Tata Elxsi Limited (500408) Earnings Call Transcript & Summary

And ladies and gentlemen, good day, and welcome to the Q4 FY '21 Investors' Conference Call for Tata Elxsi. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Lokesh Pareek from Christensen Investor Relations. Thank you, and over to you, sir.

Thank you, Lisen. Good afternoon, all the participants on this call. Before we proceed to the call, let me remind you that the discussion may contain forward-looking statements that may involve known or unknown risks, uncertainties and other factors. It must be viewed in conjunction with our business risk that could cause future results 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, MD and CEO; Mr. Muralidharan H. V., Chief Financial Officer; Mr. Nitin Pai, Chief Marketing and Chief Strategy 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. [Operator Instructions] I now hand over the call to Mr. Manoj Raghavan. Over to you, sir.

Thank you, Lokesh. Good afternoon, everyone. Thank you for joining the call today, and hope you and your families are safe. At the outset, I would like to thank the entire team, the employees at Tata Elxsi. It's been a great performance in an extraordinary year and the COVID posing huge challenges to maintaining our business continuity and customer-centricity while at the same time, ensuring the safety and well-being of our employees across the world. The entire team has demonstrated great commitment and passion to ensure that we stay focused on our customers' needs and focus on delivery excellence, customer delight and really look at opportunities for growth, right? Coming to the quarter, it was definitely a very satisfying quarter with continued growth across our offerings, industries and geographies and to wrap up a remarkable year for us, right? Of course, our revenues from operations for the quarter was INR 518.4 crores, translating to a growth of 8.7% quarter-on-quarter and about 18% year-on-year. And as you may have noticed, the growth is entirely -- almost entirely volume-led with a constant currency growth of 9.1%. Our PBT for the quarter was INR 161.7 crores, again registering a growth of 10.6% quarter-on-quarter and 47.2% year-on-year. Net profit stood at INR 115.2 crore, reporting a growth of 9.5% quarter-on-quarter and 40.3% year-on-year. So indeed, it was a very, very satisfying quarter with great top line and bottom line performance. The top line growth was driven by strong performance in both our key divisions. Embedded Product Design division is the largest division. It grew by 5% quarter-on-quarter and 15.5% year-on-year. And Industrial Design & Visualization, the IDV division, also had a very smart growth. They grew by 40.1% quarter-on-quarter and 39.2% year-on-year. Our design business continues to grow strongly with improved deal flows and deal sizes as well as cross-selling into our existing customers for upstream and design-led work. Our System Integration business also grew by 21.2% quarter-on-quarter in Q4. And all of you have been following our results for many years know that Q4 is typically a good quarter for our SI business as our customers spend their residual infrastructure budgets for the fiscal year and as it's also the year-end for them. The margins are significantly higher this time though due to a higher proportion of services involved in one of the large projects that we have -- that we bagged in the quarter and that we commissioned in the quarter, so -- and that's the reason for a pretty good performance in our SI business. And also, if you look at the SI business at the beginning of the year, because of COVID and so on, a lot of the deals were really put off and many of those deals tried to start in the last 2 quarters. That's also the reason why that business showed a good growth. Within EPD, again it was a broad-based growth across verticals. We've had growth in the Transportation business. Media and Communication business also grew. Transportation grew by about 3.2% quarter-on-quarter and Media and Communication grew 5.8% quarter-on-quarter and Healthcare continuing to accelerate faster than the rest at 11.8% quarter-on-quarter. So for the full year ending March 31, 2021, revenues from operations grew by 13.5 -- 13.4% year-on-year. Both EPD and IDV grew by 14.6% and 9.1% year-on-year, respectively. So all in all, in a very tough year, this is a very credible performance from the entire team. So from where we started in Q1 last year with so many uncertainties, I'm very pleased to end the year on a high note, delighted to exit FY '21 with an all-round growth in revenues, margins and customer additions, gives us great confidence going forward into a new fiscal year. And I'd like to thank our customers for their continued confidence in our differentiated capabilities in technology, design and digital. Finally, I would like to also thank all the shareholders, and I'm happy to announce that the Board has approved a final dividend of 240% for the year, along with a one-time special dividend again of 240%, translating to a total dividend of INR 48 per share. Of course, it is subject to approval of shareholders at the forthcoming AGM. So when you look at the overall situation in the country with COVID and so on, and what we have noticed is over the last close to 24 months, the number of retail shareholders or individual shareholders has increased significantly. So given the situation with COVID and the economy and so on, since we have done well, the Board decided to really give a good bonus for that -- all individual shareholders and all the investors in the company benefit from the returns that we get. So with that, I would like to hand over to the Q&A session. Thank you for your time.

[Operator Instructions] The first question is from the line of Ikshit Naredi from Naredi Investments.

Congratulations on the good set of numbers. I have a first question regarding the sensor technology. So as the sensor technology is increasing, so are we aggressive on this segment or this is not your cup of tea?

Sure. Sensors, when you say sensors are used in multiple places, including in IoT. So whether it is automotive, whether it is media and communication, whether it's health care, sensor technology plays a very important role. So a lot of the products that we work on have different type of sensors. So it's very much an integrated part of our service offerings that we have for the last more than 15, 20 years. So that's what we do. So yes, it's very important to us.

Okay. And my second question is in life sciences business, is the story long term? And how many months visibility you are having right now? Please share your views on that.

How many months -- sorry, could you repeat the question?

In life sciences business, is the story long term? And how many months visibility you are having right now?

Yes. So instead of calling it life sciences, we call it Healthcare & Medical business. That business, we have been investing over the last 5 years. And yes, indeed, it's a long-term story. And people who have been following our stock knows that we have been aggressively growing that part of the business. Even in this quarter, we have had a pretty good growth. And definitely, there's a good long-term visibility over multiple years. So we have no concerns there.

Okay. And my one last question is I heard about like the VR technology is like going very -- is a very large industry and growing very fast. So can you please tell something about it? Like are you working on this segment or something like that?

Yes. This is Nitin here. So if I can take that, yes, we do. And I think we have a play in 2, 3 directions. One, our System Integration business helps integrate and sell VR gear for corporates, where they're setting up large enterprise visualization setups and so on. And in fact, even in the last quarter, we have actually had some deals on that front. So that's one hand. On the development and design side, VR is becoming integrated part of how you sell and market new products and services, including automotive. So we are working in such areas where you use VR both for education, for training as well as in some cases for product development itself.

Okay. And do we see like a great margin in this segment?

The margins are not exceptional. And I think the business is just about ramping up. So we are, in that sense, I would call it, are still riding the high cycle. So we'll have to give it some time to really settle down into large-scale use cases, widespread usage.

The next question is from the line of Vimal Gohil from Union AMC.

So sir, I have two questions. One was, firstly, on the balance sheet. Just wanted a clarification on the INR 102 crore line item that is there. What would that be related to? It's in the other section -- other assets.

Just wait a minute. [indiscernible]

That is the fixed deposits having a maturity beyond 1-year period.

Got it, sir. Got it, got it, got it. Okay.

So it will be considered as cash, right? But it's just that these are fixed deposits having maturity of over 1 year, which is why they are not in the current cash balance.

Yes. These are all bank balances, but the NDS requires us to categorize it differently this year.

Fair enough. Sir, now on the margins, 30% EBIT margin is sort of unheard of in the Indian IT services industry. So how sustainable are these margins? And I also do note that there is a quite bit of offshoring pickup that has also happened. If you could just break us the margin improvement, what you've seen this year as into how much has come from offshoring and how much has come from utilization uptick? And is it possible that utilization levels are still sort of undershooting? And do you still have room for growth?

No. So there are many levers for margin improvement, right? One is, of course, increased offshoring. One is more long-term projects, more longer-term engagements and so on, of course, better realizations and so on, more complex projects, more realizations and so on. And definitely, this year has been very, very different because primarily because of COVID and a lot of expenses, including travel, even normal expenses, employee-related expenses, celebrations, none of that has actually happened. So it is a one-off part of a situation. So we don't want to leave an impression that these margins will -- [indiscernible] margins will continue. But as and when the economy recovers and as and when travel picks up, we will go back to our original margin profile that we have been talking about, right? Having said that, yes, we have been riding the wave. And if we can improve the margin, then of course, we will try to improve the margin, no issues there. But whether this will continue, I mean, there's no way that I can say that, "Hey, we will continue these high margins."

Right. Sir, what would be the reason behind -- coming to the gross margins, your gross margins have seen a sequential uptick of almost 260 basis points to 43%. I mean, clearly, it seems to me that employee productivity has improved quite sharply this quarter. Is there any IP-led revenues that have been included here? Or how should we read that?

Well, there is IP-led revenue also. But more important than that, there are certain new business models that we have gone into. And that it's really not linked to number of employees that we work on the projects and so on. So we have been very innovative in the way we handle our customers and so on. So there are certain things that we have done well and -- over the last 2, 3 quarters and that's actually resulted in improving our margins.

Sir, does that mean at least it's not EBIT margin but gross margin probably? That's all from my side.

We'll move on to the next question. That is from the line of Ashish Aggarwal from Principal India.

Just a couple of things from my side. On the industrial design business, last 2, 3 quarters have been very strong in this business. So how should we look at the growth in this business. Though the last 2, 3 quarters have been great, if we look at last 3 years, it has been -- the revenue has been flattish. So should we consider that this business can grow at the high double digits? Or how should we look at this business growth and the profitability in this business? And secondly, on the overall profitability, you said that once the travel returns -- the normalcy returns, we will go back to a better rate. So earlier, your preference was 22% to 24% PBT margins. Are we looking at those type of range once the normalcy returns?

Yes. So as I've been talking about our industrial design business, yes, we have been underperforming for the last many years, right? However, we did do a number of things, including training leadership and so on. So this is a business that is immensely scalable. And I strongly believe that design is a very, very key differentiator for us. So we have done certain things, including on the front-end sales, including in the back end, including in the type of deals that we go after and also how we integrate our EPD offerings as well as our design offerings together, right? So we have done a number of things while we were all stuck with COVID and so on. And there has been a lot of transformation initiatives in that particular division that we have embarked on. And I'm happy to say that whatever we've built over the last 4 quarters has really resulted in this sort of dramatic return of growth into that business. So even though we've grown very significantly, 30%, 40% growth and so on, but if you look at the year-on-year, we are still about 9%. We have grown at 9%. I think that is also because Q1, that particular business was deeply hit because of COVID and related things. Q1 -- Q1, and to an extent, even in Q2, we were sort of down. But however, there was a very, very smart recovery in Q3 and Q4. And that is how we were able to really show that 9% growth. So we are definitely bullish on that particular business. We would see definitely much more accelerated growth as compared to the previous year in the coming financial years. And that is a key differentiator for us and that will really drive our business. So that is what we are also pushing. And you talked about margins -- yes, [indiscernible]. Yes, whatever margin profile you've been talking about, over the long term, right? Now don't ask me what is long term in the current scenario, I don't know. But over the long term, definitely, that is what the margins that we continue to have that tradition. However, in the short term, because of all these savings that we have in other expenses and so on, margins will definitely be on the higher side. But it will taper off eventually as the economy recovers.

And lastly, just any issues on the supply side? That's it.

Yes. So supply side is getting into a little tight situation, to be frank, especially among the senior management or the senior leadership roles and so on because have been growing significantly over the last 3 quarters. Quarter-on-quarter, we have been growing and so on. So yes, we are stretched at this point in time and we are actively hiring. So that is why if you look at the numbers that we've added in this quarter, it will give you an idea of we're really going out and hiring people. So yes, we need to add a lot more people. And with the situation in the industry, everybody is hiring and salaries are shooting up. So we have all those issues. But we still hope to attract people because of the brand that we carry and the type of work that we do. And we are hopeful that we'll be able to address that situation.

And sir, the next salary hikes will be again in Q2 or...

Sorry?

The salary hikes, FY '22 will be a normal salary hike year [indiscernible] in Q2?

Yes, we will have the salary hike from July.

[Operator Instructions] The next question is from the line of Mayank Babla from Dalal & Broacha.

Congratulations on a great set of numbers. My first question pertains to the Transportation segment. Sir, as reported, we've seen that the performance has been a big rollercoaster over the last 2 years. So going ahead, what can be a sustainable sort of growth that is visible in this segment?

So this segment is most affected due to COVID and so on, right? Even if we look -- even now, if we look at the second wave coming in India, automotive companies are back to closing factories and so on. So it's very difficult for me to give any position on the sector even for short term or mid-term. However, over the long term, yes, whatever trends that they're talking about, whether it's electrification, whether it's autonomous, whether it's electric cars, all of those trends would continue. And there is no -- we don't have an issue on the long-term perspective. But short term to mid-term, definitely there will be some amount of stress, and we'll have to navigate it as it comes.

Sure. And sir, my second question is on the Healthcare & Medical Devices segment. Sir, could you throw some light as to what is driving this phenomenal growth, if some examples of some projects that we are executing that is differentiating us from the peers?

Yes. So we have been -- as I said, right, we have been investing in this business for more than 5 years now. We have a very, very clear-cut strategy, and we're executing on that strategy. We work on -- we're extremely good on product development on different medical equipment devices, diagnostic devices, point-of-care devices and a number of things that they're doing. We have very strong capabilities on the regulatory aspects. And that is one area where we have built our own frameworks, IPs that really helps us differentiate from any other service provider and really show tremendous value to the customer. So the only reason why customers would continue to give us work is, and at these rates, at the growth rates that we're showing, is are we adding value to them or not? Are we solving the importance of the customer problems that they have? If we are adding value, if we're solving the problems, the business will continue. So we have sort of focused on a few problems that the industry has, a few problems that the customer has and we are attacking that. We are building intellectual property. We are building frameworks. We're going with that. And we have a differentiated claim as compared to competition. So that's the reason why we're growing.

The next question is from the line of Hiren Ved from Alchemy Capital.

Congratulations for a very, very good set of numbers. I think this is top-notch execution and needs to be lauded. And it's pretty much the same question that I had last time also is that what are we doing to maintain or increase the pace of the opportunity set that we go after across the 3 verticals? We have -- obviously, we -- for whatever extraneous reasons, partly because of that and partly obviously because of the new way of doing business, our EBITDA margins are very, very healthy. And what are we doing to reinvest? So while I'm very happy with the EBITDA margins, I think I'm more interested in increasing the opportunity size for our company so that we can grow to a $1 billion revenue-sized company quickly. What are some of the steps that we are taking to reinvest some of that margins or even otherwise, to increase the opportunity size?

Yes. So if you look at it, there are 2 routes, right? One is, of course, the organic and one is the inorganic route, right? From an organic side perspective, we have been investing a significant portion in our front-end sales and consultants and industry experts, and that process continues. We have not stopped that investment. They're continuing. And that is the way we are opening up new accounts, new logos. And also, within our existing large accounts, we have been mining them well. If you look at our top 5 -- top 3, top 5, top 10 accounts, you'll see that they've all been growing, right? And that is because of all the investments that we have been making in mining those accounts and moving them forward, right? At the same time, there are a number of initiatives that we have also started, and we talked about adjacencies. We talked about growth initiatives. So we are investing in all of those areas, whether it is health care, digital health, whether it is on the rail segment, whether it is on the OTT space, the product development that we're going on. So all of those investments are ongoing at this point in time. And the hope is all of these investments over the next 6 to 18 months will give us force multipliers, will give us those weapons to go after and increase our business. So that is one part of it. Of course, the second part is the inorganic route. We have already identified areas that we need to strengthen and -- we are targeting companies. We are in discussion with different companies. But the only thing is that good companies, valuations are very expensive even at this point in time. And those that we believe can really add value to us comes at a premium. So that's sort of an evaluation happening at this point in time as to how the economy can help us. And hopefully, when things pacify, you'll hear from us then.

Sure. Just one more question from my side. While traditionally, we have been working with the top automotive companies who are trying to kind of move into more connected cars, autonomous cars, et cetera, and build those technologies and their platforms, are we also -- I mean -- and I think last quarter and, I think, even this quarter, you mentioned that you acquired one North American EV player. How serious is the opportunity amongst these new-age EV players? Or do they have a concept of Tier 1s like you have in a typical automotive environment? And do you see a large opportunity to work with some of those players as well?

Yes, I'll have Nitin answer that.

Yes. So the answer to that is yes and a no in the sense that new-age OEMs, on one hand, represent the ability to work ground-up, to participate in absolutely cutting-edge ways of doing things because they tend to innovate. On the other hand, they also represent risk simply because they are as good as their funding in some time -- in many cases, right? And therefore, they have, in some cases, fairly bright but short lives, if I may put that way, in terms of funding, in terms of R&D budgets, how they want to get things done and so on. So I think at this time, we are taking a very judicious call on who do we want to work with, one, and how much of effort and time we want to invest with those as against the traditional OEMs who have to pivot to the new tool, right? So I think at this time, I think we are just taking a balanced view.

Got it. And thank you for the special dividend. I hope it is not a one-time dividend. You continue to give that, unless obviously we go ahead and make an acquisition. But congratulations to the team again. I think this is fantastic work. And all I can say is I'm a happy shareholder.

Thank you so much, Hiren.

The next question is from the line of Bharat Sheth from Quest Investments.

And really, both of you, I mean, [indiscernible] apart from the whole company teamwork. So I mean, Manoj, you have given a very good color that how we are moving from, say, onshore to offshoring [indiscernible] the long-term vis-a-vis short-term duration contract. So how really -- what kind of opportunities still we have in each of the -- now and all these 4 verticals, I would say, 3 in services and apart from that, industrial designing, all are now showing a good growth action. So how really we look at, I mean, sustainability, whether it's offshoring? Because despite offshoring, I mean, we have grown, I mean, substantially on -- in value terms.

Sure. So sitting out here, I'm pretty confident of the short- to mid-term prospects of the company. Long term, you never know. Hopefully, long term also, we should not have any issues, right? So all our segments are firing very well. Yes, Transportation is a little bit slow. But I'm sure that the situation in the economy and the COVID and all this will improve, I am pretty confident that, that segment will also pick up rapidly, right? So the good thing is we have invested appropriately in various new initiatives, in adjacencies. So that even during COVID, even given other companies and other industries and even customers are struggling, we were able to figure out areas of growth, areas of opportunities and really ensure that the company grows, we don't stagnate. And as a result, we reward our investors and our employees also accordingly.

Okay. So this -- I mean, I believe margin is short of -- I mean, not as -- in long term may come down a little, but not -- earlier because of more offshoring complex deal, so higher realization and all these things and plus industrial design also started, I mean, contributing. So that is one thing. And second thing, earlier, we had, I mean, of course, ambition of growing, I mean, say 8% to 9% or 10% Q-o-Q. So in that journey, where do we really see and how is the deal win that we have currently and deal pipeline also?

Yes. The last quarter was very good. I think consequently, even during the peak of COVID, I think the last 3 quarters, we have definitely closed a lot more than in the previous years and so on, right? And it is only possible, this growth, 8% or 9% quarter-on-quarter growth that you see is only possible if you close those large deals and if we are able to ramp up and execute and deliver, right? So that discipline has been there. Teams have been extremely disciplined. We have kept our customers happy, and we have really delivered value. When, in fact, our customers were unable to work and they were having furloughs and they were closed, it was our engineers who really helped them, supported them and helped keep their business running. So to that extent, I think we have done an extremely good job. Many of our engineers have put in many hours per day, right, many hours per week on solving customer issues and problems and so on. A lot of appreciation from customers for the efforts that we have put in. And I think all of this will really hold us in good stead, right? Especially when things return to normal and so on, most of the customers will hopefully realize the value that we have delivered to them and continue the business with us.

Coming to your aspiration of 85% kind of a Q-o-Q growth -- just a last question, sorry.

[Operator Instructions] The next question is from the line of Dipesh Mehta from Emkay Global.

I have a couple of questions, I think, partly addressed. But considering our focus on 3 verticals over medium term, if you can help us subsegment or subvertical where we are investing to fuel our growth over medium term, so if you can provide some perspective, Transportation, Communication, Healthcare, which are the subverticals which we have identified to drive future revenue growth? And second question is can you say the utilization, where we are in Q4?

This is Nitin here. Maybe I'll take that. In some sense, the subsegments are reasonably clear, right? Because if you look at automotive, it really calls out into connected, autonomous, shared and mobility. Shared is, in some sense, a secondary derivative of connected and autonomous and electric. So to that extent, we are -- we clearly are investing in all 3. We're growing capabilities and capacities in all 3, right? And I think all of them are trending towards digital technology. So it's not just about what is in the car, but what's also in the cloud and how do you optimize and manage and run both the cloud and the in-vehicle piece better. As far as Media and Communications is concerned, I think we are very clear. On one hand, you have the device companies, whether it is boxes, network equipment and so on, that's traditional. You have the operators who form the second wave. When they started to take control of software, then they wanted to innovate faster and not be tied down to black boxes supplied by the device companies. And I think the third layer that is coming in now is the new media companies, who don't necessarily need any infrastructure or CapEx to run services. They're asset-light, in some sense, though content, et cetera, can be quite asset-heavy. But these are broadcasters, media studios, content owners, aggregators who can now deliver services directly. So these are the key segments in the Media and Communication side. In Healthcare, we started in medical devices, right? But we have now expanded to pharma and to digital health. So in that sense, these are new subsegments that we are both investing in and building on. In addition to all of this, I think rail and off-road vehicles, though you can call them -- you can call off-road, automotive, but it's really not automotive. It uses the same skill technologies but in a different way. So off-road and the rail for us are, in some sense, B2B or B2G kind of businesses, which are not directly dependent on consumer sentiment. So broadly, I would call this out as the entire segmentation. On the utilization rate, it has improved further. So we are, I think, at about 97% now for the quarter. We still have ways to go. So like, I think, Manoj said, I'm just making this point for everybody, there are levers. There is still room in the levers. Unwinding of these levers will take time. So it's not that there's going to be a sudden change or drop in margins and so on. But having said that, yes, [ 97% ] is where we are on utilization.

Sure. And last related question, do we say -- let's say, breakup, you said auto, wheels, mobility, connected vehicle, electrification. Do we say size and scale of, let's say, subsegment in some way?

No. At this time, we don't because we believe that...

[indiscernible]

Exactly. It's already complex, right? So it's not that you do only autonomous or either no connected and autonomous or there is no digital and electric. So it's, I think, sometimes impractical to try and [indiscernible]

The next question is from the line of Madhu Babu from Canara HSBC.

Sir, earlier, you used to have some volatility in revenues, I think. But over the last few quarters, it has stabilized and we are doing very well. But going into next year, do you see any softness in 1Q or in any volatility on the revenue trajectory or we are confident, considering the deal pipeline?

The deal pipeline is good. So I don't see such issues happening at this point in time. But all said and done, our business depends on our customers' budgets. And so can I say that there will not be any further -- any customer dropping their budget and so on? At this point in time, we can't make that assumption. So what I can tell you is, even if one or a couple of customers pull plug or they have some budget issues, Tata Elxsi is resilient enough to overcome that. And we have proved that, we have shown it multiple times, we will be able to recover and grow. So our basket of customers has improved. The size and scope of business that we deliver to customers have also increased. So we are fairly confident and believe that we have a resilient business model.

And just one more, sir. Of the 7,300 employees, how many are in the on-site in Europe and U.S.? Can you give the exact number?

On-site is a smaller number. Exact number, I think we should be around 700 or so. I don't have the exact number, but ballpark, it is around 700, 710 or so.

Okay. 10% of your headcount.

The next question is from the line of [ Hosen ], an individual investor.

First of all, sir, congratulations for the good set of numbers. Sir, my question is where do we see ourselves in the medical space due to the uncertainty in COVID-19 scenario right now?

I think medical business continue to grow for us. I don't think, because of COVID, we have had any issue in our medical -- in Healthcare & Medical Devices space. So that business continues to accelerate. So as long as there are no massive lockdowns -- and the only problem that will happen is if how medical companies, they make money, through the elective surgeries. So when elective surgeries come down, the medical companies don't make money. So as long as, for example, in abroad, in U.S. and Europe and so on, things are returning back to normal -- of course, in some countries, they still have COVID-related issues. But world over, like most countries are coming back. And vaccination, many countries have vaccinated more than 50% of their population and so on. So things are returning back to normal. So elective surgeries are happening, medical companies that are making money. So that business will continue.

Okay, sir. And second question is regarding the shortage of semiconductors, which has accelerated a lot. So do we see any kind of opportunity in this segment?

We don't see an opportunity in semiconductor shortage, right? So we don't make chips or we don't -- so it's not an opportunity. It's sometimes a risk in some of the key markets, like automotive market, there's a shortage, then carmakers are not able to sell their cars. And as a result of which, they decide to cut their budget and so on and so forth. So however, that's a very small risk. So we don't see semiconductor shortage as either an opportunity or a risk for us at this point.

The next question is from the line of Rohan Doshi from Finvest Advisor.

I have two questions. My one question is this pertain to shortage of chips only. Will it affect only the automotive industry or it can affect even the medical devices or even the communication devices, et cetera? So what is your take? Like any of your clients have suffered problems because of the shortage of chips. That in today's [indiscernible], the JLR production may be affected because of the chip shortage.

Sure. So as far as we see automotive companies being affected, but it has not affected any of our business so far. We don't see an effect of it on communications or on the health care or medical devices so far. We have not heard anything from our customers.

Okay. But do you think it can affect us in future?

Yes. So maybe I'll answer that, right? So the semiconductor shortage is fundamentally a disruption of the supply chain, right, by some extraordinary events, fire in a factory in Taiwan or -- sorry, floods in Taiwan -- no, water shortage in Taiwan, fire in some factory somewhere else also. If you think about it, these are one-time disruptions, extraordinary events. The industry is reworking the supply chain and already investing in additional capacity in plants. So yes, for the next 6 months, 9 months, you will find disruptions. The disruptions will be in certain segments, certain types of chips and so on. So my view, I think the industry, in that sense, is quite resilient to work around and will not be a quarter or 2 quarters. But I think the impact also is not going to be so bad for a quarter or 2 quarters.

Okay. So we are not getting affected?

No.

Yes. Okay. Now my second question is in the earlier con call, you said that because government has not announced this export incentive rates, you have not accrued any income. So what is your position as of now?

Same position, we have not taken any -- the government even now has not announced anything.

We move on to the next question. That is from the line of Apurva Prasad from HDFC Securities.

I have two. Congratulations on the numbers. So Manoj, looking at the acceleration in top 2 to 10, can you say that is the visibility also higher as the pipeline driver appears to be more from larger accounts? And related to that, based on your comments on addition of customers and large deals across the industry segments, is the trajectory of 5%-plus Q-on-Q sustainable?

Yes, definitely visibility in the top 5, top 10 customers is pretty good for us. The order book and the deal pipeline is good. And I think we have spent a lot of bandwidth in mining these accounts. And I think we are in a good position, especially the top 10 customers. At the same time, as we've announced, we've also won some new deals. And these are all again good logos that will eventually help us over the 6 months, 12 months to really ramp up our business. So yes, so we are in a good position. And unless something happens in the industry or any particular customer decides to pull the plug in any which way, right, we should be able to show healthy growth.

Right. That sounds good. And on the margins, while you spoke about this earlier, but this is more from a near-term perspective, do you see near-term headwinds to the margins, so be it offshore coming down from the current levels or the supply side impacting your attrition levels? And also, if you can talk about the hiring plans for FY '22.

Yes. So I think margins, we are pretty comfortable. And as I said, right, in the near term, yes. Only a few -- not issue -- the only thing is that we will have a salary hike again. And it's just not the salary hike, we've also -- because our employees have really put in all the hard work and supported our customers and the remote working has taken a toll and so on, so we've also rewarded our employees with -- apart from the normal salary hike, we are also giving them a 1-month bonus. So that will also be -- we will roll it out. So there will be an impact of both salary hikes and bonuses. And to that extent, our margins may dip a little bit. But I think over the next 4 quarters, we hopefully will be around the same margins as in the last fiscal year.

All right. Just to clarify, you mentioned 1-month bonus, which will be given out in the first quarter and the wage hike, that happens in the second quarter?

Yes. So we will not give the entire thing in the first quarter. We'll divide it during the first and the third quarter.

The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.

Very strong performance, both from a revenue perspective as well as the operational perspective. I think just one main question. So you've been highlighting our approach to increase our projects growth. From a project base, you're more annuity-based kind of a structure, which will give you more visibility and margin leaders. So if you can give some perspective on how your average deal duration for the new deal wins that has happened in, say, in this year. How has that been? Are these all multiyear deals that we have won in F '21? And that is the first part of the question. And secondly, given that we make this high gross margins, are these being priced more aggressively by sharing some of these efficiency gains per se? If you can give some perspective on that as well.

Yes. I would say at least the large deals that they've been closing are definitely multiyear deals, right? We have closed 3-year deals, 5-year deals and so on. So definitely, that is that part of it. At the same time, it's not at all the deals that we have are these multiyear deals. We also have 6 months, 12 months deals and so on. So again, it depends on customers and the area of [indiscernible]. But what I would definitely want to state here is the number of large deals that we're facing is definitely much higher than the previous year and so on. So to that extent, yes, that is [indiscernible] the large multiyear deals. Pricing-wise, I think pricing is a function of the area that you're operating in, the value that you bring in, the type of deals that are there, for example, digital or AI-based or we talked about virtual reality and all the new skills. So depending on the area that we operate in and the capability that we bring in, whether we have intellectual property, whether we have accelerators that we bring in, so the pricing is not a straight fit, right? It's not like an IT company, where we just price based on so many dollars per hour, right, based on [indiscernible] results that we bring in. So that -- we try and avoid such a pricing scenario. We bundle value and price according to customers according to the value that we deliver. But yes, it is not a straightforward answer, but yes, that's how it is.

Sure, sir. That's very helpful. And when you spoke about the inorganic way of growing, you spoke about specific capabilities that we may want to address. Are there are some white spaces that we want to -- that we want that -- that we'd like to strengthen ourselves from a capability perspective? Is it more in the media OTT segment? Is it more on the medical equipment side or on the automotive ADAS side? If you can just throw some perspective on what are some of your top 3 focus areas when we look for acquisitions. And what is the kind of deal sizes you look at?

Yes. At this point of time, we don't want to talk about all these white spaces. This is something that we are working on, right, and it's confidential to the organization. I'm sure you can guess what areas that -- we have actually talked about some of those areas in the past also, right, regarding adjacencies and so on. Those are areas that we're really focusing on in terms of looking at inorganic. However, at the right time, we will update you, I think, when we see some traction there and some -- when we take on this, then we'll let you know.

The next question is from the line of [ Harish Kawalgar ], an individual investor.

And my very much heartfelt congratulations to you in navigating this COVID-19 situation and delivering outstanding results. I have two questions, sir. And first one is regarding the special dividend. I think you have ROCE of around 35% to 40%. And return on retained earnings, that is RORE, of around 15%. And you have raised around INR 1,200 crores. And you declared INR 149 crores, around 10% of reserve, right? So I think if you have that money, then it has a chance to grow at more percentage points than giving it to a retail investor. I'm a retail investor, I don't have any issues with that. So that might be my personal opinion. But if the amount remains in the company, it will help to grow the company in the future. So what is your take on that, sir?

Yes. So as I said, right, it has been a tough year for many people, right? And there are many people, and as a group, as a part of group, we felt that we have to really give back to the society, especially in a tough year. And that is the reason why the Board decided to give a special dividend because people are struggling, people are suffering, it will help them. And so that is only logic that we decided that, "Okay, this year, let us be liberal with returning the money to the stakeholders," and that's why we took the decision.

Okay, sir. And my second question regarding the Transportation vertical, other than COVID situation, can you identify any risk over there in Transportation, why it is not growing, other than COVID situation?

Yes. So this is Nitin here. I think we've talked about this in the past. The point is that the industry has also been undergoing some structural changes because of the fact that EVs mean that you not need the kind of structures and people and skills that you had in traditional OEMs. The manufacturing methods are different. The decisions on what you need to own versus what you could afford to get supplied by third-party suppliers is also changing. Software is becoming very, very important. So earlier OEMs just did not have to worry about software. It came in a box, you gave it, sold it and you didn't had to worry about it. Now software has to change over the years, you get your [indiscernible] system gets updated, your [indiscernible] get updated inside the car. So I think there are structural changes that go beyond COVID, right? COVID only worsened the situation while making it even more difficult to spare R&D budget on all these things that you need to do, right? So we believe in some sense, technology will continue to accelerate in the automotive space. Electronics and software and digital is what will drive the industry. And I think our capabilities are very aligned to those areas. So that is where, I think, we are quite confident in the long term. But in the short term, yes, we'll have to deal with this dual problem of structural changes and COVID and revenue and stagnation in the industry in terms of sales.

We'll move on to the next question. That is from the line of [ Raj Rishi ], a private investor.

I would like to know what's your plan for the education sector. Are you making a foray in the education sector also?

Yes. So we have definitely worked with 2 large players in this segment. Our design team, the Industrial Design & Visualization team, does a lot of work in the education sector, especially around the graphics, using various tools like AR, VR and all of that, right, how to make it interesting for kids and so on. So we have a very serious play in that sector.

So can that become another pillar, like your automotive, broadcasting or your -- the medical devices and adjacency?

I'm not sure whether it can be a pillar as such. But definitely, it can be a good subsegment within the industrial design business.

Okay. It will be part of the industrial design business?

Yes. Of course, the software piece is also there. So we cross-leverage capabilities from other teams, like the Media and Communications and so on. But it's driven by the design business.

Okay. Like given my understanding of the areas which you're trying to address, the scale of the opportunity seems to be such that the present turnover of, say, Tata Elxsi, the revenues, which you're generating around not even INR 2,000 crores, like many times that is possible. I'm sure like, given the optimism that you have, generally when I've heard you, you have some internal assessment as to where you can reach in 3 to 5 years. Can that be a multibillion-dollar possibility, Mr. Manoj?

That is a huge opportunity, no doubt, right? We are in the midst of a huge market, which is growing and exploding. Technology use is really, really exploding. Yes, I wish I can say yes that there's a multibillion-dollar opportunity, and we will be there. Yes, definitely, we have our own plans and these are significant, large, what we call, very large [indiscernible] goal that we have. Yes, it is a large goal that we're taking in the next 3 to 5 years and we're working on it. But it can be a large opportunity, no doubt about it.

[Operator Instructions] The next question is from the line of Ravi Naredi from Naredi Investments.

Really, it is a very fantastic result. I'm shareholder since a very long year. And it is a surprise to know if you have given a fantastic return. And sir, if this 3D printing is going well, are we planning anything big in this segment?

This is Nitin here. There is no direct -- there's no direct plan for us in the 3D printing segment. Why? Because technology is fairly stable there. It is just that 3D printing kicked off big time after the patents expired there, headed by 1 or 2 companies, and therefore, it is not available for the rest of the market. Once the patents opened up after 20 years of closed kingdom, that is where 3D printing has taken off globally because economies of scale have kicked in. Everybody can produce at actual cost rather than what came with royalties and so on. So in that sense, I think it's a transformative opportunity for certain sectors, like very complex engineering, footwear, personal goods and so on. So design will benefit greatly. From a software development, et cetera, I don't think there is too much to count on. By the way, our System Integration business does sell and service and support 3D printing technology for very specific sectors. So they are starting to see some business, too.

The next question is from the line of Nitin Shakdher from Green Capital Single Family Office.

Congratulations on the efficient execution of your [ annual ] plans. My question is more specific to looking at the geography of Japan and looking at the business update on the health and life sciences segments there. Can the management give a small business update on that segment and geography, both in terms of outsourcing and design development? Also, we understand Japanese people to be more using their workforce rather than outsourcing, so a bit of comment on that as well as any opportunities which have come directly into the company in the upcoming Olympics or companies that you would be working with or customers that would be working with?

Yes. So Tata Elxsi has been working with Japanese companies for the last 25 years, right? Since 1996, we have been operating in Japan. And we have a pretty strong and stable customer base there. Yes, you rightly said, Japanese companies typically -- there are issues, there are cultural issues, there are language issues. They typically tend to work with their own subsidiary companies and so on. And outsourcing is not an easy addition for many Japanese companies. Having said that, I think from Tata Elxsi's perspective, yes, what's the percentage here?

Yes, that's about 8% to 10%.

About 8% to 9% of our revenues come from Japan, right? And it's been relatively stable. It's been growing but not at a very accelerated growth rate. And a lot of our business there comes from automotive companies right now because, as you know, Japan, they are leading both the OEMs and the Tier 1s there. And in general, automotive industry is also -- because of all these issues, outsourcing is not growing that rapidly, right? Having said that, yes, they have been winning projects. And especially for Japanese companies, when they win projects overseas, whether in Europe or U.S., it's very difficult for them to manage those projects because of the language and so on. So that is when companies like us, they tie up with us and then we support them in their customer communication and really understanding what the end customer needs and how to deliver that value to them, right? So yes, Japan is an important market, a good, steady market and we get good projects from there. We get good technology-related projects. And these are typically long-term customers also, right? Regarding the Healthcare & Medical Devices business, yes, and as we have already stated in the press release and so on, it's been growing pretty well. It's, in fact, the fastest-growing business for us. I think year-on-year, we grew upwards of 50% in that business. And we see a lot of headwinds there, mainly in U.S. and Europe. We are expanding that to other areas, including India and Japan, but it will take some more time. And however, that business has been growing pretty well for us, and we hope to continue that growth in the near term to mid-term.

The next question is from the line of Naveen Bothra, an individual investor.

Congratulations for industry-leading excellent performance for the continuous third quarter in a row. Even if I leave out the [ first quarter ], I think, the last 5, 6 quarters, we are performing excellently. So congratulations to all management team and the team at Tata Elxsi. First of all, I would like to appreciate, you have already -- I appreciate everything around the capital allocation, almost delivered on that promise than earlier in the last 2, 3 calls. So we appreciate that very much. All the free cash flow generated this year has almost been distributed. So congratulations for that one. I appreciate it. My one question is regarding the hiring plan targets. What are our hiring plan targets in view of the large multiyear deals. We have 1 in all the 3 verticals. So in this year, we have hired around 11% to 12% [indiscernible]. So going ahead, this year's target, if you can throw some more light on this one, it will be helpful, sir. For Manoj, sir.

Yes, definitely. So thank you, Naveen. So yes, we have been growing pretty well. And so our utilization is also going up. So definitely, as you have seen in the last quarter also, we have hired a number of people. And our plan is twofold, right? One is we would be hiring people from colleges, fresh grads and so on. Approximately maybe 700-or-so engineers, we'll be hiring from colleges. And on top of it, yes, we will have an accelerated hiring from lateral schools because of the opportunities and the projects that we have bagged and we really need to execute. So we will be hiring maybe an equal number or even slightly more, depending on how the big pipeline and the closures happen in [indiscernible]. So hiring will definitely be accelerated this year to meet the requirements also of [indiscernible].

So if I can understand right, it will be 700-plus, 700 lateral hirings?

At a minimum.

At a minimum. Okay. So second question is just regarding pharma business [indiscernible], sir. What do you mean by pharma in the health and medical device space, we have entered into pharma space? So what you do mean by pharma? Are we hiring scientists and all these things in this vertical?

No. So maybe I'll take that question. So in pharma, we see 3 different types of pieces. Two of them are skills that we carry on from the medical device space. Because a lot of pharma companies also provide for drug delivery devices, whether their -- their drugs are delivered through insulin pens, through single-dose pens, through very specific kind of delivery devices, so there is work to do. Just like we do with medical devices, there's work to do with pharma on drug delivery. Two, there is work to be done on packaging, labeling, regulatory and related work, which has similar skills as what we do in medical devices. So of course, we need to bring in domain experience, core teams and so on but lower-level skills are the same. What is the only thing that is absolutely different would be in drug discovery and so on, which at this time, we are not focusing on. So we're really trying to build on, adjacent skill sets but applying to the pharma industry.

The next question is from the line of Ankit Shah from White Equity.

Can you share your thoughts on, on-site, offshore mix, let's say, for next 2, 3 quarters? And what could be a sustainable mix over the medium term?

I think on-site, offshore mix over the next 3 quarters will continue to hover around the same, right? Because most countries have already started stopping [indiscernible] from traveling. There's no flights now and so on. So at least 1, 2 quarters, I don't think situation will improve. And also, customers have got used to this offshoring and working -- delivering value from offshore. So I think we may never go back to those early days -- earlier days that 50% used to be on-site and 50% needs to be offshore. So even after 3, 4 quarters, maybe we should be in the same, maybe 35 -- 30-70 or 35-65, that range.

The next question is from the line of [ Rugresh Kalyani ], an individual investor.

Actually, what I want to ask is when we're using this work from home, but I got to know that we expanded our office premises. What is the reason behind that?

We've extended -- expanded our office spaces? Okay, I'm not sure, okay, what you're picking up on, but we have definitely looked at expanding capacity, especially in the SEZs and so on. That is more to take benefit from what we do as overseas work. But otherwise, we have been careful about expanding office space.

Okay. And one more thing is can you give me a broad-based growth guidance for at least for next 3 to 5 years?

We don't do that as a rule. So I don't think we'll change that for the next 3 to 5 years.

I think our growth, you can look at our growth trajectory, and I'm sure you'll be able to posit your thoughts.

The next question is from the line of Nemish Shah from Emkay Investment Managers.

Congratulations for a great set of numbers. Most of my questions have been answered. Just one data point, what will be our effective tax rate going forward?

Tax rate, I think we should be about 26 -- 25%, 26% in that range, right? So what we are doing is also we are -- in this year, we will expand our SEZ capacity also. So we will have a lot more of our business coming on SEZ. So they will be tax-free. So we will have an opportunity to reduce the tax rate.

The next question is from the line of Sanjaya Satapathy from Ampersand Capital.

A fantastic set of results. And in fact, I can see that most of the people have not been able to digest the pace of growth that you have shown in the last couple of quarters. And you, yourself, are appearing to be a bit shy of accepting that tremendous achievement. Because 8%, 9% quarter-on-quarter growth seems to be too strong -- or too good to be true. So the way I just want to frame my question is that, of course, there has been tremendous amount of operating benefit to which has happened. But on, let's say, the kind of domain that you're addressing, is it suffice to say that you are, unlike typical IT companies, who are in that 8%, 10% kind of growth industry, you are in 20%, 30% kind of growth industry? That is what if you can just make us understand.

Yes. So maybe I can take that. The answer is not a single dimension of saying are we in area of service, which is growing at 30% vis-a-vis, are IT companies in the area of service, which is growing at 10%. I think the answer will be multidimensional. One part of the dimension is industries that we operate in and their growth rate. Two is the areas that we operate in terms of what are we doing in terms of technologies and so on and what is that adoption going to be. For example, autonomous or electric or connected car may be growing at completely different rates than the automotive industry sale, which technically at this time is stagnant, right? The third dimension, I think, also comes from within engineering, what do we do? So we traditionally have been always focused on electronic software and digital. I think that, by itself, has higher growth and adoption and spend in related budgets of customers than in all other areas. So I think if you think about it, you should actually multiply all these factors and not look at it purely as one single dimension of are we in a growth industry at all. So that would be my position.

Yes. I really appreciate this kind of a bit of a subjective understanding. But since we don't have the data, can we really summarize it by saying that you are essentially catering to a much higher growth industry than the plain vanilla IT services...

Absolutely. That can be a straight assumption you can make.

The next question is from the line of [ Arjun ], an individual investor.

My first question is can I know a bit more about the multimillion connected car opportunity that you have declared in your results? What is the nature of the opportunity?

Yes. So I presume you're referring to the deal announcement that we made. So yes, right. So if you look at it, we have built an in-house platform for IoT that is tuned to deliver connected car services for customers. And this is predominantly meant for OEMs, who want to deploy their own platforms, want control over software and so on. It works on the cloud, but it is fundamentally delivering software ownership to OEMs. So Tata Motors, by the way, was our first customer that we went public with last year. So we've now won another OEM, who is global and their [indiscernible] for a specific market. That will be the first market that we launch in. And it's a multiyear program, obviously, because we'll have to work with them, not just by licensing the platform but also helping them integrate it, implement it and run it. So we believe that the, one, the deal itself is multiyear and multimillion, but we're also hoping that there's an upside of being able to address other regions by demonstrating the capability and the power of the platform that we're deploying.

Okay. My second and last question is our industry is fully in a disruption. So which disruption worries you the most?

[indiscernible] the disruptions, so disruptions doesn't worry us at all. We have seen so many disruptions in our career, and disruptions are always [indiscernible] for us. So it's good, let it come on.

The next question is from the line of Manish Bhandari from Vallum Capital.

I have two questions. My first question is regarding the deal announcement, what you have done and one of the deal announcement is about the cybersecurity services. I just wanted to know, is this a new very strategic area for us, something similar to what it was we had here for some time back?

Yes. So maybe, I'll take this again. For us, cybersecurity is more of a horizontal. So while health care technically is an industry vertical, we see cybersecurity as becoming an important topic for all our customers across industries. Now we have to note that we are not dealing with enterprise security. So we are not here to be a McAfee or equivalent. We are looking at the context of what the cybersecurity means for the kind of devices we work on. So what does it mean for gateways? What does it mean for cars? Where are the ways to enter these devices? How do you protect them? What do you need to do from system software, both in the device and in the cloud. So I think we are coming from our domain and our deep understanding of these devices and these industries and then trying to address the cybersecurity issue. So I hope that clarifies.

Is that a consulting assignment of individual clients?

No. So it tends to be both. So that is amount of consulting and, let's say -- like you would have with a design project, you will have to think of cybersecurity in the design stage itself. So it becomes just another dimension of what you need to design and develop for. And then there are also services where once products are deployed that you continue to monitor and make sure that there are no further risks occurring.

Sure. And my last question is regarding the exchange gains. Do you have anything in the -- this quarter to report, gains or losses?

Muralidharan, are you there? Can you handle that?

Yes, Manoj. I am there on the call. Let me handle are. Yes, we do have a loss from the exchange gain in this quarter.

Loss from exchange [indiscernible]? How much is the loss from exchange currency fluctuation?

Yes. It's the currency fluctuation because we had some forward coverage booked in advance. So that and the currency movement went in the other way. And so -- and the collections did not materialize as we thought. And so we had a loss there.

How much? Can you quantify the number?

It's INR 4 crores.

It is disclosed in the results in the page, it is INR 4 crores.

Ladies and gentlemen, that was the last question. I now hand the conference over to the management for their closing comments.

Thank you, everybody, for the call, and look forward to see you again in the next quarter.

Thank you. Ladies and gentlemen, on behalf of Tata Elxsi, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.