Tata Elxsi Limited (500408) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Tata Elxsi Q1 FY 2025 '26 Earnings Conference Call hosted by Tata Elxsi Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shashank Ganesh from EY. Thank you, and over to you, Mr. Ganesh.

Thank you very much. Good evening to all the participants on the call. Good morning and thank you for joining us from the Western side. Before we proceed to the call, let me remind you that the discussion may contain forward-looking statements that may involve known or unknown risks, uncertainties and other factors. Therefore, it must be viewed in conjunction with the business risk that could cause further results performance or achievements that differ significantly from what is expressed or implied by such statements. To take you through the results and answer your questions today, we have the senior management of Tata Elxsi represented by Mr. Manoj Raghavan, Managing Director and CEO; Mr. Nitin Pai, Chief Marketing and Chief Strategy Officer; Mr. Gaurav Bajaj, Chief Financial Officer; and Ms. Sneha V., Company Secretary. We will start the call with a brief overview of the past quarter by Mr. Raghavan, followed by a Q&A session. [Operator Instructions] With that, I would like to hand over the call to Mr. Manoj Raghavan. Over to you, Manoj.

Thank you, Shashank. A very good evening to all of you, and thanks for joining us today for our Q1 FY '26 earnings call. I hope that you and everyone are finally safe and healthy. For the first quarter of FY '26, we reported an operating revenue of INR 892.1 crores. EBITDA margin stood at 20.9% and PBT margin was reported at 21.1%. This quarter was challenging across key regions with geopolitical uncertainty and industry and customer-specific issues impacting R&D spend and deal closure across geographies. Our transportation business that represents over 50% of our overall revenues did well to exit flat in constant currency terms. Automotive industry is still in the state of flux with the China business and tariff-related uncertainties, casting a cloud on R&D strategy and spend, while the Tier 1 supplier business continues to be challenged. We had announced large deals in the previous quarter in SDV vehicle engineering for Mercedes-Benz, a European OEM and Suzuki. These are now ramping up, and we have the necessary capacity and capability to service them and grow over the next few quarters. Our largest customer is stabilizing in the outlook and revenues and we expect to stay steady for the rest of the year. We are in discussions for some large strategic deals with OEMs, including some new logos in Japan, U.S. and Europe. I'm pleased to report our continued progress in the decency strategy, with 2 strategic deal wins from the off-highway segment in ADAS and connected vehicles. We're confident of the continued recovery and growth of our transportation business through the rest of the year, backed by deals that they have won, a healthy pipeline of large deals and a new customer logos. Our Media and Communication business reported a decline of 5.5% QoQ in constant currency. Large consolidation deals we announced at the end of Q4 FY '25 will contribute to revenue growth in the upcoming quarters. The transition investments at approach consolidation deals has largely contributed to this dip in this quarter. While the overall business environment in this industry continues to be subdued, we have been working on shaping some large deals, both for consolidation in existing clients and some strategic AI and automation led large deals with new logos. I'm also pleased to announce a strategic multimillion dollar design digital deal with the U.S. tech giant for next generation AI and product-feature development. We expect to bring back growth in this vertical in Q2 on the back of the deal ramp-ups and healthy deal pipeline. Our Healthcare and Life Sciences segment declined 6.7% quarter-on-quarter in constant currency primarily affected by tariff-related impact on medical devices with 2 key customers in the U.S., which is the primary market for this vertical. This has impacted R&D and discretionary spend in the short term, and we expect recovery in the service line in the second half of FY '26. We are expanding our customer base across U.S., and I'm pleased to report 2 key wins, including a global pharma and biotech leader from Europe and a Medtech leader from Japan. On the talent front, we'll continue to add to our talent base with over 400 fresh engineers planned in this quarter. We expect a steady improvement in bottom line and margin even as our 2 largest businesses, transportation and Media and Communications returned in Q2 FY '26 and beyond. And utilization is on the back of ready capacity and capability we have invested in over the past few quarters. Before I conclude, I'd like to announce the launch of our new reimagined website, which went live earlier this week. I encourage all of you to visit our new website that position Tata Elxsi at the forefront of an AI-first design-led proposition for brands and business to deliver reimagined products and experiences, improve the efficiencies and time to market. Thank you. And with this, I hand it over back for a Q&A session.

[Operator Instructions] Our first question comes from the line of Bhavik Mehta from JPMorgan.

A couple of questions. Firstly, on the auto vertical, can you comment in terms of how the demand pattern has changed over the last 3 months, both in terms of deal closures as well as deal ramp-up? Are the clients still in wait-and-watch mode given the tariff situation? Or are we seeing them restart their spend going forward? And the second question is on health care. Can you talk about -- or actually can you give more color on the 2 client-specific issues? Is this cancellation of projects? Or was something ramp down, which should come back in the second half?

Thanks, Bhavik. On auditor, we -- I mean we see deals coming through in Europe and the APAC region, right? And some of the deals that we have won in the previous quarters, the ramp- were a little bit slow. That ramp-up has started accelerating. So in the last quarter, we did see good ramp-up of the deals that we had closed in the previous quarters, and that trend continues -- that trend we expect to continue in the upcoming quarters as well. So our U.S. market is still a little bit slow. But other markets, we see a much better visibility, deal closures as well as ramp-ups happening. Regarding the health care, these are primarily U.S. customers, 2 large customers of us, wherein some of the new projects that we are expecting to ramp up, that was put on pause primarily because of lack of clarity, given all the uncertainties in their own business and so on. However, we expect that to get started in the coming quarters. So we are expecting that some of this will get started immediately in Q2 itself. However, we also have a set of other new logos that we have opened in the health care space. These are still small businesses for us, but we expect a continued growth of that, and we expect in H2 we will be able to ramp up a much bigger business with some of the new logos that we've opened.

Our next question come in of Manik Taneja from Axis Capital.

Manoj, I basically had 2 questions. The first question was with regards to the business outlook within the top single customer, which has continued to do very well and given some of the annual report disclosure it appears, you expect further growth in this account in FY '26, if you could clarify on that front? And the second question was with regards to the way our margins have shaped up through the course of recent quarters. While I do understand there is some element of limited revenue growth at play, but how should we be thinking about spare capacity in the context of the fact that over the course of -- 4 of the last 5 quarters, you cut headcount and still your margins have been down? And do you now really think our margins can flow back to what we used to report in FY '20 to '24? Or you might probably need to adjust to a new normal in terms of margins?

Sure. Thanks, Manik. Regarding JLR, yes, I mean, the situation at JLR is a little fluid, right, given their own sales and other related issues that they have. However, from our perspective, I believe that, look, we will be able to maintain at the current level. We may not have an aggressive growth there. But I think we have enough visibility to maintain our business and also have some incremental growth there. Coming to the margins, of course, as you rightly said. A lot of the margin situation is because of the drop in the revenues. And definitely, as the revenues pick up, we are confident of getting back to some margin profile. We foresee that over the next 3 quarters, we will gradually be able to pull back the margins. It's not going to happen all of a sudden. But all efforts are on to really look at all the levers that are available to us and to focus on more improvements in the coming quarters, right? So yes, I think if you look at it, because of the Q1 current situation, maybe from a financial year perspective, we could end up with a margin, which is lower than what we have performed in the last financial year. But I think we should be able to pull up the margin gradually over the next 3 quarters.

Manoj, my question was more for the medium term. You used to operate at about 29%, 30% EBITDA margins. Do you think that's the margin we should probably think about as improves, not just in this year but beyond this year?

Yes, yes, that is the aspiration. That is exactly what we are aiming for. We definitely need to get back to those margin profiles. In the medium term, definitely, that's what our focus is.

Sure. And how should we be thinking about wage hikes for us, given typically we used to give wage hikes in Q2 for the junior folks. Any comments that you could share with regards to what you are thinking about for this?

Yes. So most probably, those hikes will happen from Q3 onwards. October time frame.

Okay. But as of now, you're still planning for wage hikes?

Yes, yes.

[Operator Instructions] Our next question comes from the line of [Muzaffar Shaikh], an individual investor.

I would like to ask about the government PLI schemes and factory, which is coming up in Gujarat. So where are we on that? And do we see it coming in the coming quarters?

Sorry, the semiconductor factory in Gujarat in Dholera is actually Tata Electronics, right? Tata Elxsi has nothing to do with that factory. However, Tata Electronics is a customer of ours, and we continue to support them in some of the projects that we're doing, but we are not really involved in the factory.

The next question is from the line of Debashish Mazumdar from SVAN Investments.

One follow-up question, which Manik was earlier asking about margin. So if I understand correctly, one of the reasons Tata Elxsi used to report a very strong set of margins because they are focused on offshore centric deals, but over the last 2 to 3 quarters, what we have seen is a consistent fall in margins. So is it like we have shifted our focus more into on-site focused deals also, their margins are initially low and will be able to sign to catch up later? Or it is like a normal process of business which is impacting our market?

No. So our offshore-centric business continues, Debashish. There is no change in that. A majority of our business continues to be more than, I think, 76% continues to be offshore. So there, there is no change. However, I think the margin is more to do with the top line degrowth that we are showing. Once we get back to our growth, the margin profile will come back. Of course, also the type of deals that are there, the consolidation deals, the large deals that we have signed up, a lot of it also puts a little bit of pressure on our margins. And that is something that we are working to see how we can improve using operational efficiencies.

Okay. And of the last quarter, the deals -- last to last quarter, the deals that you have won, which is Asia specific, so when those deals ramps up happening, we are seeing some margin pressure. So is it like those deals are -- contours of those deals are such a way that it's a kind of lower-margin business for us?

It's not lower margin business, but in some cases, we need to take over and manage the transition. In some of those cases. we may not get revenues in the initial period. However, the revenues will start ramping up once the steady state happens and so on. So we have some of those deals work affecting us at this point in time. But however, as the deals ramp up and so on, and then we take overall control of it, the margins will definitely come back.

Sure, sure. Understood. But you are confident of kind of operating at 29%, 30% kind of EBITDA margin in medium term.

In the medium term, yes.

Okay. And one last question from my side. You normally provide a good color around Tier 1 OEMs and Tier 1s in transportation, and also off-market and passenger vehicles. So if you can give some idea around the different segments, how different segments are doing for us and as an industry overall?

Yes. As I said, right, automotive industry, I mean, if you look at our transportation business, in actual currencies, they have shown growth. But in constant currencies, we have ended flat. I think that's a fantastic performance. Almost 72% to 75% of our revenues now come from OEM, which is the passenger car makers. The Tier 1s have sort of reduced, which is in line with what we see in the industry, right, moving forward. From adjacency perspective, we continue to see deals closures happening. I think we have announced some of the deals also, both in off-road segment and commercial segment. Our investments in aerospace and defense, we continue to build teams. We have still not announced any large deals there, but I think those are all in works. And hopefully, in the subsume quarters, we should be able to announce some large deal wins there as well.

The next question comes from the line of Manik Taneja from Axis Capital.

Manoj, while you partially alluded to the investments in defense and aerospace. But if you could help us understand the likely investments that we will make in terms of expanding our GTM in these segments? And will that probably create more headwinds in the near term from a margin selling point? Or these are limited investments and thereby you can manage to other operating levers?

No. So we have already ramped up almost 150 people team in this space. We have invested in building capabilities. We have -- for example, we have built our own capabilities in drones. We have built capabilities and eVTOLs. We have -- if you actually come to a campus, you can see some of these actually flying, right? We have shown demos to global players. We have been working with HAL, NAL and some of the defense labs in Bangalore. A lot of interesting work actually happening. I wish we were in a situation to really convert some of this into deals and bring in revenues. I think we're almost there. We should be able to hopefully announce some deals, some very, very good discussions happening with potential customers, both the large players in U.S. as well as defense labs and DRDO and ISROs in India. By the nature of the business, these are all long lead time businesses, but the capability that we have built is fantastic. And why I'm saying that is because of the real interest that some of the force that we have shown, some of these technologies, right, what we see from them, right, the interest that we see from them. So yes, I think we're not expanding the investment further. We really would want to close some deals and get into a revenue situation before we start investing again.

Okay. And any medium-term revenue targets that you would want to share with regards to these incubated work segments?

I wouldn't want to put a number there. But I would say at least we would like to make a start this quarter, right? And what we're looking at is anywhere between INR 50 crores this year, right, to get started. But in the subsequent a couple of years or 3 years from now, hopefully, we will be able to ramp up significant business in this domain.

Our next question comes from the line of Moez Chandani from AMBIT Capital.

My question was on the Media and Communications segment. So there, you said that the industry has been subdued for several quarters now. But anything incremental that you've seen in Q1 versus where you were seeing a couple of quarters back? And what needs to change for this segment to really revive in terms of growth? I know that you're expecting growth to come back in Q2. But really, where do you see the industry going in the medium term? And do you see a material acceleration in terms of growth there?

Yes. I think this industry globally has been very subdued. And it's not only for us. If you look at most players in the media and telecom market are reporting very, very muted numbers. There are structural issues in the industry as well, right? If you look at it, a lot of M&A is happening. During COVID, this industry grew very rapidly. But after COVID, all of a sudden, you see that most operators, whether it's media services operators or telecom operators, globally, have not been able to add net new subscribers. The subscriber numbers are actually coming down. The ARPUs are coming down. So there's a little bit of an issue structurally in this industry. A lot of the deals that we see at this point in time are a lot about efficiency-driven deals, how can we do more with less consolidation deals. And of course, we are starting to see AI and Gen AI-led deals as well in this particular industry segment. We see -- as I said, we obviously in the media space, if you look at it, we see M&A is happening. We see even large companies, whether it's Warner Bros., Disney or NBCU, taking decisions of hiving out the digital piece as a separate company and the legacy pieces as a different company. So there are a lot of things happening in this particular industry. From a telecom perspective, again, 5G investments are really not brought in new revenue streams for our operators. We're now getting into the 6G era. So again, we see a lot of focus on what do you say, using of open source, bring down the cost, automation, how to improve operational efficiencies. So these are all the themes that are playing out. And we are trying to capitalize on some of these, right? For example, we have built our own product called NEURON, right, which really helps in the automation piece, right? How can we help customers automate their deployment, their operations using automation framework, using Gen AI and so on, so that without adding manpower, can they still continue to deliver operational efficiencies for their customers. So there are various things that are playing in this particular industry. We have -- of course, we operate from a services perspective. At the same time, we also have certain products that we license to customers, that sort of acts like a differentiator as compared to a lot of our competition. So we're trying different things to really open up the market and also to grab wallet share and so on, right? Efforts are on. But the market currently, I think, is in a very, very difficult situation. Having said that, I think we have reached the bottom from our -- from Tata Elxsi's perspective. And some of those has also been because of the large deals that we have won and the transition period and transition cost. And all of that is now behind us. So hopefully, from the coming quarter, we should be able to report better results in this particular vertical for us. Having said that, as the market is still very, very -- it's not an easy market at all. And the deals are all -- most of the deals, the large deals, especially are around efficiency themes here.

Yes, yes. My next question was on your system integration and support segment. I've seen a very sharp decline on a quarter-on-quarter basis, right, nearly down 30%. So how should we think about that? Do we expect that this is going to continue to decline going forward?

No. So I think that is all because of one deal that we won in the last quarter, which was a onetime deal, a large deal, I think almost INR 13 crores, INR 14 crores worth of deal that -- it's a small business for us, right? So in percentage terms, you might say there's a big drop. But actually, it's not that big a drop, okay? So don't go by the percentage. What has happened was last quarter, there was a large deal that is the Bharat Pavilion in Japan, in Osaka and that was a fantastic work that we delivered last quarter. We were hope -- there were other deals, similar experience design deals that we were bidding for in this quarter. However, closures did not happen on time. And that's the reason why there is a sharp dip in that business, if you look at it from a percentage term perspective. However -- I mean that is the nature of the business. These are -- you could get INR 10 crore, INR 15 crore, INR 20 crore deals with a turnaround time of 3 months or 4 months. And then we really need to find replacement deals and so on. That's the nature of the business there. So if you look at it, SI business will usually be around INR 25 crores, INR 30 crores a quarter for us.

We have our next question from the line of Bhavik Mehta from JPMorgan.

Just one question on the Media and Telecom segment. Can you explain how does the large deal transition cost impact the revenue? I understand there are upfront cost because of [indiscernible] impact the margin. But how does it impact the revenues? Just curious about that.

Yes. So I think, Bhavik, if you look at it, it's a large deal that we have won, right? So what happens is that deal comes at certain common terms, which is lower than the rates at which we have been working in the previous quarters. Now if you look at it, when we get into that deal, so for example, this was the first quarter of that deal. So our entire portfolio of business in that particular customer, the rates have been reset to a lower per unit rate because of the commercial construct of that deal. So if you look at it, volumes have not gone down. But because of the rate negotiation that has happened on the overall portfolio, the business has come down. However, there is a commitment, it's a 3-year commitment. So we will be able to make up this over the next 3 years.

So is this reset already happened in 1Q? Or should we see this being a headwind to some extent going forward?

It has already happened in 1Q, the first quarter.

Our next question is from the line of [ Ashis Dash ] from Mirae Asset Capital.

So my question is on Healthcare and Medical Devices vertical. So this vertical has remained soft for the last few...

Sorry to interrupt, Ashis, but your line is not very clear. May I request you to please check the mode that you're using?

[Technical Difficulty].

Ashis, I'm sorry to interrupt, but your line is breaking up in between right now. [Operator Instructions]. Our next question is from the line of Vimal Jamnadas Gohil from Alchemy Capital Management.

My question was on autos, given the fact that the entire sector is in a bit of a flux because of tariffs. And we've done a good job of keeping our heads above water, but I want to understand the ramp-up of newer deals. And as to why will they not get a -- why will the ramp-up not get impacted because of the situation we are in. What leads to your confidence on the ramp-up of the last deals that you've won? And why will the existing deals not ramp up if the current ones that you've won in the previous few quarters, if they are doing well, why should the existing ones also do -- shouldn't they do well?

No. So what is the confidence you asked, right? The confidence is because we had certain -- between the customer and us, we had to achieve certain ramp-ups in Q1. And we have certain ramp-up to happen in Q2 and beyond, right? So I'm happy to tell you that the Q1 ramp-up has happened as per expectation, right? So we don't see any pullback. We don't see any slowdown that is happening from that ramp-up perspective. Of course, given that the markets are not very -- in a very favorable position and so on, but still the ramp-ups have happened. And the sort of engagement that we're having with customers, right, the sort of reviews that we're having on a regular basis gives us the confidence that, look, this ramp-up, whatever deal that we have planned is going as per original plan. We're not changing any of those deal terms, right, so far, right? And that is a commitment in Q2 as well that look -- this is a ramp-up that we will have, and we are progressing as per that schedule. There is no pullback. There's no budget cuts. The projects are coming in, engagements that are happening with the customers. So all of that is happening as per plan. So that's why we are pretty confident that those deals are going ahead as per plan.

So Manoj, again, it's encouraging to hear the new deals ramping up well. My follow-up then would be on the existing business, especially with Tier 1s and Tier 1's have done very well over the past few quarters wherein we've faced some pain on the -- sorry, on the OEM business, sorry, our OEM business has done very well versus a Tier 1 sort of struggling. So why isn't that our existing Tier 1 contracts are showing the kind of growth that the newer deals are showing?

No, the Tier 1 business globally is very, very stressed. That is because the Tier 1s are also not winning large deals, right? Many of them are closing deals because OEMs are taking over that role. OEMs are becoming more like Tier 1, like OEMs are really wanting to own software. So we see that happening across the globe that more and more deals are -- in an automotive industry, the OEMs are taking that ownership. And even if there are Tier 1 opportunities, most of the Tier 1s have their own GCCs here. And the current -- I mean, whatever we've seen of the Tier 1s is a lot of the work is being done out of the GCCs. So to that extent, our business from Tier 1s, we see -- continue to see that decline. And whatever little business that we are seeing is from the GCC and our engagement with GCCs.

And Manoj, what about OEMs? How will the existing business from OEMs pick up from Q2 and Q3, when do you expect that to pick up? Ex of the newer deals?

No, no. We are already seeing that, right? We're already seeing when I say more than 72% of our revenues today is coming from OEMs. I think maybe a couple of quarters ago, it was at 60%. So we are seeing the gradual move that more and more of our business is coming from OEMs. Of course, the large deals we have on that is also helping. But across the globe, we continue to see deal momentum in OEMs. A lot of the deals, whether it's in Japan or in APAC region and India, we see a lot of OEM movement there. Europe also, the new deals that we are seeing is from OEM. So that is also improving. U.S. is a little bit slow. I mean some of the OEM customers that we are engaged with, they have seen some amount of disruption, what do you say, project stoppages and so on. But we are not getting a clear idea as to when we will be able to restart some of those discussions with the U.S. OEMs. But minus U.S. OEMs, I think we are seeing -- we're seeing a good recovery happening across the market.

Our next question is from the line of Karan Uppal from PhillipCapital (India).

Yes. Just continuing the question Vimal asked, so the ramp-ups, which you are seeing in the auto business, could you clarify which areas you are seeing to demand? Is it EVs? Is it hybrid? Is that SDV, body engineering, which are the areas which you are seeing the demand?

We continue to see demand in ADAS, in SDV as well as electrification. And some of our older relationships we have, we still continue to see work on body chassis, infotainment, cockpit areas as well.

Okay. Also, just wanted to check all the Mercedes deal, which you have announced. If you can provide the ballpark range, what was the deal size? And what is the scope of not given to Tata Elxsi? Is it around OS, middleware, cloud, verification validation, all these areas? If you can clarify that? And how is the pipeline for SDV-related book?

Yes. So I think we have -- whatever information on Mercedes, we have already issued a press release, right? So we are not going to provide any further color other than what is already provided. But a lot of the business actually comes from the SDV area, plus a little bit of powertrain as well out there.

And how are you seeing pipeline for SDV-related deals, Manoj?

A lot of the OEM deals that we are signing up and a lot of the conversations are around SDV.

Okay. Okay. And the last question from my side is on FY '26 growth. So in terms of vertical mix, how do you see each of these verticals performing? You have mentioned some ramp-up visibilities there in auto segment. And in media also, you are a bit positive. So from the full year perspective, how do you look at the vertical growth?

I think, of course, for the financial year, I think our growth will be led by the transportation business. That would continue because on the back of the deals that have signed and also on the traction that we see in the market, the growth for the company will definitely by the transportation business. Media and Communication business will recover, and that's the plan that we are working on. So we hopefully will see the growth from Q2 itself. Healthcare, I would be a little careful there. It's -- I mean, there's tariff-related issues and so on and the fact that it's a smaller business for us and we do 0have -- we don't have a large list of customers. It's a select set of good customers that we have. So that will be a little volatile for us. And -- but however, we hope in H2, we will start seeing the growth in that particular business. We have done a lot of investments there, including from a leadership perspective, from a sales perspective. We have done a lot of investments, and we are hoping that from H2 onwards we will see an uptick in business there. And this business is also a little bit of a long lead cycle business. So we are working on some good opportunities and so on, but closure times -- closure takes time in the Healthcare business. So yes, so that's how the 3 businesses would pan out.

The next question comes from line of [ Arvind Jadhav ] an Individual Investor.

Looking at head count reduction in the quarter-on-quarter and year-on-year, also the attrition rate is also increasing like in quarter-on-quarter and year-on-year. Looking on the -- it looks like the business environment is quite challenging right now. So is there any strategy to bring back the past glory in the performance going forward?

No, of course, that's what we have been discussing all along. I mean, the business environment is definitely tough. We've discussed about how the 3 verticals. So we also talked about how the growth will be led by the transportation vertical that we have. And that's what we have been working. The media and communication also will come back to growth. Healthcare will take some more time. So we are hopeful that whatever steps that we are taking, we will be able to grow our business, right? Yes, the head count has come down because we have not been aggressively hiring. We still have a decent bench that is available. And as the business grows, we'll be able to utilize the bench at the same time, improving our margin as well. So we're very conscious about the situation, Arvind. And hopefully, you'll see the performance come back in the coming quarters.

Okay. And any new strategy entering in the new geography or any new verticals or any inorganic growth opportunity there?

We still would focus on the main geographies, right, which is U.S., Europe, Japan and India. Of course, we have entered into Middle East, Africa and Latin America and Southeast Asia. So these are new geographies that we have some business today, not a major business, I would say. But hopefully, we'll be able to ramp up our business there. On M&A, yes, we are looking -- we have certain -- at any point of time, we have certain pursuits. But again, it will only be -- whatever we look would be a tuck-in sort of an acquisition, right? So yes, and regarding new verticals, we are looking at adjacencies for each of our 3 main verticals. We are currently focused on the aerospace and defense as a new vertical, and we are investing. I think I talked about it in one of the previous questions. So that is what we will be focusing on in the financial year.

Are you optimistic regarding margin in the aerospace and defense sector?

Sorry, what is the question?

Regarding margin in the aerospace and the defense business, are you optimistic on that?

Yes. I think we'll answer that question once we see the -- I mean we are taking a very differentiated position and a very different approach as compared to some of our traditional partners, traditional -- sorry, as compared to some of the traditional companies that operate in aerospace and defense, right? So we believe we have an opportunity to win deals at decent margins there.

Sir, any guidance regarding FY '26 revenue and net profit, any idea...

No, we don't give guidance either revenue or profitability.

Okay. And the last question from side, sir. Is there any plan for the stock split or bonus issue regarding the shareholders?

I think that was -- the question was addressed in our AGM by our Chairman. A lot of our shareholders have asked about it and we will be considering that in the Board, and we'll get back at appropriate time to the shareholders.

Our next question is from the line of Sulabh Govila from Morgan Stanley.

My first question is with respect to the media vertical. So just wanted to understand this large deal that we had won last quarter. So by when do we expect this to fully ramp up? Can you provide any color on that?

Full ramp-up should happen by H2 of this financial year.

Okay. So you mean by the fourth quarter?

Yes. Most probably between third quarter and fourth quarter, yes.

Okay. Okay. Understood. And with respect to the mobility vertical, while you highlighted that there are certain deals which continue to ramp up and there are more ramp-ups which are coming from 2Q onwards. Are there any potential areas of leakages that you still expect in the coming quarter, given that we mentioned that Tier 1 is continue to be weak. And in JLR, we expect momentum to be maintained in the sense we don't expect an aggressive growth out there? And U.S. OEMs may also be weak. So if I add all of that, so it's probably 3/4 of the portfolio. So just trying to understand if there is any area of potential leakage or weakness, which is there in the quarter?

I think the Tier 1 in portfolio would continue to be under stress, right? And it is purely because of the business issues that the Tier 1s are having. Already our -- I would say, our revenues from Tier 1s have come down. I think we have reached a stage where I don't really foresee too much of a drop in that portfolio. But the fact is that their businesses are challenged. So that could be maybe a little bit more of degrowth in the Tier 1. But it should not impact us so much because the growth that we are seeing from the OEM side will be much larger and faster as compared to the degrowth. So we should be able to show positive growth is our expectation.

Understood. Understood. And then just the last question on margins. If you could provide the margin book for the quarter, given that the cost increase this quarter is quite sharp. So just trying to understand what's the sort of investment that has gone in this particular deal on the media side?

I will ask Gaurav to take you through that.

Sulabh, if you see our overall total cost, that has not gone up significantly. I think it is almost flattish or slightly up from the last quarter just by INR 4 crores, INR 5-odd crores. But that cost increase is mainly on account of currency impact on the on-site people salary cost and some of the visas that has been applied in the quarter. However, the margin was the major flow-through and dip in the margin is because of the revenue sequential decline. Otherwise, on the operating side, the cost doesn't have any signature change.

The next question is from the line of Rohan Nagpal from Helios Capital India.

So just continuing on the ramp-up within the OEM business. So if I look at the impulse to spend and invest more in R&D and the electrification SDV programs, et cetera, that has been constant for the last 2 or 3 quarters or maybe longer, actually. And if I look at the macroeconomic environment, it seems to be stable, if not deteriorated. I mean, TCS called out continued uncertainty and they actually called out a demand contraction. So that is in contrast with what you are saying in that, you are fairly confident of growth from the OEM side of the business for you. So I'm just trying to understand qualitatively, what is driving the growth? Like what has happened now that the OEMs are finally ramping up their spending and there is increased momentum in deal closure?

I think I'm not talking about all the OEMs suddenly deciding to spend and so on. I'm talking of the OEMs where we have engaged and OEMs where we have signed some of the large deals over the last couple of quarters, they are shown inclination to spend, right? So I'm confident of the set of portfolio of accounts that Tata Elxsi is handling at this point in time, given that we had better objectives in Q1, and we don't see any of the customers going back on the deals that they have signed, we are confident that, that will continue. I'm not talking about the larger overall macro and what is happening to the larger overall spend in the market. I'm not talking about it.

Fair enough. I was just asking because you said that there is a slowdown, so to speak, in North America, you're not quite sure when that will come up, but you said Europe and Asia, you see that ramp. So okay, I guess [indiscernible] that stuff. But even on the pipeline, if you're looking at the pipeline, are you seeing if pipeline is increasing, is it the pipeline for follow-on work with your existing portfolio? Or are you seeing a slightly broader up in pipeline even for logos that you don't include? Because I think you called out a new logo addition, right?

Yes, yes. So it is both, right? Customers -- existing customers of us. Also, we see an uptick in business in the subsequent quarters. And the new logos that we've signed on, we are seeing that whatever large deals that we signed on, that is continuing to -- our execution -- from an execution perspective, we continue to execute as per plan.

Okay. But all of this momentum is solely within your existing customers? You see -- it's going to be difficult to expand to other logos within this year is what you're implying. Is that correct?

No, I'm not saying that we do have pursuit for -- from a new logo perspective and new customers, right? So that continues. I'm not saying that we are not going to get -- in fact, as we speak, there are other opportunities and deals that are chasing, proposals being made. So the good part is we are seeing all those discussions happening, conversations with new customers happening. So that is positive. That gives me hope that, look, we can do -- I mean, moving forward, in the next 3 quarters, we will be able to grow our business in the transportation industry.

Okay. So I just want to clarify that I understand. I just want to confirm that I'm understanding this correctly. So it's not just an increase in the momentum of say, deal ramps within your customers, so there is an increase in the momentum or at least velocity of conversations with the broader automotive ecosystem with OEMs in Europe and in Asia. Is that correct?

Yes, Europe and Asia. U.S. continues to be slow for us.

The next question is from the line of [Rajakumar Vaidyanathan ] from [ RK ] Investments.

Sir, just a question on the margin front. The question is given the extensive work, I just wonder [Technical Difficulty] we will be able to surpass the margins that you have in the...

Okay, we are not able to hear because you're not very audible at all.

[Operator Instructions]

Sir, [indiscernible] front, so the revenue engines are not firing now. So I just want to know if once your revenue engine fires that you have extensively invested in AI and Gen AI, so fair to assume that you'll be able to surpass whatever in the past years the benefit of AI engine...

I think your voice was still not very clear, but I guess your question was that once the revenue and all the new verticals started to fire, whether we would be able to get back or surpass our historical margin using Gen AI engine. I think we answered that question previously that I think the focus is to steadily grow from here. And once the revenue gets back, I think we are very confident that we will get back to our historical levels of the margin, but that would be our midterm aspirations to get to those levels of margin. But I think from here onwards, you will see there will be a gradual uptick in the margins as we progress on the steady state -- I mean, steady revenue starts to build up on a quarter-to-quarter basis.

Okay. Sir, just to labor on the same question. So actually, what I want to know is what is the impact of this AI on your headcount? In other words, if you were using 1 headcount earlier, has it brought down the number to 0.9 or 0.8, what is the number that you want to see?

No, of course, we are using AI and Gen AI. We are increasingly talking to customers and so on. But unlike IT or a BPO or some other industries, the impact of AI is still -- is not going to be very dramatic as we speak, right? There are a lot of legal issues, customers are talking of open-ended liabilities. There are a number of legal issues to be sorted off before you can see uptick of usage of AI and Gen AI in the engineering today. So you cannot assume that because Gen AI is now available, you will be able to deploy lesser manpower and so on and so forth. Yes, for certain tasks, it is possible a certain type of projects, it is possible. But it is not a generic for all projects, we'll be able to do it. So I'll be very guarded and not to mislead you in saying that, look, Gen AI is a panacea for all issues that we're going to have. That's not going to happen.

Okay. Got it. And sir, the next question is I just wonder how big is the gaming segment for you folks? And any outlook...

No, we don't operate in the gaming segment. We used to maybe 10 years ago, but we have sort of got out of that segment.

Okay, sir. And lastly on housekeeping questions. So I see the tax rate has moved to almost 27% in this quarter. So is that the guidance for the whole year? Because last year it was 23%.

[indiscernible] 26% odd. I think we have been mentioning during the last few quarters that some of the benefit under the SEZ is coming to closure, and we have been moving from 100% tax holiday bracket to 50%. And hence, the tax bracket will move towards high north of 25%. That's what we are seeing now. Last quarter was lower because there were certain tax order credit before income tax refunds orders were there. But otherwise, if you see our normalized tax rate for the last few quarters, it is now about 26-odd percentage.

Ladies and gentlemen, we will take that as our last question for today. I would now like to hand the call over to the management at Tata Elxsi for closing comments.

Thank you once again for all investors for all the questions that you have. I look forward to seeing you again end of next quarter. And hopefully, we will come up with a much better performance that we anticipate in the coming quarter. Thank you so much, and look forward to talking to you again soon. Bye-bye.

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