Tata Elxsi (NSE:TATAELXSI) Q1 2027 Earnings Call

0:00 Ladies and gentlemen, good day, and welcome to the Q1 FY twenty six twenty seven Earnings Conference Call of Tata Elxsi Limited hosted by E and Y. 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. Please note that this conference is being recorded. I now hand the conference over to Mr. Shashank Ganesh from E and Y. Thank you, and over to you, sir. 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 this discussion may contain forward looking statements that may involve known or unknown risks, uncertainties and other factors. Therefore, it was reviewed in conjunction with the business risks 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. Nadeed Rana, Chief Financial Officer and Ms. Singhavi, Company Secretary. We will start the call with a brief overview of the past quarter by Mr. Rahulan, followed by a Q and A session. We would appreciate your cooperation and let's secure yourself with two 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 with time permits. With that, I

1:31 would like to hand over the call to Mr. Manoj Raghavan. Over to you, Manoj. Thank you, Shashank. A very good evening to everybody who has joined us today for the Q1 FY twenty twenty seven investor call. I hope all of you are fine and doing well. I'm pleased to announce that Tata Elxsi has passed the key milestone of crossing more than INR1000 crores of quarterly reporting operating revenues by delivering INR1021.1 crores in the first quarter of FY twenty twenty seven. In constant currency terms, our revenue grew by 6.5% year on year and 1.3% quarter on quarter. The growth was led by our major verticals, which is Transportation and Media and Communication, which grew 6.711.5% respectively year on year in constant currency.

2:24 We see this performance as a reflection of the strength and relevance of our unique design led and AI enabled engineering capabilities supported by large strategic engagements in the chosen industries. We posted an EBITDA of INR216 crore, which grew at 15.7% year on year and an EBITDA margin of 21.2%. The Media and Communication business delivered robust growth of 4.7% quarter on quarter in natural currencies and 2.9% quarter on quarter in constant currencies, which translates to a year on year growth of 22.2% in natural currencies and 11.5% in constant currencies. The strong performance was enabled by the ramp up of key engagements which we announced in the previous quarter and large programs with global operators and broadcasters.

3:15 Our transportation business, which contributes more than 55% of the SBS segment revenue, reported a resilient performance in an otherwise challenged macro environment with a growth of 6.7% year on year in constant currency and 13.3% year on year in actual currency. This was led by large automotive OEM engagements and strategic off road and aerospace deal wins. We continue to strengthen our pivots towards OEM and today 78% of our automotive revenues is from our OEM customers. The Healthcare business exited near flat with a minus 0.3% quarter on quarter in constant currency, reflecting the muted global healthcare business environment. The anticipated momentum was staggered by the delayed deal awards from some of our key customers.

4:06 We, however, remain excited about the long term prospects of this segment. We continue to invest through scaling our newly launched platforms such as Vital, Anatel, reimagining our offerings with AI Gen AI and taking center stage in med tech and healthcare events, setting ourselves to capture emerging opportunities. In the quarter gone by, we have accelerated our efforts to expand platform led offerings. Our Neuron platform portfolio has enabled Sky in Europe to transition towards zero touch network operations with enhanced cyber security delivering up to 30% to 70% efficiencies in various parameters. Our AI led material intelligence platform Vital also aims a strategic deal with a global medtech company. We are executing upon our future focused strategy and we'll continue to intensify our investments in specialized talent, rigorous upscaling, AI powered platforms, tools and infrastructure that strengthens our human plus AI plus domain proposition.

5:09 These forward looking investments will enable us to stay at leading edge of technology advancements while accelerating value creation for our customers. The U. S. Region performed well for us across verticals led by new deal wins and deal ramp ups. Some of these strategic programs demand quick ramp up at onshore for transition support and initial stabilization. We have incurred additional cost of deploying forward teams as well as specialist third party contractors to help accelerate transitions and mitigate visa delays for our engineers. This is partly reflected in our on-site offshore ratio and bottom line performance and should ease over the next two to three quarters. We are firmly focused on sustainable growth, deepening our engagements with key customers and positioning ourselves to shape and win strategic long term deals and add marquee customers.

6:00 We look forward to carrying the growth momentum to subsequent quarters while remaining steadfast on our operational rigor and business discipline. Thank you, and over to Sushank for the Q and A session. Thank you very much. We will now begin with the question and answer session. Anyone who wishes to ask a question may press star and then one on their touch tone phone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking your question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Again, to register for a question, please press star and 1. Your first question comes from the line of with JPMorgan.

7:03 Please go ahead. Hi. Thank you. So a couple of questions. Firstly, I wonder if you can give some outlook on your three verticals given, you know, the middle is still remains in place. So, you know, how are the discussions with clients evolving on spending intentions, you know, for the next few quarters? And if you can, you know, say, you're gonna call three verticals, how they're different? And secondly is on margins. You did talk about, you know, some onshore investments in subcontractors as well. So how should we think about the margin trajectory going forward? I mean, is this like a onetime thing, which is in the base now or is it starting for the next few quarters? Or any color on the margin outlook for the year? Sure. Think, mean, upfront, let me tell you, I think it was a reasonable quarter for us because two of our larger businesses, which is transportation and the media and communication vertical had a pretty decent performance. Think media and communication vertical has been sort of underperforming for quite some time and I think some of the deals that they have closed in the previous quarters, we've finally able to ramp up and achieve the full ramp up situation.

8:18 So, I think there are, as we speak, there are deals that we are chasing. There are some pretty large consolidation deals in media and telecom space. Some of these we are very, very confident that we should be able to swing in our favor. So, I think over the next two to three quarters, we strongly believe that we will be able to continue our growth in the Media and Communication vertical. From the Transportation vertical, yes, I think Europe situation is a little we have to wait and watch the challenges in German market and so on.

9:04 We have not been affected as much and the deals that we have closed, we continue to execute. There is some slowdown in the new deals. But having said that, I think for us, you know, The U. S. Market, you know, we were able to really significantly grow, not just the automotive revenues, but also the efficiency revenues, including, you know, the off road and farm and equipment as well as the aerospace and defense segment. So overall, when we look at it from a transportation business, we are hopeful that, yes, there is softness in Germany in particular, but we strongly believe that all the other adjacencies and the efforts that we're putting in other markets, Asia, including India, I think we have seen some pretty very good deals that we have closed over the last couple of quarters and these ramp ups are happening as we speak.

10:02 So I strongly believe that look for both our media communication and transportation, we should see growth over the next two to three quarters, right? That visibility is coming as we speak. Healthcare, again, it's a little bit of know, it's like a it's like a moving target. It's a smaller business for us. Less than 10% of our revenues, you know, come from healthcare. But it's a very, very important business for us because we strongly believe we have built fantastic capabilities, including a lot of, you know, AI, GenAI related tools that we have built for this particular market. That is a good when we talk to customers and as you know this in this particular industry, the deal pipelines, the deal closures would take some time. There are some very good conversations happening. I wish we had a better story to say.

10:58 And we are really hopeful that, look, Q1 would be a good story. Unfortunately, some of the deals that we have been discussing, we have still not been able to close it and complete the paperwork and so on. So having said that, we're still in mid term to long term. This is an area that we're investing in. We have built fantastic capabilities and we strongly believe that this will eventually, you know, in this financial year, we will see growth in the healthcare and life cycle life sciences space. So, this is somewhere we are definitely continuing our investments and so on. On the margin side, maybe I will request Nalin to give you an overview.

11:44 Yeah, I think we have some one timers that have hit us in the quarter, but definitely we have a plan to grow back and if you look at it over the four quarters really look at how we can get back to our margin profile. So, I'll hand it over to Nalin to answer that question. Thanks, Manoj. So if you look at our EBIT margin, so our EBIT margin has decreased three thirty bps on a sequential basis and 80 bps on a increased 80 bps on Y o Y basis. So looking at the change in margin in three buckets, right, to give you some color. So the first bucket is gross currency gains that we have got in the quarter. That's about 40 to 50 bps.

12:31 Then we have in this quarter around one fifty bps of one off costs or short term costs. And there's a third bucket of two twenty bps, which is towards investments in people, go to market and capabilities. Now taking these, the second and third buckets one by one, right? So 150 bps. So 150 bps, this quarter, you know, we had to incur some transition costs for some of our large consolidation deals that are taking place. Second one is, there were some onetime costs that we also took towards retention of select employees who we believe are sort of critical for the business. Third one here, there were costs in relation to a particular customer that we had to incur in this particular in this quarter, which we do not anticipate going forward.

13:26 And the fourth is upfronting of certain annual costs. So these are absolutely standard costs, pretty much fixed on an annual basis, but we had to, for various reasons, upfront some of these costs in this quarter. So this bucket, the way we should think about it is most of these would go away in the next quarter. Some of these will transition over the next couple of quarters. Then there's this third bucket of about two twenty to two thirty bps. Now this is on account of few factors. One is investment in on-site sales and delivery. In this quarter, we saw, you know, significant ramp up in some of our U. S.-based deals. So we had to ramp up our delivery there. Lot of this ramp up we had to do through subcontractors because of, a, you know, the short time lines, b, also visa restrictions that are existing in the industry.

14:20 In addition to this, we have applied for visas of our own people who who are... Who will sort of supplement these contractors or replace them over a period of time. Right? Then there were costs... Again, for these deals, there were costs related to ramp up of these deals. Then we are, as mentioned by Manoj earlier, ramping up our investments in specialized talent, AI tools and infrastructure. Lastly, we had, you know, very recently a chapter 11 in one of our customers, which sort of led to higher provisions for the quarter, which you can also sort of see in the you'll be able to see sort of in the financials. Then the second bucket, the way this bucket, the way I would think about it is, you know, these are little more secure, but also should go away over a period of time. Right?

15:13 So subcontractors, we look to make... You know, optimize those by, you know, moving some work streams offshore or our own employees replacing the subcontractors over a period of time. And finally, leave only the critical sort of resources that are there. And similarly, you know, customer related ramp up costs, you know, as sort of our deals get ramped up and stabilized, I think these should also stabilize over a period of time. So these So just to recap, around 150 bps, they should go away more quickly. Second bucket should move away, should sort of improve over a period of time. Okay. Got it. That's helpful. Thank you.

16:01 Thank you. Your next question comes from the line of Bimal Jamratas Kohil with Alchem Capital Management Private Credit Limited. Please go ahead. Yeah. Thank you so much. Sir, just one follow-up on the margin question. In the other expenses line item, which is about 135 odd crore, are there any ForEx losses also that are being that are built in this particular quarter? Yeah. So this is what actually I referred to. You know? There's other expenses largely increased because of two... You know, I would attribute it to two items. One is a Chapter 11 at one of our customers, where we had to provide for the receivables on a conservative basis.

16:47 The second one related to up fronting of certain sort of annual cost. So not... I would say not a big forex item, but, you know, these are the sort of the two main drivers. Okay. Fair enough, sir. Sir, I missed on missed out on the auto OEM contribution in this quarter. How much was that? 78%. 78. Alright. And, sir, lastly, we've been talking about revenues from adjacencies. When can we when can we possibly see some sort of, you know, quantification of disclosure as to how much are we getting from these adjacencies? I think in this financial year at some point in time, we will definitely be able to disclose. You know, hopefully, you know, by by end of the financial year, we should be in a position to tell you exactly.

17:36 All right. Awaiting that, sir. Thank you so much and all the best. Thank you. Thank you. Your next question comes from the line of Ravi Menon with Axis Capital. Please go ahead. Thanks for the opportunity, and congrats on a really good performance in the media and communications segment. So then I wanna check what's the pipeline like in transportation, and are you seeing car... Automakers actually look at new hybrid platforms? What sort of role can you play in that? And in the medium term, again, segment, one of your top customers is undergoing a corporate restructuring. Any changes to your engagement that might come either positively or negatively from that? I think coming to the MCV, yes, I think we are discussing with our customers at this point in time. There is no clarity in terms of is it going to affect our business or not.

18:31 If you ask me, I would say that it will only help us, it could be positive because there are we have not deeply penetrated you know, the NVCU, you know, piece, so that is an opportunity for us to really go there. So at this point in time, there's nothing that we can we can... There's nothing to inform in terms of is it going to affect us or not. We are keenly watching that space. From an automotive customer's perspective, we've already discussed, I think, globally, yes, both in The U. S. And in APAC, Japan and India, I think we've seen traction is definitely there. There are large deals that we are bidding for.

19:20 Continental Europe is a little bit of wait and watch as we speak. Though there are opportunities that we have built, there are large deals that we have placed, but given the uncertainty in the market, we're not sure on the pace at which some of these additions will happen. So I think there's a little bit of a wait and watch there. But otherwise, overall automotive industry, I think we should see some good growth coming in minus Europe. Thanks, Anwar. And some of the overall headcount is down a little bit. So what's the sort of hiring plan, especially for fresh college graduates this year? And how does that compare to the last year's fresh college graduate hiring?

20:10 I think we'll we are on a wait and watch rate. I think our utilization is just about 95% or so right now. We still have some leeway to go. We have been hiring freshers as we speak, but the numbers have been pretty small. Think will hiring fresh grads, will only look at it as our growth momentum picks up, right? So will be very, very moderated the way we go ahead and especially with now AI engineer also coming in that is we wouldn't want and go and hire a huge bunch of freshers.

20:58 It's as I said it's a wait and watch. We are hiring freshers, but it's very moderated level. I think last quarter we would have added about 100 or 150 engineers you know from the colleges. So, it's a small number that we had. Thank you. Given the current market, you think it's actually preferable to higher laterals because it's still fairly easy. Yes, laterals only very, very specific where there is a need, right? Most of our focus is utilizing our bench and utilizing our existing team members and of course focusing on retaining our key talent, right? That's what we are focused. And could you talk a bit about the sales investment that you made?

21:48 So I think both in U. S. As well as in Europe, we have added, you know, sales headcount. We've also we've also added advisers, you know, to to support us in some of the large deal, pursuits. Apart from that, we've also spent in terms of events that we participated in to build our brand and also to gain visibility in the larger, you know, market space. These are specialized events. We're not going after those large events and so on. There are for each of our industry verticals, there are those specialized events which are there and that's something that we are focused on and we're spending money.

22:40 Thank you so much sir. Best of luck. Yeah, thank you. Thank you. Your next question comes from the line of Moish Chandani with Ambit Capital. Please go ahead. Yes. Hi. Good evening, and thank you for taking my question. My first question was on your overall growth expectations for FY 'twenty seven. I think you had said last quarter that you probably would be aspiring for a high single digit sort of a number. Is that something which is still the aspiration given issues that you've complained in transportation? Or do you think it would be more, say, closer to the mid single digit number for the year? No. So our aspiration continues to be the same. We we are... We we just need our health care business also to fire up right and and then I'm sure that we will be able to get to that get get to that sort of a growth rate that we are aspiring. So think we're not changing our aspirations.

23:34 Okay. Understood. And then secondly, just broadly on, you know, I think, in a previous session, briefly touched upon AI and, you know, if that's impacting some of your hiring. But how have your conversations with clients been on the AI implementation? What are your clients saying? And is that impacting, say, your volume growth or your T and M project going forward? Yes. So maybe I'll take that question, Moiz. This is Nitin here. I think AI in general, on one hand, in product engineering, given the fact that the industries that we operate in are largely mission critical, especially automotive and healthcare, has been very careful and measured in the first place, especially when it comes to implementing it into the SG and process, into products that we'll deploy in the future.

24:23 So there's a certain amount of care and caution that's being exercised. But having said that, I think we are driving a very strong path of providing a path of transformation aided by two parts. One is the platform led offerings that we are building. So what we are saying is it's not so much about AI for itself. Each of these industries require solutions that are tailor made to their context that provide for coverage of certain aspects of cybersecurity, of FMEA and so on that are very specific to those industries. So to that extent, I think what we're doing is we're taking a very domain plus AI, if I may, view of each of these industries. And we're saying, look, you don't have to transform all at once, but we will provide a platform led approach that allows you to take the SDLC part by part and still connect it up at the end. So what we're actually seeing is that kind of a measured, calculated adoption.

25:23 And I think we're doing very well there. So to that extent, I don't see deflation. I don't see shrinkage. I don't see any of that. We rather see opportunities. But having said that, I think the overriding problem is... And point is the spend that is being earmarked for AI, unfortunately, is also kind of curtailing r and d spend, if I may. I think that's the larger perspective rather than anything else. Got it. Thank you. That's all my questions. Thanks, Bhaskar. Thank you. The next question comes from the line of Amit Chandra with HDFC Securities. Please go ahead. Yes. Thanks for the opportunity.

26:08 So my question is on the increased investments that we have been doing. So if you can elaborate a bit more on kind of what are the investments around. So these are mostly, like, platform investments or just more on r and d? Or or is it more related to, like, client specific engagements that we have? As you said, we are investing more in subcontracting, investing more in on-site and is it fair to say that the new deals that we are taking, they are like initially lower margin deals? Yeah. So these investments definitely are around, you know, building specialized talent pool. Right? That is actually there. We talked about the AI infrastructure that is needed that we are... They are building. So, and also all the tools and the cloud investments that are needed to deliver value to our customers, right. So, it's a combination of all of that which are the investments.

27:06 And of course, in some of the large deals that we have taken, there is also the transition costs, right? There is some bubbling of costs that happens because these are typically three or five year deals, wherein in the first quarter of commencement of the deal, there is some amount of bubble cost that comes in. So, these are all the investments that we are doing and that has sort of affected our margins in this quarter. Okay. And in the transportation vertical, obviously, OEM is now 78% of the automotive revenue. So, like, within the OEM bucket, how we're seeing the top line and the non top line moving. And also if you're seeing some softness in some of the OEM accounts, especially what is happening in the European region.

27:58 So if you can, you know, provide the, you know, commentary on what is happening with the OEM. Yeah. So the top customer has been pretty steady for us. So that's definitely a positive. And I've already indicated the softness in the OEMs in Germany. I mean, we have there are large deals that we've already closed. Those ramp ups are going a little slow there. So, as a result of which are what we would have expected that we will achieve in Q1, we have not reached that. But I'm hopeful that over coming quarters, we will be able to ramp up to the expectations, right? The good part is we've had a good recovery in The U. S.

28:44 As well as in the APAC region and all that has actually contributed to the growth in the automotive segment for us. Okay. And then lastly on the subcontracting part, if you can quantify the subcontracting cost and what is it what if they are positive revenue in this quarter versus last quarter? I'm not sure whether we can give specific details of the subcontracting cost. Amit, maybe this is Nitin here. I can just provide one slice, which is if you look at our on-site, offshore ratio, you'll see that the ratio has shifted by about 1%, four ninety basis points, right, 0.9%.

29:29 You can kind of and this all happened within one quarter. So you can look at that part and assume that the fair part of that is what we contracted out. And that has an associated impact on margins. Okay. Thank you and all the best. Thank you. Thank you. Your next question comes from the line of Kartik with RK Investments. Please go ahead. Yes. Can you hear me? Yes, sir. Speaking. Yeah. Alright. Yeah. Thank you. Thanks for the opportunity. A couple of questions. Maybe you addressed first one a bit earlier. So first is there is this growing concern, right, of the defector impact on software coding, maybe especially on engineering R and D, maybe it might hit much harder than traditional IT, right? So what I mean, is there a pressure? And how are you ensuring that the Tata Elxsi margins are protected?

30:36 And the second question is related to your slide on transitioning to platform like engineering, like in terms of these proprietary platforms, Neuron, Admir and Tether. So if you could I wanna know how aggressively you are sort of supplying this to address this pricing pressure. Any... Anything on what are the clients looking for? Like, is there more demand that, you know, using more with less pricing, something like that? Any color on? Sorry to interrupt. The line for the management has been disconnected. Please stay connected while we reconnect the line for the management. Ladies and gentlemen, we have the line for the management reconnected. Kartik, sir, could you please repeat your questions once again?

31:23 Yeah. Okay. Yeah. Thank you. And I was talking about this... The whole, you know, deflector, basically, the impact of using AI auto... Autonomous tools on the software coding. And the fact that it might hit the engineering R and D higher than traditional IT selling rate. So I wanted to understand how Tata Elxsi is protecting their margin in such impact like this? And the second question is on the slide on transitioning to a platform like engineering. I wanted to understand how aggressively you're deploying these platforms like you're on, heavier in terms of addressing the pricing pressure?

32:09 Know, any... Anything more on how the clients are using these proprietary platforms? So, Kartik, this is Nitin here again. Maybe I'll take those two questions. So on the first part, as far as the impact of AI on the SDSC, think the point that I was trying to make is, we are working with B2B customers in the chosen industries that we operate, which is healthcare, media, telecom as well as automotive and transportation. You tend to have one, very large core basis. Two, these have been built over many, many, many years. So, this is not fresh core. Three, these are fairly complex and built by multiple teams. Right? So first, understand the scale, size and complexity of the problem.

32:58 Like they say, a car has a 100 times more code than a Boeing Samsung seven forty seven does. Right? So that's the complexity you're talking of. Part two, while we tend to think of software coding as the biggest part of what work is done, reality is that product planning, feature planning, architecture Requirements. And so requirements capture, requirements mapping, regulatory alignment to the multiple countries that these products will be deployed in, actually is a bigger part of the problem than actual coding. Coding is just one part of the whole cycle. And that is where we believe that while AI can come in and you can say that look, software code, can write c plus plus code.

33:44 I don't know, 20% faster, 30% faster and so on. But the net impact of that part of saving in the entire life cycle is not too high. That is part one. Part two is customers are not as much focused on cost savings as they are on whether it delivers productivity or quality. Because in the ranking of CTQ cost, time and quality. Right? I think the industries that we operate in, inverted. It's quality, time and then cost comes last. So to that extent, I think the proposition stays strong, is Tata Elxsi leading edge technology capabilities, deep domain expertise, now backed by AI. I think that is the proposition that we're offering, all of course delivered from India at scale.

34:33 I think this is the real, if I may, tagline that we are delivering on, right? I believe that is still very, very relevant now and going forward. Your second question was to do with our own platforms. We would think about it, there are two types of investments that we're making. One is in platforms like Tether and Neuron and so on, which go into the customer products and services because it's transforming their products and services. And I think NurOwn that's why we took a lot of time to craft the value that our customer is driving. So the press release that we made with Sky, I think absolutely clearly calls out multiple dimensions on which we are delivering value, whether it is efficiencies, whether it is autonomous operations, whether it is customer experience and so on.

35:30 The same is with our connectivity platforms, right, because these are customer facing. Investments that we're making in platforms like Ytel or Anatel or Dev Studio are more true with how do you accelerate the software development life cycle of a customer. So this is something that end consumers will not see. This is something that provides efficiencies, but more focused on quality and time savings rather than on cost, right? So that is the view we are taking. Adoption, traction is fantastic. Reception is fantastic. Adoption, we believe will be thoughtful and calibrated simply because customers are not going to jump at the first platform they see. I think they are taking a very careful long term view of what are we doing, who are we working with, how do we make sure that what we are taking on and adopting is supported for the long term. So I think these are decisions that customers take very thoughtfully and carefully and hopefully the proposition that TATAELXSI provides both as a brand and as a capability, stands us well.

36:37 So if I have to summarize, were saying the first one is not much of a defect in impact as such because the cost of R and D stuff is much, much less than in the whole pipeline. And for the second one, you're saying it's a long term view that it doesn't have anything to do with the billing rate right now, a really long. Correct. But it definitely is making a positive impact on our win ratios and win ability. We're definitely having a definite halo effect even as we speak on what we offer to customers and what customers believe we are capable of for their long term transformation. Okay. Thank you, Mitchell. Yeah. Thank you so much, Gautam. Thank you.

37:23 Your next question comes from the line of Soula Povila with Morgan Stanley. Please go ahead. Hi. Am I audible? Yes, you are. Yeah. Thank you for taking my question. So I had two questions, both on the investments that we made in the quarter. So one is on the on-site investments and delivery that you spoke about. So historically, we've excelled at an offshore centric delivery model. So should we see that this investment on the on-site front as a change in the nature of demand versus what we used to do earlier? And this is more structural, or you would say that this is more technical and specific to a few projects?

38:10 Yeah. I think, you know, as we said that some of the large consolidation deals that we have on needed, you know, on-site resources to be available. But over the long term, the business model is to, you know, move a lot of that work offshore. So we're not moving away from a business model perspective. We would be in that 75%, twenty five seventy five being offshore and 25 being on-site. Today, I think it is 74%, 26% or so, it's just 1% that we have moved. But we will over the subsequent few quarters, as Nalin explained, we will be able to move a lot of this work back offshore. And we are not changing our business model, if that is the question. Okay. Okay. Understood. And secondly, you know, a large part of the cost that you mentioned, they were either transition related or ramp up related.

39:06 So one is that... Is this is this specific to a particular vertical, or is this broad based? And the benefit of this investment on revenue, have you already seen that in this quarter, or should we see that in the coming quarter? So we've seen partially, we have seen the uptick in revenue, both in our media and communication vertical as well as in the transportation vertical, primarily if you look at it from a U. S. Geography perspective. I think we have been able to U. S. Geography has grown pretty well. And I think that is one of the reasons subsequently over the over the subsequent quarters, will see us going back to offer based execution.

39:59 Understood. Understood. Thanks for taking my question. Thank you. Thank you. The next question comes from the line of Karan Upul with PhillipCapital India. Please go ahead. Yes. Hi. Thanks for the opportunity. Just a question on the transportation vertical. So last quarter, U. S. OEMs have commented pretty strongly in terms of R and D investments, either on HDBs or investments in hybrid platforms. So are you seeing any traction on these areas from The U. S. OEMs? And secondly, do you expect the transport vertical to start growing from Q2 onwards sustainably? I think definitely on the SBV, lot of the deals that we are discussing and a lot of the deal pipeline is based on SBV. So that continues.

40:52 As I've explained earlier, both U. S. And APAC regions, we are seeing good deal pipeline and good conversions as we speak. Europe is a little moderated right now. We would wait and watch in terms of especially Continental Europe during all the troubles that OEMs there are facing. But having said that, I think overall, both automotive and adjacencies, we see growth happening in subsequent quarters. Got it. Manoj, can you just help us with the broad split of the transport vertical within U. S, Europe and APAC, if that is something that you can share? I think for us, still it is Europe heavy.

41:44 If I'm not mistaken, to slightly more than 40% of our revenues would come from Europe and about roughly about 25%, 30% coming from U. S. And remaining from APAC. So that's the Europe is still the one geography for us from an automotive perspective. Got it. So despite pressures in Europe, you are still expecting The U. S. And APAC to basically offset and sell? Yes. Yes. And just on margins, so shall we expect nineteen percent EBIT margins as the floor from year on, we should expect improvement in margins? How should we think about it from next week?

42:32 Sure. So Karan, as mentioned, there is one bucket of costs which we would see for which we are which should go away in the next one or two quarters, around 150 bps or so. Although this will be partially offset by or this will be offset by wage hikes that we have planned. So we had done a cycle of wage hikes last year in October for juniors and in January for seniors. We are implementing a company wide revision in Q2 to remain competitive in retaining our talent, right, that we are investing in and that we want to retain, who have done projects, valuable projects, etcetera. So next for the next quarter, I would say, the margins will be sort of a combination of two things, impact of wage hikes coming in, but also impact of some of these one offs going away. So it will be sort of a balance of these two things.

43:30 Post that, once the wage hikes are fully sort of baked in, we should sort of see a ramp up in margins as we go through the rest of the year as sort of our revenues pick up and wage hike is sort of already built in. So there should be a sequential ramp up as we move towards Q4. Got it. Thanks a lot and all the best. Thank you. Thank you. The next question comes from the line of Abhishek Shindadkar with INCREATE Capital. Please go ahead. Hi, thanks for the opportunity. My first question is regarding you know, this onetime cost that we had to pay for the customer.

44:19 Probably, I missed the customer vertical, but I presume it is US and transportation. But what I wanted to understand, is this a generic trend that, you know, customers are asking, you know, the vendors to onboard subcontractors? Because we heard a similar trend in one of the other IT companies as well. And just wanted to understand what could be our reaction in case there are other customers who come back with some similar demands? That's the first question. The second question is on the wage hikes from 2Q. Can you just quantify, given that we are doing it for a company wide versus staggered last year?

45:08 And the third one is for Nitin. Nitin, you mentioned that the AI spend is curtailing the R and D. I mean, that was a comment you made. Can you just elaborate in terms of what are the clients thinking given that the perception was that the R and D is something that would, given its revenue generating, may not be paused immediately? Thank you for taking my question. Yes. I think I'll answer the first question in terms of contractors and so on, right? No, let me, I think, correct or make it clear, right? Customers are not asking us to take on contractors, right? I don't think that is right. What is happening is in The U.

45:56 S, as you know, with H1B visas, hard to come and so on, when we win a large deal, need to for transition and so on, we need to have our own people out there maybe for one quarter or a couple of quarters and then move work offshore and so on. So at any given point of time, we have a limited set of visas that are available. So to augment the team, we always we have to on a short term basis, we need to augment the team with contractors so that we do the due diligence and we really do the transition within the timelines and so on. So that is what this increase in one time costs are, right?

46:44 We have never seen customers asking us specifically to onboard specific consultants or contractors, right? So that's not something that we are seeing. Other question on second question on the margins, right? On the wage hike. On the wage So hike, wage hikes, I would say that at this stage, we are still sort of working through it, right? And there are a couple of elements there. So a, while we are doing it, it's a company wide hike. It's a company wide hike for all eligible employees, right? And given we have a lot of employees who have sort of joined us at different points of time, there's a set of employees who are not eligible for a wage hike as of now. Again, this wage hike is a the hike is a combination of variable and fixed, etcetera.

47:37 So there is that element as well. But I think We'll get back at the I think we'll get back at the end of Q2, right? We don't want to give you a number at this point in time. And on the last question, Abhishek, on the point about whether AI has an impact from curtailing R and D spend. I mentioned in the context of where the budgets get allocated. So ultimately, and D, some of it is strategic, some of it is discretionary. So when you are spending money and you have to now decide where you want to spend money, I think you see certain companies prioritizing AI because obviously it seems like the flavor of the day, the need of the day is the priority of the day. So to that extent, it does have a little bit of an impact on how much budget is being allocated R and D, right?

48:26 So that is the point that I was trying to make. Helpful. Just to follow-up on that. So this is more about right shifting of the budgets rather than deferment or, let's say, perpetual deferment, right? That's correct. You for taking my question and best wishes for the year. Thank you. Thank you. Thank you. Your next follow-up question comes from Sulap Goveela with Morgan Stanley. Please go ahead. Yeah. Hi. Thanks for the opportunity again. So my question was on the. You also mentioned when you talked about the investments, you also mentioned that there were certain interventions that you had to do for retention of select employees during the quarter.

49:21 And now we are also talking about, you know, preponderment of wage hikes. I'm just trying to understand the attrition in the industry right now doesn't appear to be high. So I'm just trying to understand what you're seeing differently, which is leading to some of these initiatives at your end. Yes. So our attrition is around 16% today. So as you know, right, it's not about how much your attrition is. It's also about the are you able to ensure that all your key critical talent, right, are taken care of, right? So I think with the number of GCCs coming into India and with the sort of aggressive hiring and so on, especially for AI ready talent and talent that really understands domain and digital technologies, there is still a huge demand.

50:26 Though you might say at an overall level, in the industry, the demand is muted. But for very, very niche specific talent that we carry, I think there is still a huge demand. So we need to ensure that we take care of that talent and we... And then what we're doing is to ensure that, you know, while our revenue, you know, clock picks up and we are seeing traction in the market, we don't want to be in a situation where we are struggling to service them and we have to go out and hire, right? So we really want to retain the key talent that we have. Understood, sir. Thank you. Thank you for taking my question. Thank you. Your next question comes from Rishi Modi with Modi Advisory.

51:12 Please go ahead. Hi. Can you hear me guys? Rishi, we can hear you. All right. Great. A couple of quick questions. On the media and communications piece in the previous quarter, you mentioned that the industry growth had not yet picked up. We've done well in this quarter. Just wanted to know whether the broader industry has picked up or it's largely us outperforming? And if it's not the industry pickup, when do you see the industry picking up and how much data can we capture just from the industry growth? I I think... Yeah. I think the media and communication industry in general and the vertical for us, I think over the last few quarters I've been going through a very, very turbulent sort of ups and downs and so on, right? But I think over the last 0.5, what we have seen is we have seen some large consolidation deals from some of our customers.

52:22 And this industry is also going through a lot of M and As, right, as we speak. And a lot of strategic decisions that customers are taking and so on. So what has helped us is in two such transactions where we were the incumbent and we were providing a significant engineering, outsourcing. We were the prime vendors in a couple of these deals, in a couple of these customers. There were significant M and A that have happened. And as a result of which, suddenly we had access to a much larger pool of projects to focus on, right? And when an M and A happens, of course, the customer is trying see how to optimize and how to move work to vendors that are a lot more offshore centric so that their overall cost can come down.

53:18 So I think our value proposition in terms of domain, digital as well as offshore centric really clicked with some of these customers that have gone through these M and As and so on. And I think that has helped us really win some deals, which is... So essentially, we have been able to eat into a, you know, completion by your business by showing superior execution and superior offshoring and offshoring capabilities. And that has helped us in the business. Right. So, Manu, just to get my understanding right, we were already onboarded with the companies with acquired other companies and rather than got acquired by other companies. And hence, the new target company, we were able to replicate the same thing.

54:09 Exactly. So on the larger front, would you say more of our customers have been acquirers in this consolidation phase, or now do we see our companies getting acquired and hence we have to get reevaluated by the acquirer? It is both. Right? A lot of... In in in many cases, our customers were acquirers, but there were one or two cases where our customers have also been acquired. But that also has so the acquiring company did not have a footprint in India. Okay. So that helped us because they looked at our operations, they looked at how we are delivering, and suddenly they realized that they are, you know, Tata Elxsi is a valuable partner which they want to engage with. Okay. So we are not being reevaluated in any... Largely any of these acquisition led revaluations that normally happen. Yeah. So that's news. All that has happened, we have... We were able to show a superior value, right, through our upselling.

55:11 Got it. Got it. One on the recent... All of these immigration changes that keep happening, right, you know, visa fees keep getting all the orders. When we quote us, keep getting all those. Do we have provisions in our contracts with our customers that if there's an unreasonable amount of change and act, you know, you have to bear or, like, who absorbs the hit on these externalities? And because... So just... If you could give me an understanding how that shapes up. No. The the usual visa fees that, you know, go up and so on. Right? Not just in The US, but in UK and Germany and many other places. Right? That, you know Right. That we have to absorb. Right? When I say absorb, of course, you know, there is a COLA increase that we negotiate year on year and so on. So in some way, we we do get to be... I mean, in in in in a few customers, we managed to get some amount of increase and so on.

56:11 It is not as if that, oh, okay, your visa fees has gone up by $2,000 So, hey, customer, customer will pay exactly that $2,000 to us, right? It's more than overall, it is bundled into our cost of operations and bundled into our rate, right, hourly rate. And that's how we manage it. But however, when you talk about H1B like 100,000 and so on, no customer is willing to pay that. So that is something we can't go back to customers. Right. So then we will have to increase our onshore mix as we go ahead, right? Yes. We get higher growth out of The U. S. Market. That is where we... If we don't have the results, we depend on third party contractors and so on. We have a we have a, you know you know, MOUs and partnerships with a set of companies. We depend on them to really help us in the short term.

57:05 And these U. S. Contracts that we currently have, I'm assuming the new contracts you will price in, say, a higher onshore mix, but the existing ones, don't think you can alter. Would they be largely long term contracts and hence, our profitability on these existing contracts reduced versus our estimate when we bid in? No. So just to clarify, existing contracts where you already have on-site people deployed, there is no change in cost. It is only where you are trying to win new contracts or you are winning new projects, which then demand new people to be sent for the transition phases. That is the only point where you would have all these questions raised. Rishi, therefore, I'm not very clear what the question is about, right? So basically, let's say, I'll just explain it quickly. We assume, let's say, 80% of our offshore mix, 20% will be onshore for a contract, for example.

58:01 Yep. But because of these visa issues, you are required to have more onshore employees, and the mix turns from eighty twenty to seventy five twenty five. Does that happen? No. No. So, Rishi, I think you're getting it wrong. First of we operate ninety-ten. We are the best offshoring metrics anywhere. Our intent is always to keep it there because that is the proposition. So for a given contract, ratios will not increase. It's not that customers are starting to prefer more On-site. Please understand. This is not a COVID reversal, where I think customers are not starting to prefer more On-site, nobody is. The need for On-site is demanded by the kind of deals that you're picking up, the complexity of what you're trying to take on, the transition time that it takes to capture knowledge, whether from customer itself or from somebody else, and the ability to architect and bring it back.

58:52 Just to be clear. Okay. Alright. Finally, just a quick one, utilization rate, if you could just spell it out for this quarter? It's around 75.4%. 75? Sorry, 74.7%. Yes, just getting to 35%. Okay. All right. Fine. Yes, that's it from my end. Thank you. Thank you, Harish. Thank you. Your next question comes from the line of Ranir Kumar Singh with Ranir HUS. Please go ahead. Hello. Yes, sir. Yes, sir. Please proceed.

59:39 Thanks for taking my question, sir. Almost So a small difference to what you are saying. Just Q2, we'll see a wage hike impact, but that will also be offset to a large extent because of some of the onetime or the higher cost that we saw in this quarter going away. So there's an offsetting element to a large part of that cost.

1:00:29 Now how much gets offset, where exactly we'll end up is a function of what exactly the wage hike numbers ends up being, how much sort of costs go away, our own revenue growth. So it will be a combination of few things. Thank you, sir. Thank you. You. Ladies and gentlemen, we will take this as a last question for today. I now hand the conference over to the management for closing comments. Yeah. Again, mister, thank you. Thank you for the time. It's interesting times, and I think at least from our major markets and major verticals that we have, I'm very happy that we have been able to show growth, a decent growth especially in the media and communication business.

1:01:21 And I mean, if you compare with competition and what we hear commentary from lot of our competition, I think our automotive or transportation business has also done reasonably well. So our focus is to really continue growth on both of these large verticals for us, at the same time focusing on our healthcare business to see how to get it back to a growth path, right? So that's the focus for us. And of course, improvement and seeing how we can digest the wage hike at the same time and also look at seeing how we can do all the one timers and still show a profitable quarter in Q2, right? So that's going to be the focus for us in Q2 and subsequent quarters Q3 and Q4.

1:02:12 So I think Q1 has gone reasonably well for us. Even if you look at comparatively Q1 of last financial year, I think we have done pretty well. And I hope that we'll be able to continue this you know, growth path in the subsequent quarters. So thank you, and look forward to talking to you again in in q two. Yeah. Bye bye. Thank you. On behalf of Tata Elxsi Limited, that concludes this conference. Thank you everyone for joining us and you may now disconnect your lines. Thank you.