Tata Elxsi Limited (500408) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to Tata Elxsi Limited Q3 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Diwakar Pingle from Christensen Advisory. Thank you and over to you, Mr. Pingle.

Thank you very much, Meerav. Good afternoon to all the participants on the call this morning if you're logging in from the West. 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 businesses that could cause further 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, Managing Director and CEO; Nitin Pai, Chief Marketing and Chief Strategy Officer; Gaurav Bajaj, Chief Financial Officer; and G Vaidyanathan, Chief Investor Relations Officer. We will start the call with a brief overview of the past quarter by Mr. Raghavan followed by Q&A session. We would appreciate your cooperation in restricting yourself to 2 questions to allow participants an opportunity to interact. If you do have any further questions, you may join the queue and we'll be happy to respond to them if time permits. Having said that, I'd like to hand over the call to Mr. Manoj Raghavan. Over to you, Manoj.

Thank you, Diwakar. Good afternoon, everyone. Thank you for joining us today for the Q3 earnings call. At the outset, let me wish you and your families a safe, healthy and a very Happy New Year to you. I'm pleased to report that we have delivered another quarter of consistent strong growth. Our revenues from operations in the quarter gone by was INR 635.4 crores registering a growth of 6.7% quarter-on-quarter and 33.2% year-on-year. The growth was almost entirely volume led reflecting in constant currency revenue growth of 6.5% quarter-on-quarter and 32.7% year-on-year. On the bottom line, we have delivered another quarter of industry-leading performance. Our PBT grew by 17.1% Q-on-Q and 36.9% year-on-year to INR 200.3 crores. And company's net profit for the quarter stood at INR 151 crores, reporting a growth of 20.4% quarter-on-quarter and 43.5% year-on-year. We have crossed the INR 200 crore PBT and INR 150 crore PAT milestones for the first time in our industry. The company's growth continues to be powered by our largest division, which is Embedded Product Design division, EPD. EPD grew by 9.6% quarter-on-quarter and 35.4% year-on-year in constant currency terms. And if you note, I think this is the second quarter that we are showing almost a 10% quarter-on-quarter growth for EPD. Within EPD, the growth was broad-based across verticals. The transportation business posted a third quarter strong growth of 9.7% quarter-on-quarter and 30.9% year-on-year. Media and communication delivered another quarter of consistent growth with 6.5% quarter-on-quarter and 31.1% year-on-year growth, respectively. Healthcare continues to be the -- to grow faster than the rest and posted a growth of 22% quarter-on-quarter and 73.4% year-on-year. As you would have seen in our fact sheet, we continue to add new marquee logos to our customer base and win new strategic deals across key growth areas in all these 3 verticals. We are focusing on building a base of customers in each verticals and segments that can drive consistent growth for us. You will find this reflected in our overall performance across industry and regions beyond the Top 10 customers. Our design-led offerings are powering differentiations and deal wins for us with customers and provide a force multiplier of the downstream development integration. This also helps us improve margins as we increase overall composition of software work in the design digital deals. In the last earnings call, I had mentioned an existing top end customer where a large design digital deal was put on hold, which affected Q2 and the full Q3 numbers for our Industrial Design business. The IDV business posted a growth of 61.7% on a year-to-date basis even with this impact. So we are confident that we will resume this project in the coming quarters. We have been steadily adding our talent base all through last year and in the last 3 quarters with laterals as well as fresher hiring. In Q2 we added almost 500 fresh engineers while we added about 150 fresh engineers in Q3. We are selective in fresh engineer hiring and we will invest further in bringing in a large number of fresh engineers over the next 3 quarters. I'm especially delighted with the industry recognitions both from analysts as well as the awards we are winning for innovation and technology. The safety center for Tata Steel uses augmented and virtual reality to deliver experiential safety training to 45,000 workers. For the first time, this is done anywhere in the world. The VideoTech award for the most innovative OTT technology of the year was won against some of the leading product companies across the world in the OTT space, again underlines our product and solution-led capabilities. In summary, I would say it's been an excellent Q3 with superior top line, bottom line performance that was supported by industry-leading operational excellence and talent retention. We continue to execute strongly on all our key strategies, driving growth across our 3 primary industry verticals and regions, building our software and digital platform engineering -- product engineering capabilities. We are also entering the fourth quarter with a strong order book and a healthy deal pipeline across our key markets and industries. With that, I would hand over for the Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Bharat Sheth from Quest Investment Advisors.

Congratulation on an excellent performance. Since FY '20-'21 as well as in these 2 quarters you are talking of everything, our growth is volume-led growth. So to understand what is driving our margin, that one lever you say was because of this designing lead. But what are the other lever that is helping us because our -- and when we are doing more of advanced work or advanced technology. So are we getting some kind of a price increase or not? If you can give some color on that part.

Gaurav, if you want to go ahead. Yes.

This is Gaurav. So I will take that and maybe Nitin and Manoj can add to that. See, when it comes to the margin, there are few things that is very important to us and we have definitely been always focusing on this. I think the first and foremost, as you also rightly said, is the business growth and the consistent business growth, okay? And if you see that all our business verticals are doing really well and for the past few quarters, we have given at the overall company level very sustained and healthy quarter-on-quarter and Y-on-Y growth. So of course, those scale and economies always helps for your margin and bottom line expansion. And the second, I think what we prioritized and strategized at the start of this year and 2 years back is the quality of the revenue mix, okay? So we always strategize that we want to prioritize the value of our offering and the better margin deals and we have been signing few sizable deals with a multiyear contract and these are at terms where we feel very satisfied and happy and those strategies are really working for us. And so that also kind of add to the better margin profile at the company level. And the third probably is on the cost side, which is your operating leverage and arbitrage. So our internal focus always been the disciplined execution and also the operational efficiency. So if you see our utilization, we have been -- our utilization has been at all-time high. Earlier we used to be in the band of 73% to 75%. Now that utilization is almost 83%. There is the other sector where we're able to achieve certain kind of leverage. And then the last probably is the offshore and onsite arbitrage. We've always been offshore centric approach and our customer always accepted that. But during these pandemic times, we've also further cemented that kind of approach with the customers. So that is also kind of helping us. Earlier it was pre-pandemic level, our onsite mix was about 35%, 36%-odd. Now it is almost 23%, 24%. So our offshore revenue mix has improved in the overall business, which is helping our margins. So probably it's a combination of both top line growth, quality of earnings, and operational leverage and arbitrage.

Fair point. But if one really look at, we are reaching almost a full kind of a operating leverage that we are enjoying and now we have to keep on adding our lateral. And if volume will continue such as I understand at higher margin, but are we getting some better pricing or how long this kind of a trend will continue. So on the margin trajectory side, just I mean not in 1 quarter or 2 quarter; medium-term perspective if you can give some more color.

So Bharat, see, we don't make any forward-looking statements or margin statements.

Directionally, Gaurav.

But having said that, still we believe and we are still confident we will continue to deliver one of the industry leading margins relative to most of the parameters, But as you know that in the current scenario and situation, everyone in the industry has kind of benefited from some kind of suppressed SG&A and some discretionary spend. We believe that once things gets opened up, some of that will come back but we don't know. I mean of course that will not be limited, but that would always be over the period. And we believe that it will never be at the 100% level of the pre-pandemic level, it would be some percentage of it. But today, it would be very difficult to say that when, how much it will come back. But on the other side, if you see with our growth and we believe that with our overall pipeline and funnel and the general robustness of the demand for this industry, I think growth will always be there. And with our other operating lever along with our growth, I think with execution strategies and all those things, we will continue to drive and offset some of those parameters. But we have to have some exploration margin band and we are quite confident that I think we will continue to deliver one of the better margins of the industry.

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

Congratulations on fantastic execution quarter after quarter. My question is that you had mentioned that in the transportation vertical, you're seeing growth back and you also had initiatives of essentially starting into other adjacencies like offroad, railways. Could you tell us if you've been able to make any headway and what kind of progress you're seeing in the nontraditional transportation that we are already very strong in? That's question one. Second is given the fact that skill sets in this area are still relatively few, are you able to get a pricing uptick on the services that you are delivering with the customers?

Sure. So on our transportation business if you look at it, primarily a lot of our business used to come from passenger car vehicles. But over the last I would say 6 to 8 quarters, we have diversified our revenue profile to include commercial vehicles as well as offered farm equipment and the rail segment. So it's been a steady progress. We won some good deals on the commercial vehicle space last quarter and that really helped us grow this piece of revenue. Our rail business is also growing steadily. I would say our focus is over the next 3 years that 20% of our revenues in the transportation business should come from these adjacencies that we called out, right? And we are working towards that so I don't see any concerns there and I believe we'll be able to achieve our objectives there. Skill sets, as you rightly said, there is a huge pressure on skill sets. These are not run-of-a-mill skill sets. You can't use fresh engineers here, you need experienced people. So all of that is applicable. And yes, we have been able to negotiate better terms with customers. So it definitely also helps us in our overall business growth.

And just one last question. Also I think this year as this quarter as well, your health care vertical has grown very well. Do you believe that this vertical will lead in terms of Q-on-Q growth even going forward considering the base is still small?

Yes, Base is small, but again the problem with some of these smaller businesses is that you can always have one bad quarter here and there, right? So while I would really want to say that yes, the growth is going to be indefinite, but I can't predict the future, right? Having said that, I think we have been -- both quarter-on-quarter and year-on-year, we have been having a pretty decent growth in the health care business. And our long-term 3-year road map that we put forward talks about a 40-40-20 ratio between automotive, media and communication and the health care business. So we are moving towards that direction. If you look at the fact sheet that we laid out, we are moving towards that direction and I would really focus on the -- I think last year is when we laid out so we are 1 year into that and the next 2 years we hope that we will achieve this ratio of 40-40-20. So I would really focus on that and not what happens quarter-on-quarter and so on. So I think we're moving in that direction and pretty confident that we will achieve our objectives over the next 2 year time frame.

Yes. Just one last question from me, which I've asked before and I'm sure many shareholders would want to know. What do we intend to do with the cash that is now sitting in the balance sheet? I know you mentioned before that you would look at some acquisitions or if you would look to distribute that cash to the shareholders in form of dividends or so on and so forth.

Both options are available, right? There are discussions happening regarding M&As and acquisitions and so on. So we will definitely want to have some cash available to really do an inorganic acquisition. Having said that, I think we will be having those discussions in the next Board meeting regarding payback to investors and dividends and so on. So essentially yes, both options are available and we will take those decisions in the next Board meeting.

Thanks. Congratulations again and best of luck.

The next question is from the line of Aditya Ahluwalia from Invesco.

I think my first question would be just some outlook on the sustainability of this growth that we were showing last year. Do you think it's possible to continue at these numbers next year and the year after?

Sustainability, if you look at it, you just need to go back 8 quarters and see how the growth trajectory has been. So we have shown that sustainability over 8 quarters. So will we be able to show the same growth the next 8 quarters? I believe we are pretty confident about it, but we never know how the industry outlook would change and so on. But as a management team, we are pretty confident and pretty bullish. Whatever we laid out as a strategy 2, 3 years ago, we have followed the strategy and we have communicated that multiple times to investors and whatever performance you are seeing are down to those strategies that we laid out; including adjacencies, including focus of medical business, including the sort of growth in the U.S. market and so on. So we've laid out certain themes and so on and we have followed through on all of those themes. And I'm pretty happy that we have been bang on. Whatever strategy that we laid out, we have followed it and we are seeing those results right now. And then we have a great set of customers, good logos to have and quite a lot of them are underpenetrated. There is lot more that we can do with some of these key logos that we have. So I would be pretty bullish about sustaining this growth going forward.

That's very helpful. So you said you have very good customers and we noticed that your top customer has been doing pretty well and the concentration or the share of the top customer has also been increasing in the last couple of quarters. So can you tell us what is driving this strong growth in the top customer and is it JLR or any sense on that?

I think it's a lot to do with deeper mining and focus and actually some of the large deals that we have been able to win over the last 2, 3 quarters. And I would say some of the growth that we're seeing or the ramp-ups of deals that we have won over 2, 3 quarters ago. So yes, we're pretty happy with where we are.

So the outlook is strong on JLR fund as well, is it?

Sorry, I couldn't hear the question. What is it about, Aditya?

The growth outlook on JLR is also the same as the rest the company, it will perform in line?

Yes. I think JLR is also -- JLR's business over the last couple of quarters are also looking up. I think they have been affected by the semiconductor crisis, but I think they are on a very strong wicket and in the next 2 quarters once the crisis -- it comes out of this semiconductor crisis, JLR will definitely be much more profitable. They'll have lot more cash on hand. And we really hope that will really help us also in terms of more outsourcing budgets and more R&D work and so on. So we're pretty bullish there.

Just are the deal structures similar as far as the life cycle of the project or has that changed in these times?

So what we have been seeing is over the last 6 to 8 quarters is that we have become more and more strategic with many of our customers. We have been able to strike long-term deals with many of these customers and actually provide value to these customers. So I think there's definitely been a shift from a one-off project basis to a more long-term sustainable win-win relationship from both parties. So that's -- we continue to see that.

Sorry to interrupt you Mr. Aditya. [Operator Instructions] The next question is from the line of Mayank Babla from Dalal & Broacha.

Congratulations on a great quarter and consistency in performance. Sir, my question relates to the previous participant as well as far as sustainability is concerned. Sir, if you could -- it would be great if you could give us your opinion on what percentage or component of our revenues are related to discretionary spend by clients? And what indicators should one follow in case things turn around from here or even become better? What indicators should one follow for demand environment basically?

Can you repeat that question on what do you mean by indicators? I mean what...

What macro indicators should we look at to gauge how demand is translating into our revenues basically?

I think you should just focus on how the world is moving towards more and more digital spend. That will give a good indication especially on all the 3 verticals. Increasingly what we see is a lot of our business comes from integrating design and digital put together and that is a theme that we have been focusing on. So whether it's our media and communication business wherein a lot of our new projects or new customers have been focused on the digital part of the business and even in the medical business if you look at it. How does digital technologies, cloud, DevOps, Agile; all of this affect the various industry verticals? And we are bang on, we are right there in all this transformation that is happening across the industry verticals. Even in the automotive industry if you look at it, a lot of the new deals that we're winning are on digital spend on connected cars, on cybersecurity. A number of those trends that are really changing the way the industry is operating in. So I think that is sort of a hint to you in terms of where we're making our money.

That was all from my side. Best of luck for the future.

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

Congratulation, sir, for the stellar set of performance and continuing the last 10 quarters more than 5% quarter-on-quarter sequential growth in this quarter also and as you spoke about the confidence that coming 8 to 10 quarters will be almost similar to like that. So congratulation for a great set of performance. My question is, sir, regarding the IDV division. We have performed quite better compared to last year year-on-year. But when we see the numbers, quarter 1 was INR 78 crores and after that it has come to INR 56 crores around. So if you can throw more light on the IDV division going ahead and what are the prospects there? And second question is regarding our top customer is still from the media sector or again JLR has come back to the top slot?

Sure. So yes, IDV is a smaller business that we have and IDV has seen some amount of yoyo in their quarter-on-quarter revenues and so on. I think it's largely to do with one large customer where we've completed a particular work and next set of activities was supposed to happen in Q3, but that project did not get started. But at the same time, we are hopeful that we will kick start that in Q4 or in Q1 of next year. So again, that is one of the customers in the Top 6 to 10 bracket that we have and that's a pretty sizable engagement for IDV. So I think it's a temporary issue. And as you rightly pointed out, if you look at the quarterly numbers, sometimes it's -- quarter-on-quarter numbers, sometimes it is misleading because it's a small business and even one significant deal moving here or there will cause your numbers to look very different. But as you rightly pointed out from a year-on-year basis if you look at the full year basis, IDV would definitely grow 60%, 70% over the last year's performance. So that is the sort of confidence that we have and this is very positive for us. But however, we get your point. We are working on strategies wherein we are building a set of good customer base for IDV so that we can consistently grow that business and consistently be able to report numbers there in line with what we have done in EPD. Having said that, the real issue is also that IDV's capabilities really help the organization not just IDV alone, it helps our customers in EPD also. So many a time it's a combined deal between EPD and -- IDV and EPD. Sometimes it's very difficult to split the revenues between EPD and IDV and so on. So from an organization's perspective, IDV has definitely contributed in the growth that EPD has shown though the numbers, IDV shows a smaller number and maybe even a quarter-on-quarter degrowth. But actually from an organization's perspective, the capabilities that we have in IDV has actually helped us to win larger deals in EPD and also to get better margins and better pricing also because of the capabilities that IDV bring in. So IDV is very critical and we will definitely see how we can stabilize the IDV revenues moving forward. And also I think last time -- because we're also contemplating because IDV is all said and done a service line. And so the way we represent DPD, IDV and so on, we may have to relook it so that it's more aligned with the industry verticals that we are operating in not the service lines. So that's something that we are working on. Regarding the top customer, yes, it is still a media and communication vertical customer and we're pretty happy that we've been really growing those revenues, winning large deals and really winning market share from competition. JLR also continues to grow. So I think these are very positive for us.

Okay. One last question from me. If you can share about the IPR and licensing revenues, are they still below the 5% or crossed the 5% if you can share about that?

It's still below 5%. Again the products or the frameworks that we have, our standalone even though the revenues are not very significant but from a positioning perspective, from a right-to-win perspective, these are all important products to invest on and really build these products and these solutions to help us win large deals and beat competition. So while the standalone revenues may still not be significant, but definitely to build credibility in the space, we need to continue to invest in building these products and licenses and we'll continue to do that.

Congratulations once again, great set of numbers.

The next question is from the line of Karan from [ Jetha Global. ]

So I wanted just to dig into the win you cited in your fact sheet with the new age OEM. Perhaps you can just give us a sense for the size of the deal and the various components of the deal. That's the first question. The second question, which is somewhat related, is it appears to be a trend where your peers are starting to win business from not just auto companies, but also auto semiconductor companies such as Renaissance or Qualcomm or at least they're in trials with those companies. I'd just be curious as to whether you would be exploring the same opportunity. And then the last question I had is just the shortage. Of course, [ Tata ] announced recently or last week that they're still being impacted by the auto shortage. So you mentioned you think it is a 1 or 2-quarter problem and then after that we're sort of in the clear. I just want to push on that and ask how much visibility there is there where if that slips, do we then see a slowdown in the transportation segment?

Sure. So I will ask Nitin to take the first part. I'll answer the second part. Yes, we work with the semiconductor companies. I mean for example, we have been working with some of these names for the last 20 years. So auto semiconductor companies is something that we have been working for many, many years. In fact some of them are large customers of ours and though we don't publicly announce these large deals, but we are very well entrenched with some of these auto semicon companies. And in fact we will be making some press releases so that you're aware of the type of activities that we do with some of these companies. So that's very much a part of our focus. Regarding the last part of your question, I think you talked about the semiconductor shortage and so on. Yes, I strongly believe that it's a couple of quarters away, in fact in this quarter I suppose companies like JLR and so on will show much better improvement in their sales and so on because the shortage is going down. So we really hope that that will really help us translate into more business for us. So we're pretty bullish there. Nitin, if you could take the first part.

Yes. Thanks, Manoj. In fact I just wanted to add to what Manoj said that unfortunately, we don't have much to announce on the semiconductor side because we've been working with them for long. So there's nothing new about it to talk about. But coming back to that new age OEM, we have initiated an engagement on core platform software development. When you talk of platform software, that essentially forms the architectural hub for everything on top, whether it's electric or it's autonomous or it's connected. So this is the platform architecture itself. So while we made a small start, we believe that it's the beginnings of something that can be much larger.

The next question is from the line of Pranav Thakkar, individual investor.

Congratulations...

Sorry to interrupt you, you're sounding slightly distant. May I request you to speak little louder.

Congratulations on great set of numbers. The quarterly profit of -- the yearly profit of 2016 is now quarterly profit of our company so very happy and great going. My question is with reference to the design linked incentive initiated by the central government and wherein certain percentage of revenue of semiconductor chip being designed will be the company who designs will be eligible for it. So is Tata Elxsi is eyeing to get that DLI scheme? And another recent reference to the number of count of REIT players we are associated and also if you can share the number of count semiconductor companies we are providing services for?

Yes. Well, the DLI scheme I think is something that we are evaluating and as you know, we definitely do lot of industry design sort of activities. But at this point of time, we really don't have anything else to report on that. We do work with about close to 4 semiconductor companies in this space. And what is the other question, Nitin?

Out of Top 10 EV manufacturers we are associated with because it's like a follow-up or clarification given before 2 quarters?

How many EV companies that we -- are participating with us.

So Manoj, I think that's difficult to call out because the question is when you say EV who because all the conventional car companies also make EVs today. And then you have a whole set of new age OEMs who don't have -- I mean except for barring one maybe don't either have volumes or even production commenced in most cases. So I don't think that's a fair count. We would not want to call out that number right now. All I can say is that we work with a very, very good number of traditional OEMs who are pivoting very strongly to EV and a whole set of new age OEMs who are born EV.

The next question is from the line of [ Dev ] from Invest Yadnya.

Congratulations on a good set of numbers. My question was can you tell me the total contract value of this year's quarter?

Usually we don't disclose these numbers so I'm sorry, we will not be able to share the details with you.

Okay. And can you tell me about the ER&D space in general and what is the future outlook now?

Nitin, you want to address that? That's future ER&D.

Yes, let me take that. So I think as far as digital spend goes, as far as budgets outlaid by companies go; I think ER&D is seeing the largest growth among all of the spends that are possible from companies or enterprises. So you have typically IT spends for run management, you have application development spends, you have infrastructure spends and you have ER&D spend. So within these buckets, ER&D has traditionally been the smallest piece. It's now the fastest growing and that is simply because I think in general what is happening with companies is that the context of connected and intelligent products and services, which can be monetized based on the kind of data that you have and the connectivity and the relationship you have with customers irrespective of which sector you operate in, whether you're a car company or whether you're a media tech telecom company, whether you're a medical device company. The fact that you're connected to consumers or customers and you are able to deliver more services to them because of that connectivity and connections and that data that you get from them allows you to enhance the value of what you're delivering, I think is the strongest trend for what brands and products and companies will do for the future. So I think in a simple word, that is what is driving this industry and therefore, the space that we are in which is software-centric design-led I think forms the crux of what we believe value will be delivered on the basis of. So I'm hoping that answers your question because there's no simple answer or a small answer to your question.

And any growth expected -- I mean growth rate numbers you can tell you?

Yes. So again I think like Manoj said, we don't offer a guidance on future growth. I think the closest to get is Manoj's statements on our past performance over the last many quarters and the fact that we don't see any significant reason for why that should not continue without any significant external factors changing.

Dev, I'll request to come back in the question queue for a follow-up question. The next question is from the line of Pradeep Gokhale from ITI Mutual Fund.

Congratulations on excellent numbers. My question is regarding operating margin. If you look at last year or even the December '20 quarter or the quarter gone by, the margin range was around 30%-odd and I believe the COVID related cost savings and all would have been there in those quarters. So what -- and in your remarks, you said the large growth is largely volume led. So what explains the almost 2%-plus improvement in operating margin versus December '20 or September '21 quarter that we see?

I think that has been answered by Gaurav in the first question that was raised. Maybe Gaurav, you can repeat it once again.

Sure. So I think that was the first one which we took. So I think what we mentioned that it will always be a combination of on the top line and the bottom line, what strategies and what we are doing. It will be a combination of the growth and the sustainable growth and versus the quality of the rating. And I think the focus that we have this year we have been focusing and prioritizing is the better margin deals and also prioritizing the value offering to the customers. So that is also helping in terms of building the better top line compared to -- both top line and also the bottom line compared to what has been reported in the past quarters in the last year. And also the other factor is on the operation -- operating leverage and arbitrage, I think in terms of the utilization sector improvement, employee pyramid and the arbitrage that we are getting from the offshore mix in the overall revenue. So all those factors and the parameters is contributing to the better margins and of course you mentioned yourself that certain SG&A expenses and discretionary expenses, which little bit suppressed due to the lockdown and pandemic, that is also helping the growth of the margins currently.

But those would have been similar, right? In December '20 quarter also, it was post-COVID or last quarter also. Those would not be -- those would be largely be same, right? I mean...

That's right, Pradeep. So this is Nitin here. So I think while on the travel costs and the typical SG&A, we would have somewhat a similar situation 2, 3 quarters before and now. I think the answer really lies in the other factors, right? Onsite, offshore ratios have continued to lever towards offshore that significantly gave us better margins. Our utilization has gone up by a few points and all you need is a few percentage points of increase to give you that little boost. We have improved the quality of revenues in terms of the kind of work that we're doing, we continue to improve that. We're not saying it's not improved. We continue to improve that. We continue to realize better margins from the kind of design digital deals that we're signing. So it's really...

Also the business volume has also increased, right? So contribution of SG&A to that extent also will go down.

The next question is from the line of Abhishek from Nomura.

Congrats to the management for a good performance. Sir, I'm looking at the last slide of your presentation where I see that your fixed price projects have been rising consistently and now they're almost 50% of the total revenue. Can I say that this also has been a factor behind your improving margin trends and over a longer period of time, do you think there's further scope for you to make your revenue stream more fixed price annuity-related business or the nature of business means that might be the kind of mix will work in future as well? Any color here will be useful, sir.

Do you want me to take that, Manoj?

No, I'll handle that. So yes, fixed price over a period of time has been going up and you should understand that fixed price means we take a lot more risk in terms of ownership and delivering value to our customers. So to that extent, I think our internal systems, internal processes have really helped us to be able to deliver value to our customers. At the same time ensuring that from Tata Elxis' perspective, we don't bleed or we don't get into such deals wherein profitability gets a hit. So having more fixed price essentially means that you need to have very, very strong internal controls, your entire estimation capabilities, your project management capabilities. All of that comes to force and I'm pretty happy and proud to say that look, we have built one of the very, very strong internal capabilities to really be able to focus on project management and delivery excellence. So to that extent, yes, I would say the type of fixed price projects have increased and also helped to an extent with the margins. But again it's a double-edged sword. If you take some wrong deals and if you take full ownership and take it in a fixed price and so on and if you don't -- if you underestimate or if the complexity of the program goes up rather than what they had estimated, then there's also a possibility of losing money in those deals. Cash flow -- I'm pretty happy with the current situation. Idea is that really to push more and more fixed bid and so on. But eventually, we will have more fixed bids as we mature in our service offerings and our overall confidence, we will move towards the balance sheet.

Sure. That's helpful. So over the longer term, do you think this number can even go up from here towards 55%, 60% in line with the IT services companies who also have ER&D businesses? Do we see a scope of increasing towards that number?

It is possible, but I wouldn't want to indicate any time frame or anything like. I think as the industry matures -- and you should understand that as compared to IT deals and so on, which is typically maintenance and so on, everything is known, right? Most of the ER&D at least in projects that we do are fresh new developments, mostly new technologies, new areas. So like any project company venturing into any new development, there is a lot of risk in terms of whether the products will come out on time, on schedule, with the quality parameters, all of it taken care of. So to that extent, I will caution you to really -- we will not move that in a hurry is what I want to say.

Got it. This is helpful. And sir, any comments on attrition? It has jumped up for us in line with how the industry is also behaving. But do you think we are closer towards the peak of attrition for ourselves and should possibly stabilize in the coming quarters at around this 18%, 20% mark?

I do hope -- I do seriously hope. We're doing a number of things to control attrition. There's lot of initiatives with our employees and lot of internal programs that we're doing to really build a better place for our employees. So no doubt about it, this is taken very, very seriously. We are also looking at for example from a salary hike perspective also. I think 2 years ago we did a salary hike in the October quarter, then in about 9 months last year in July we did a salary hike and in 6 months from there in January we're proposing a salary hike. So essentially what I'm saying is look, over the last 15 months we will hiking our salary 3 times. So there are a number of things that we are doing. So I think we should be able to control this.

Abhishek, I'll request you to come back in the question queue. The next question is from the line of Mithun Aswath from Kivah Advisors.

Sorry, I think we have again lost you.

Mithun, may I request you to come back in the question queue. The next question is from the line of [ Siddesh Saraf ] from [ Toona Investments ].

It's around how people plan to go in the 3 verticals, auto, media, and healthcare. You mentioned the 40-40-20 split. So how do you see the total addressable market for these verticals growing for Tata Elxsi and where do you plan to go deeper? Specifically if you could throw some light there, it would be very helpful.

Nitin, you want to address that?

Yes. Thanks, Manoj. So [ Siddesh ], I think the way we see it is that on one hand, the markets that we have picked are very, very large by themselves. So automotive obviously is among the largest ER&D markets ever among any segment that we pick up, media and telecom follows closely. The health care market in terms of medical devices is far smaller. But when you look at the expanded definition that we have, which is of digital health and pharma, you're again talking of a fairly significant market. So the first thing I want to clarify is that the market sizes are big enough and we represent only a fraction of that potential market. For us, the way we see it is that we need to drive our growth both in terms of realizing the potential within each of these verticals, but equally also derisking between any industry cyclicity that we see. Because all said and done, every industry has a cycle and you will see that cycle turning up and down over a period of time. So we also want to make sure that we are not single industry focused, we are not completely dependent on the cyclicity of a single industry. So to that extent, the ratio that we called out as a strategy a few quarters back which is to drive 40-40-20 ratio, looks at both factors. Looks at one, the market and the market size; 2, looks at the opportunity in terms of technology and where the industry cycles are; and 3, looks at risk and balancing that risk. So in that sense, I would call it out as a strategy that we have taken rather than a reflection of the potential of each of the markets because you could choose to take just one market and get all your money from that. Nothing stops us.

Got it. That's very helpful. And just one more thing. So in the past couple of quarters, we had an announcement on an adtech partnership and we had the partnership with Greenhill as well. So from a partnership standpoint, could you also throw some light on the plan ahead, where are the areas that you plan to partner and for what specific areas? Just any insight there would be helpful.

Manoj, if it's okay, should I take that?

Yes. Go ahead.

So the way we look at partnerships really are twofold. One is acquisition of technology and 2 is go-to-market. So from an acquisition of technology, we already have a large number of partnerships that are already at play, which allow us to understand, absorb and prepare ourselves on what is coming up. And therefore, there are partnerships that we have with very leading semiconductor companies that are inventing chips and software and applications for certain areas like 5G and autonomous cars and so on. We equally have partnerships with companies that are building components of software that go into any of the areas that we're investing in. In media and telecom, it could be adtech, in automotive it could again be software that goes into autonomous vehicles or electric vehicles and so on and so forth. So these are all technology-related partnerships that allow us to make sure that we are ready. We are the first off the block in terms of what our customers are exploring and wanting to build on. The second kind of partnerships are where we not only acquire technology, but we include them in our solutions and we go to market together. Now those are a little more fewer in nature, but they are also more strategic. So when you look at areas like OTT and you look at areas like adtech and you look at areas like EV, you will see that we'll be announcing a lot more of these partnerships where 2 companies come together, build solutions together and then take it to market together. And the idea is of course to increase the volume that we have accessible to us in terms of customers, but also make it easier for customers to select us in terms of time to market, in terms of cost, in terms of innovation, the ability to improve our right to win. So we have clearly laid out plans on both fronts, technology partnerships are many and we already have them in play, go-to-market partnerships are far fewer. We also have to be careful because that impacts our brand too. So when we choose a partner and we go together, we have to make absolutely sure that we are selecting the right partners as much as the other party is selecting us and that it does not impact our reputation in the long term. So you'll find that we will make announcements as we go along and you'll find that they're all aligned to where we believe the world is going.

The next question is from the line of Amit, individual investor.

Congratulations on a fantastic set of numbers. My question was pertaining to the nonlinearity between the revenues and the costs this quarter where revenues have grown faster than the costs and our employee growth is also 5% Q-o-Q. Is this something that is sustainable, is this nonlinearity or this is kind of a one-off?

I think we've improved on our billability and ratios and so on. Yes, we definitely would need to add a lot more employees moving forward. And so I would say I think nonlinearity that you talked about is a combination of multiple factors; better longer-term deals, better pricing and so on is also a factor there. So that part will continue. But definitely, we'll add a lot more employees. So it's not that we'll be able to do greater revenues with lesser employees. So we are not at that.

Understood. Then my second question is in the -- we've announced deals in EV connected vehicles, autonomous vehicles. I just wanted to know what the average length of those contracts would be?

Typically, most of these deals are between 12 to 18 months, some cases 24 months and so on.

Congratulations again for a fantastic quarter.

The next question is from the line of Yash from Indira Securities. The next question is from the line of [ Gunjan Shanshan ] from First Global Securities.

Congratulations on the good set of results. My first question is on the follow-up on the margins. If you can throw some light on the vertical-wise margins between auto and media and health care.

This is Gaurav. So we don't report margins at the industry vertical levels. I think as our operating -- public operating metrics we only do at the company level so we won't be able to disclose the margins at the industry vertical levels, but it's fairly spread across all the verticals. So we don't see any vast difference.

Not exact numbers, just a rough estimate like is there a huge variance between 2 verticals?

Yes. I think I've answered this question in earlier calls also. Our medical business continues to be on the higher side, the margin continues to be on the higher side followed closely by both media and communication and automotive.

And my second question is regarding the attrition rate or you can say the employee costs. So what are the -- what are you seeing the trends in the whole industry? This is not for Tata Elxsi only, but across industries. So what do you -- what are your thoughts regarding that? Can you throw some light on that as well?

Throw light on attrition you mean?

Yes. So the attrition rate is higher in this quarter for all the companies. So I just wanted to understand.

I think the fact is that due to the pandemic and so on, many industry segments realized that they need to have a digital play. It's not just in the 3 verticals that we are working in, in all other verticals also. Those companies that have had a digital play were still able to continue their operations, were still able to service their customers and deliver value to their customers. So what they're seeing is a lot more of the companies -- even the traditional companies are aggressively getting into the digital play. They want to have a digital play and what that means is more demand for engineers who can help them create the digital play and that has a spiraling effect on the entire industry.

The next question is from the line of Kanishka, individual investor.

Congratulations to each one of you on your fabulous performance. My question -- I have got 2 questions. First, I want to understand. See, there is a marked initiative going in the EV side. So from Tata Elxis' point of view, I want to understand that if you, let's say, consider a car, what kind -- what percentage of contribution Tata Elxsi is making in that particular car, which is a ready product as of today and the technologies which you're working on and you also mentioned about partnerships? If I see the next 2 and 3 years where this particular sector matures; from the current percentage content, where do you think you can take it to in a finished product in the next 2 to 3 years?

Maybe I'll take that. You have to look at it along 2 dimensions. One is in terms of what is it that goes into a car today and if you look at it, you have mechanical components including structural material such as steel, plastics and so and then you have electronics and software. Software of course is intangible. When you weigh the car, you'll find that there's no weight attached to software, but there is value attached to software.

Yes, I was talking about value terms. I'm sorry. I was talking from the value terms in terms of the software contribution or the content contribution, which Elxsi does in a finished product today and the technologies that you're working on where -- at what percentage traction you want to take it in the next 2 to 3 years when it matures?

Got you. So therefore if you look at that journey, the first journey is software and electronics increasing as a percentage value in the car itself and that is an absolutely upward trend also. So while the total number of car units sold globally are not increasing, what is really increasing is the percentage of sophistication in the vehicle driven by electronics and software. So that directly drives our growth too, part 1. Part 2 is sophistication by itself, which is not doing the same thing that you did the year before and the year before that. So if you look at autonomy, we had absolutely no autonomous features, we had no driver assistance features. We're now starting to see that come not just in high-end cars, you're actually seeing even mid-end and low-end cars starting to talk of ADAS features and we expect that that sophistication will continue to accelerate and increase. So if you move from Level 1 autonomy to Level 2, Level 3, Level 4, Level 5; that's one journey. Two is seeing more and more mid-segment, small segment cars starting to deliver features of autonomy. Electric vehicles is a trend by itself so we have always been working on electric vehicles. We believe that it had a long road ahead, it just seems to be pivoting faster. Connected has always been there. We believe that more and more cars will now offer connected services, including infotainment and otherwise. So for us, I think that is the driver. One, the fact that in general electronics and software will continue to increase at a rapid pace. 2, the level of sophistication is increasing in each of these technology trends. 3, there is a larger percolation downward into -- from premium to mid and lower segments. The last and most important trend is also that a lot more of the software development -- a lot more of that innovation is being delivered through software, which otherwise was mechanical, electromechanical or electronic is now becoming purely software defined and software delivered. So that again increases the amount of work that we'll have to do quarter-on-quarter, year-on-year.

And my second question is that so you have like mentioned 3 verticals; auto, media and healthcare. I want to understand from you there is this major shift which is happening in the manufacturing side so I'm talking about the manufacturing up cycle where the traditional ways of manufacturing is moving more towards robotics, automation. And like as I see, a car which is more mechanical is moving towards more software driven. Do you see there could be a tremendous amount of opportunity in the manufacturing side globally where Tata Elxis can actually work on that opportunity or maybe you guys have already started to look at it as an adjacency?

Yes. So that is something that we are both watching and investing in. So that is something that's already underway. And you are right, there is an opportunity there not in conventional manufacturing, but in transforming manufacturing to a lot more connected and digital; more the industry 4.0 path of automation and connected factories. So we do see an opportunity there and we are exploring and investing in some areas.

Ladies and gentlemen, that would be the last question for today. I will now hand the conference over to Mr. Manoj Raghavan for closing comments.

So thank you all for taking your time today. I hope you've got a good idea about Tata Elxsi and where we stand in this ever-changing market, right? But one thing that's pretty clear, we're pretty confident on the capabilities that we have internally as an organization, the part of the senior leadership that we have to drive the business and also the great talent pool of engineering team, architects, subject matter experts and so on. So I'm pretty confident that we have a right winning combination to really propel our business forward and I wish -- I hope that we will get back to you next quarter on a similar term. Thank you so much.

Thank you very much. On behalf of Tata Elxis Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.