganesh: Thank you very much. Good evening to all the participants in the call. Good morning for joining 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 results 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 appreciate your cooperation restricting yourself to 2 questions to allow participants and opportunity to interact. If you have any further questions, you may join the queue, and we'll be happy to respond to them as time permits.

With that, I'd like to hand over the call to Mr. Manoj Raghavan. Over to you, Manoj.

Manoj Raghavan: Thank you, Shashank. Good day to all of you joining us for the Earnings Call for the Fourth Quarter and for the full financial year '23-'24. FY '24 has been a year of consistent operational performance with a revenue growth of 13% despite the global macroeconomic uncertainties and volatility in the media and communication industry over the last few quarters. We have done well to maintain industry-leading EBITDA margins at 29.5% for the year, even while we continue to invest in expanding our talent base through all the 4 quarters with a net addition of 1,535 Elxsians through the year.

Now I come to a summary of the financial performance in FY '24, our revenue from operations were at INR 3,552 crores, a year-on-year growth of 13%, EBITDA margin at 29.5%, PBT margin at 28.5%, profit before tax

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grew 11.9% to INR 1,048.7 crores. And actually, this is the first time our full year PBT crossed INR1,000 crores.

Coming to the summary of the financial performance in Q4 of FY '24, our revenue from operations came in at INR905.9 crores, a degrowth of 0.9% quarter-on-quarter and a growth of 8.1% Y-o-Y. And the operating revenue growth actually on a constant currency basis had a degrowth of 0.6% quarter- on-quarter and 7.2% growth Y-o-Y. EBITDA margin came in at 28.8% and the PBT margin at 27.9%.

The Board of Directors have recommended a final dividend of 700% that is INR70 per equity share of par value of INR10 each for the financial year ending March 31, 2024, subject to the approval by the shareholders of the company at the AGM. We had laid down a strategy of integrating our design business deeply with our key industry verticals, complementing our software and digital business with a design-led proposition. This is now complete with a seamless end-to-end proposition from ideation to market introductions.

This is enhancing our competitive differentiation, providing early visibility into customer product roadmaps, and creating larger downstream development deals. Over 90% of our industrial design and utilization revenues are now directed to customers in our 3 main verticals, while the remaining comprises of innovation and design-led projects in other industries, including consumer packaged goods, retail, energy and utilities, manufacturing, adding diversity to the application of digital design and feeding possibility for future verticals for the company. This has been classified as others in the segment report.

Starting with this quarter, we are reporting this integrated view of our industrial design and visualization business in all 3 verticals and not stand- alone. So our software development services, SDS, combines the erstwhile EPD revenues and IDV revenues into the respective verticals as 1 segment with a system integration and support constituting the other segment.

Now let me provide a summary of the key industry verticals and segments for the company. If you look at our transportation business during the financial year, our transportation business grew strongly at 20.5% year-on-year in constant currency terms and now accounts for almost 50% of our overall SDS revenues. A lot of this work that we do for OEMs constitutes over 56% of our overall transportation business and we are now embedded into the SDV programs of 5 global OEMs. This business grew at 1.2% quarter-on-quarter in constant currency terms, despite delays in the planned scaling of SDV large deal that we have been awarded previously. I'm especially delighted with the German Design Award 2024 for our work on automotive HMI, which underscores the design-led proportion that we are now delivering to customers globally.

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We were selected into the SDV program of another global OEM and are ramping up teams to support infotainment, ADAS and EV software track over the next few quarters. The quarter also saw a digital technology-led deal in the rail segment, for development of an advanced collision detection and warning system for a rail operator in North America. This leverages advanced sensor technologies and AI to provide an early warning system.

Coming to our Healthcare and Life Sciences business. This business registered a growth of 7.6% Y-o-Y in constant currency terms in the financial year. We have established a strong foundation for continued growth with the addition of 5 marquee customer logos in the year, and expanded capabilities and platforms in new growth areas such as digital therapeutics and connected health. The offshore development center for innovation and R&D we announced in March 2024 for Dräger Medical, the German-headquartered leader in critical care and safety equipment, demonstrates the relevance of our technology and design expertise and deep domain capabilities for next- generation health care.

We are investing and winning deals with Gen AI-led solutions for the health care industry, including identification and elimination of toxic materials from the medical device supply chain. We are building platforms and winning deals for digital therapeutics, an emerging and strongly growing team for healthcare of tomorrow.

Coming to the Media & Communications business. This business declined 2.6% in constant currency terms during the financial year. This quarter saw a merger led impact of a deal ramp down with 1 customer. However, considering the severity of challenges in the media and telecom industry, we have done well throughout the year to protect business, add marquee customers and increase wallet share with key customers. We are seeing growth in operator revenues and our overall customer base. Even as customers continue to tighten budgets and optimize spends, we believe that there are opportunities in contributing to the revenues through advertising technologies or adtech and enabling opex reductions through automation and transformation of network operations. We are actively investing in offering platforms and partnerships for both areas. Both leverage AI and Gen AI to deliver speed and autonomous operations.

We are delighted with NEURON, Tata Elxsi's network transformation and automation suite being declared the platinum winner of the Juniper Awards for telco transformation. It was also the center stage of a showcase at the Mobile World Conference in Barcelona in February.

The power of our design-led proposition is best underscored with a multimillion U.S. dollar program we won late in this quarter for the customer experience transformation of video services of a leading Africa plus Middle East operator operating in over 25 countries. This also demonstrates new

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opportunities for us in new markets, such as LATAM, Middle East and Africa.

Coming to our system integration and support business, we continue to pivot to value-added services, innovation-led projects such as experience centers and supporting downstream deployment and run management of our products and platforms.

Q4 revenues and growth was impacted by hardware shipment delays due to the Red Sea shipping crisis, which did not allow us to deliver and build some revenues. Despite this, it grew credibly by 18.6% in the financial year '24 in constant currency terms, getting close to INR100 crores business in this financial year.

From a customer standpoint, we are transforming our customer base across industries with a significant shift towards OEMs in the automotive industry and operators in the media and telecom industry. While we continue to invest in deepening our key customer relationships, this is reflected in the strong growth in our top 10 and top 25 customers across the company.

From a talent perspective, we continue to invest ahead of time in building our talent pipeline. We are expanding our presence across locations in India and overseas. Our employee retention continues to be the best among our peers and industry at large, at 12.4%. We added 178 Elxsians, net - additions in the fourth quarter and 1,535 Elxsians in the full year, and we have a planned intake of fresh engineers and laterals through FY'25.

On the AI and Gen AI front, we continue to invest strongly in solutions, POCs and projects, and ramp-up of talent across the company. We have created and deployed specialized programs to be able to get 25% of our engineers AI ready by Q3 of FY'25. We are working on experimenting and innovating using Gen AI across design and software.

We are targeting areas that may be impacted by Gen AI and disrupt our business such as coding, automated testing that we proactively take to customers. Equally, we are applying Gen AI to workflows and processes, regulatory work, automation of network operations as a new service framework and solutions we can take to customers.

The large deal that we announced in the healthcare regulatory space already uses automation and AI to deliver efficiency, speed and higher quality to workflows for our customers. We are also enriching our reserves platforms such as NEURON, iCX, TEcare, with Gen AI to enable new use cases and customer experiences for our customers. In the quarter, we also hosted a Gen AI hackathon internally for our employees with over five to six teams participating across all industry segments.

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Even as we step into the new financial year, we are pleased to announce two new members to the Board.

Mr. Soumitra Bhattacharya has had an illustrious corporate career, especially in automotive industry, with over 28 years at Bosch Group. He serves as the Chairman of Bosch Limited and is a Director for IFQM, an industry-led initiative focused on quality excellence and innovation.

Ms. Ashu Suyash is a highly respected leader and served as the MD and CEO of CRISIL, among leadership roles across many leading institutions. She has recently set up Colossa Ventures, an investment ecosystem for women entrepreneurs and is an independent director on a few boards, including Hindustan Unilever. We look forward to leveraging the rich experience in network, industry knowledge and strategic inputs from our new directors.

In summary, I'm pleased with our overall performance and resilience in revenues, margins and customer additions throughout the year in a volatile macroeconomic environment. We are entering the new financial year with a commitment for growth and the continued confidence in our differentiated and integrated design digital capabilities.

This is backed by strategic relationships we have built over years with key customers, the qualitative change in revenues towards OEMs and SDV programs, entries into new operators and marquee healthcare logos, investments in talents and hiring that we have made and continue to make, investments in strategic technology areas in AI and a strong deal pipeline we carry into the new financial year.

Thank you and we can open the floor for Q&A.

Moderator: Thank you very much. We will now begin the question-and-answer session. The first question is from the line of Bhavik Mehta from JPMorgan. Please go ahead.

Bhavik Mehta: Thank you. Two questions from my side. Firstly on the media client, can you just give more color in terms of whether it was in the media vertical or in the telecom space? And if you can quantify the ramp down as well for the quarter and is this something which is completely done, or should we expect some further ramp downs in the coming quarters as well?

Second question is on margins. We saw margins decline by more than 100 basis points this year. So how should we think about margins for next year, given that the demand environment has not changed? Are you targeting to maintain margins or do you still have levers where you can see margin expansions? Thank you.

Manoj Raghavan: Yes. So I think the dip that we had with one account was in the media operator segment, it impacted almost 3%, that one single degrowth that we've

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	had with one customer. Coming to the margins, I think we are pretty
	confident with the sort of pipeline that we have and the levers that we have to
	manage our margins. So we are definitely looking to come back to the
	margins for the full year that we delivered in the last financial year. So I think
	that is what we would focus on.
Nitin Pai:	Just to add, Bhavik, we are done with the ramp down. So that doesn't
	continue or decline further.
Bhavik Mehta:	Okay. Just a clarification, this 3% impact is for the quarter at overall level,
	right?
Manoj Raghavan:	No, at the MCV level.
Nitin Pai:	So Media and communications degrew just a little more than 4% for the
	quarter, out of which about 3% was attributable to the single customer and
	the single ramp down. We are done with that this quarter. So when you start
	the next quarter, we have no further impact from that customer.
Bhavik Mehta:	Okay, got it. Thank you.
Nitin Pai:	Otherwise, we would have ended up just about neutral. So that's the point.
Bhavik Mehta:	Okay. Thank you and all the best.
Moderator:	Thank you. The next question is from the line of Sulabh Govila from Morgan
	Stanley. Please go ahead.
Sulabh Govila:	Hi. Thanks for the opportunity. So my first question is on the transportation
	business. So I just wanted to understand that there are multiple moving parts
	in the sense that, on the one hand we have OEM-related business where we
	see SDV projects coming in. And then at the same time, there is a delay in
	the form of ramp-up of some of these projects? And also ex of OEMs, some
	of the Tier 1 business could be coming off. So just wanted to understand right
	now, the sort of growth that we have posted, which is 1.2% Q-on-Q, when
	can we think about this accelerating given that there are multiple moving
	parts there?
Manoj Raghavan:	Yes, it is as we rightly talked about, currently 56% of our business comes
	from OEMs. So if you look at it in the previous financial year, I think our
	Tier 1 business was more like 50% and OEM business was more like 40%. I
	think we've done exceedingly well to transition this into a lot more focused
	on the OEM business and the sort of deals that we have been winning.
	Yes, there have been some delays in one deal that we have won, but we
	definitely see that ramp-up picking up towards the latter half of this quarter.
	So I think our focus is to continue to exploit the opportunities that we see in
	the OEM business. We used to have a large portfolio of Tier 1, so what we're
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really focusing is to really focus on select key Tier 1s that we believe will continue to grow strongly.

And in these Tier 1 businesses, we are looking at consolidation opportunities. So we are not abandoning the Tier 1 business, because we still believe that there are opportunities there and there are a lot of consolidation opportunities that we are bidding for at this point in time. So that is something we will strongly focus on.

We hope that the delays and the issues that we are seeing in the industry over this quarter, we will see that coming to a close, and we'll hopefully be able to ramp up on all the deals, because we have done all the necessary work that is needed for preparation, we have the pipeline available. So it's a question of ensuring that we ramp up and the customer decisions are taken, and we move forward.

Sulabh Govila: Okay, understood. And my second question was on the media vertical. So I just wanted to understand that while you mentioned that this particular ramp down is now over and you also see some of the opportunities in other parts of this vertical. So just wanted to understand that from an overall outlook for this vertical in the coming quarters versus what we've seen overall in the last year, which is sort of a decline for the full year. So should we expect in the coming quarters an improvement in the outlook for this vertical, given what you see today?

Manoj Raghavan: We believe that we have bottomed out in Q4 for this vertical. Internally, we have done some amount of restructuring in the way we go to market in this particular vertical. We made some strategic choices. I'm pretty confident that we will see growth coming back into this vertical as we move into Q1 and Q2 of this financial year. So the pipeline is building up, and I'm pretty bullish that we will see a recovery.

Moderator: Thank you. The next question is from the line of Vimal Jamnadas Gohil from Alchemy Capital Management Private Limited. Please go ahead.

Vimal Gohil: Yes, thanks for the opportunity. Sir, two questions on auto. Firstly, on the deal ramp up last quarter, we had roughly 2% growth. We would have expected that with the deals that we had won in Q2, they would have contributed in Q4. And so this 1.2% growth includes those ramp-ups or this 1.2% has come without that, because we're talking about the delays in the deals that we won in Q2 as well, right? So how should we think about that match?

Manoj Raghavan: So we have ramped up a very small team. So the full ramp-up has still not happened. So you can practically say that 1.2% doesn't include any ramp-up from that deal. So we're expecting that ramp up to happen in the later half of Q1.

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Vimal Gohil:	Right but has that ramp-up already started?
Manoj Raghavan:	Very pretty small ramp-up has started. The actual deal is a multimillion,
	multiyear deal, but we have not been able to ramp up to the initial
	expectations, because we had certain customer-related issues. And we are
	hoping that will get over towards the end of this quarter.
Vimal Gohil:	And how much has our OEM business grown as compared to FY '23 in FY
	'24, if you can give me the number?
Manoj Raghavan:	The OEM business was about 40% in the last financial year. FY '23 was
	40%, FY '24 was 56%.
Vimal Gohil:	Okay. So this 56% is for the entire FY '24, not for Q4?
Manoj Raghavan:	Correct. Entire.
Nitin Pai:	So Vimal, maybe I can just add. The OEM business grew by about 40% year-
	on-year.
Vimal Gohil:	Okay. So, which implies that there is a significant decline in the Tier 1?
Nitin Pai:	That's correct. That's correct.
Vimal Gohil:	And we've bottomed out there is what we're saying?
Nitin Pai:	That's right.
Manoj Raghavan:	Yes.
Vimal Gohil:	Okay. And next question is for Gaurav. Maybe if you can help us understand
	the puts and takes for the margin performance for this quarter?
Gaurav Bajaj:	Sure, Vimal. So margin came down by 100 basis points, 30 basis points came
	from the cost currency headwinds. While we continue to invest and expand
	our talent base to capture the capability and capacity building and also keep
	investing into the talent pool in terms of the AI capabilities. So 80 basis
	points came from that cost towards talent building, which got added during
	the quarter.
	We also done with the last batch that we on boarded for 2023 campus in this
	quarter, that together was 30 basis points from exchange and 80 basis points
	from people rate investment capability building, give you total 110 basis
	point dip. At the same time, we have some benefit from the cost of sales that
	we got to optimize that gave us a benefit of 10 basis points, and hence, the
	total EBIT drops from the quarter-to-quarter basis came at 100 basis points.
	But if you see at the overall company level P&L, the cost has not
	significantly changed, just in the quarter, there was a certain headwind in a
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few of the verticals hence the revenue got a dip, which has an impact on the margin. But at the same time, we see there enough levers available, capacity available to tap those levers available for us to get back to the margins where we operated for the full year in FY '24.

Vimal Gohil: And last clarification is the erstwhile IDV business, which we have now merged with the software business that gets reported between Media and Comm's and the other verticals, right? Nothing gets added to auto?

Manoj Raghavan: It adds to all the three verticals. Just to explain why we had to do this - we have been talking about our integrated design digital offering and taking a design-led solutions to our customers. So we have been winning a number of integrated deals, and depending on which division was really leading it, the revenues are occurring to that particular division.

So in some cases, IDV used to get that revenues. It is not only the design revenues, it also included the software revenues. In some cases, the transportation or the Media and Communication verticals, they were getting the complete revenues. So it was sort of a little misleading in terms of how to segregate what is designed and what is the EPD offerings.

It was getting very difficult to go on a case-to-case basis and make this differentiation. So we've decided that, look, let us have an integrated EPD plus IDV offering because it no longer made sense to really differentiate what is EPD and what is IDV.

And this value proportion also resonated very well with our customers. And it only makes sense when we look at it, when we give an industry breakup for all our revenues, we were only giving the EPD revenues. And that was sort of misleading because 12-13% of our revenues, which used to come from IDV were not represented in this breakup.

So for apple-to-apple comparison, if you want to compare peers or if you want to compare us with any other organization, it made sense for us to give an integrated idea, what is the total market share of all the revenues that we are generating, how much is for automotive, how much for Media and Communication, and how much for Healthcare. So that was the reasoning why we decided that it is better to give a full view to the investors.

Moderator: Thank you. Next question is from the line of Manik Taneja from Axis Capital. Please go ahead.

Manik Taneja: Manoj, I basically just wanted to get your thoughts on two, three aspects. Number one thing was that we've seen some of your traditional IT service companies acquire ER&D companies with deep customer relationships in some of the large OEMs. So how do you think that, coupled with the fact that, as customer spending moves towards middleware aspect, how do those

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