Tata Technologies Limited (TATATECH) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Tata Technologies 2Q FY '27 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Vijay Lohia, Head, Investor Relations and M&A at Tata Technologies. Thank you, and over to you.

Thank you. Hello, everyone, and a warm welcome to Tata Technologies Q2 of Fiscal Year 2017 Earnings Conference Call. Joining us today from the management team are Mr. Warren Harris, Chief Executive Officer and Managing Director; and Mr. Uttam Gujarati, Chief Financial Officer. We'll begin today's call with opening remarks from the management team, covering the company's performance for the quarter and key business highlights followed by the Q&A session. Before we proceed, I would like to remind everyone that certain statements made during today's call may be forward-looking in nature. These statements should be viewed in conjunction with the risks and uncertainties outlined in Slide 2 of our quarterly fact sheet, which is available on our website. Our press release, financial results and investor presentation have been submitted to the stock exchanges and are also available on the IR section of our website. We trust you had an opportunity to review them. With that, I now invite Warren to share his opening remarks. Over to you, Warren.

Thank you, Vijay. Good evening, everyone, and thank you for joining us. Three months ago, we said FY '27 would represent an important inflection point for Tata Technologies, supported by a strong order book, sustained large deal momentum and our differentiated position in full vehicle development and engineering transformation. As we close the first half of the year, our performance continues to reinforce that convention. For Q2, revenues from operations increased 22.2% year-on-year in constant currency to $178 million. Services revenue grew 4.3% sequentially and 26.2% year-on-year to $142 million, contributing approximately 80% of our total revenue. Despite absorbing annual salary increments representing more than a 100 basis point headwind, operating EBITDA margins remained resilient at 16.1% and reflecting continued execution discipline and the strength of our operating model. We also continue to invest in future growth. During this quarter, we added approximately of 300 associates to support strategic program ramp-ups and strengthen key capabilities across the business. At the same time, attrition reduced by 70 basis points sequentially to 15.6%, reflecting the progress we are making in employee experience, career development and engagement. As we scale larger and more complex programs, while people remain one of our most important competitive advantages. From an industry perspective, we are seeing structural shift in the approach that our customers are taking to product development, specifically the automotive -- in the automotive industry, we believe that the sector is at an inflection point. Chinese OEMs have established new benchmarks for product innovation, development, speed and cost competitiveness and are increasingly expanding globally. In response, Western OEMs are becoming leaner and fundamentally rethinking how products are engineered and brought to market. We believe OEMs will increasingly focus on what defines their brands while outsourcing more engineering and product development activity. The winners will be partners that can own outcomes, particularly full product and full vehicle outcomes and build strategic relationships with the C-suite of those companies. This is the thesis around which we are building to other technologies. By product realization, we mean taking responsibility for the entire product life cycle from concept through launch. Our ambition is not just to become a large engineering service provider. It is to become a strategic product realization partner capable of owning increasingly complex engineering and product development outcomes for the world's leading OEMs. Our JV with BMW provides a compelling proof point to that theme. BMW has publicly announced plans to reduce headcount in Germany while continuing to invest in and scale our joint venture in India. We believe this reflects a broader industry trend as OEMs increasingly leverage strategic partners like ourselves to improve competitiveness, accelerate innovation and enhance productivity. The quality of our business. The quality of business that we are winning also reflects this positioning. Several large engineering engagements and full vehicle programs secured over recent quarters are now ramping, and we expect a more meaningful contribution from these programs during the second half of the year. Pipeline conversion remains strong with 5 large deals secured during Q2. These included a landmark $138 million full vehicle engineering program with a leading European luxury automotive OEM, spanning 2 vehicle programs. This win is an important milestone. It validates our ability to assume responsibility for increasingly complex product development outcomes and reflects the confidence our customers are placing into other technologies. We also secured an engagement with a leading North American commercial vehicle manufacturer to lead the end-to-end development of a new vehicle platform and support the associated digital TV infrastructure. Taken together, these wins reflect a broader shift in our portfolio towards larger, more strategic and more outcome-oriented engagements. Based on our first half performance, continued program ramp-ups and healthy pipeline conversion, we remain confident in maintaining strong double-digit growth for FY '27. While automotive remains our primary growth engine, aerospace is emerging as an important second growth engine for our company. Demand across the aerospace sector remains strong while the industry continues to face challenges in engineering capacity, production throughput and manufacturing efficiency. Our strategy is focused on areas where engineering heritage manufacturing expertise and digital capabilities can create differentiated value, including manufacturing, engineering, propulsion, MRO, digital transformation and the application of AI and automation. Our relationship specifically with Airbus provides an important foundation creates opportunities to expand our participation across the broader aerospace ecosystem. Over time, we believe aerospace can become a meaningful contributor to both growth and diversification. AI remains a central pillar of our strategy. Our objective is to combine decades of product engineering, manufacturing engineering, and full vehicle development expertise with AI to help customers achieve significantly faster development cycles, lower development costs and higher -- and drive higher engineering productivity. We believe the future leaders of our industry will be those capable of helping customers achieve China like development speed and cost competitiveness while maintaining Western OEM grade quality, safety, governance and IP protection. Today, nearly 1,000 Tata Technologies associates are developing and deploying AI agents across our engineering and business processes. We are systematically codifying decades of engineering knowledge and delivery experience into reusable AI-enabled capabilities across the product development life cycle. We are already seeing improvements in productivity, quality, development speed and scalability. More importantly, we are transitioning from AI-assisted ways of working to AI native ways of working across our value chain. We believe the combination of product realization expertise full vehicle development capability and AI native delivery creates a powerful competitive advantage for Tata Technologies. To conclude, our first half performance reinforces our positive outlook for FY '27. We remain confident in delivering strong double-digit growth for the full year, supported by strong demand, ongoing program ramp-ups, healthy pipeline conversion continued investment in talent and improving retention trends. More importantly, the nature of work and trusted to Tata Technologies is changing. Customers are increasingly asking us to take responsibility for larger more strategic and more outcome-oriented programs. As OEMs adapt to a more competitive global environment, they will increasingly seek partners capable of owning outcomes and accelerating innovation. This is the opportunity we are positioning Tata Technologies to [ capture ]. Through our leadership in product realization, growing full vehicle development capability, expanding aerospace and AI native transformation, we believe Tata Technologies is becoming a highly differentiated engineering and technology partner well positioned for sustainable long-term growth. Thank you. I will now hand it over to Uttam to review our financial performance in more detail.

Thank you, Warren, and good evening, everyone. We delivered yet another quarter of strong growth and profitability, so supported by healthy execution across our strategic programs and continued operational discipline. Revenues from operations grew 22.2% Y-o-Y in constant currency to USD 178 million, while operating EBITDA remained steady at 16.1%, and despite absorbing the impact of annual salary increment during the quarter. With that, let me take you through the financial performance of Q2 in greater detail. Services revenue increased 4.3% Q-o-Q in constant currency to INR 1,356 crores, reflecting continued growth in our services business and ramp up of strategic programs. On a Y-o-Y basis, services revenue were 26.2% in constant currency and 22.1%, excluding STec. Growth was broad-based with automotive growing 7.6% Q-o-Q excluding sTec, while nonautomotive grew 7.5% sequentially in U.S. dollar terms. Demand at STec remains subdued, particularly from its largest customer in Germany. While we anticipate some additional softness in Q3, we expect conditions to stabilize in 2027 and remain confident in the underlying strength of the business and its medium- to long-term growth prospects. Technology solutions grew 9.2% year-over-year in constant currency while declining 6.6% sequentially to INR 343 crores. The sequential decline was primarily driven by the timing of revenue recognition in education business and the change in accounting treatment for certain OEM hosted SaaS license within the product business. Effective July 1, 2026, revenue from these contracts is being recognized over the license term rather than upfront at the point of sale, in line with an evolving accounting guidance under IndAS 115. This change reduced Technology Solutions revenue by INR 12.6 crores during the quarter. Consequentially, total revenue from operations increased 2.1% sequentially to INR 1,699 crores. Excluding the impact of the revised revenue recognition policy in the product business, total revenue in quarter 3 would have grown 2.8% Q-o-Q. Looking ahead, we expect the product business to recover in Q3, benefiting from seasonal demand patterns. However, the Education segment is likely to face near-term pressure as project execution is impacted by slower infrastructure readiness at certain customer site. Services continue to demonstrate strong momentum, providing resilience to our overall performance. Resultantly, we remain confident in reiterating our double-digit consolidated revenue growth outlook for the full year. Our profitability remained resilient despite an estimated 100 basis points headwind from annual compensation revisions implemented during the quarter. Through disciplined execution, operational efficiencies and the favorable business mix, operating EBITDA remained steady at 16.1%. EBITDA grew 2.2% Q-o-Q and 31.5% Y-o-Y compared with the same quarter last year to INR 273 crores. As several large client programs gain momentum across the second half, we remain focused on balancing continued investment in growth with initiatives aimed at enhancing operational efficiency. During the quarter, we invested in a new office facility in Poona to consolidate our operations and create capacity for future growth. This has led to an increase in D&A and lease-related interest costs. As revenue scale and operational leverage tendons, we expect these investments to be increasingly absorbed within the business supporting profitability over the medium term. We are also managing through a period of temporary demand softness in parts of our Germany business as customers undertake restructuring and cost optimization measures. Against this backdrop, we expect to deliver sequential margin improvement through disciplined execution and productivity initiatives. Importantly, these factors are transient in nature and do not alter our confidence in the long-term opportunities ahead. Our operating profit or EBIT increased 25.3% Y-o-Y reaching INR 239 crores. Our joint venture with BMW continues to perform strongly and remains ahead of our expectations. In quarter 2, our share of profit from BMW Tech works increased 20% sequentially and 115% Y-o-Y to INR 11.4 crores including deferred income of INR 8.3 crores, the venture contributed a total of INR 19.7 crores during the quarter, underscoring the strength of the partnership and its growing contribution to our profitability. Other income dropped 35% Y-o-Y to INR 31 crores, driven by noncash items like foreign exchange gain losses. Profit before tax rose 7% year-on-year to INR 242 crores. Adjusting for noncash foreign exchange movements, underlying PBT grew 16.4% Y-o-Y, highlighting healthy growth in the core business. Net income for the quarter was at INR 171 crores compared with INR 166 crores in the same period last year. Excluding the noncash items, which I just pointed out, profit after tax would have increased 13% Y-o-Y, maintaining a strong balance sheet and a healthy liquidity remains a key priority for us. At the end of Q2, our net cash position stood at approximately INR 330 crores compared to INR 880 crores at the end of Q1. The sequential reduction was primarily driven by the dividend payout of nearly INR 475 crores during the quarter. Despite the significant shareholder distribution, our balance sheet remains robust, providing us with financial flexibility to support ongoing growth investments, pursue strategic opportunities and maintain disciplined capital allocation. Our DSO stood at 102 days at the end of Q2, compared with 97 days in the previous quarter. Our billed DSO came in at 63 days compared with 65 days in Q1, an improvement, while the unbilled DSO were at 39 days compared to 32 days. While we saw a modest sequential increase in the unbilled DSO collections remained healthy, and the movement in unbilled was largely timing related with no change in the underlying quality of our receivables. Moving on to the operational metrics. The highlights are as follows: Our total head count stood at 12,095 associates at the end of the quarter, representing a net increase of 316 employees or 2.5% sequentially. This increase was primarily driven by the ramp-up of several large programs secured over the past quarters. While we are investing to support growth opportunities and ensure successful program execution, we continue to maintain a disciplined approach to workforce management, aligning capacity expansion with client demand and operational efficiency. Our talent metrics remains broadly stable during the quarter with trailing 12 months voluntary attrition improving modestly to 15.6% on a sequential basis while continuing to remain with a manageable range. We continue to see strong engagement across our workforce, supported by meaningful investments in learning, career development, leadership programs and opportunities to work on large-scale engineering and digital transformation programs for our global customers. Building a future-ready workforce remains a strategic priority as we continue to scale capabilities across areas such as admitted software, software-defined vehicles, AI, cybersecurity, digital engineering and advanced manufacturing. During the quarter, we delivered over 27,000 learning as and trained more than 5,000 associates across technical and professional skill areas. We also expanded AI readiness across the organization through focused enablement programs covering over 1,000 employees. In parallel, we strengthened our engineering talent pipeline through targeted hiring in strategic domains and continue to invest in leadership development programs aimed at preparing the next generation of business and technical leaders. These investments position us well to support the ramp-up of recently won programs and capture well for future growth opportunities. Overall, we are pleased with the performance in the quarter, which reflects the strength of our diversified portfolio, improving deal momentum and disciplined execution. While we continue to navigate some short-term challenges, particularly within certain customer segments and geographies, the underlying demand to underlying demand in environment remains encouraging and our strategic programs continue to scale well. Supported by a strong order pipeline, a healthy balance sheet, continued investment in talent and growing contributions from strategic investments, strategic initiatives, such as BMW Tech Works India, we remain well positioned to capitalize on the significant opportunities ahead. Accordingly, we reiterate our expectation of delivering double-digit consolidated growth for the full year while continuing to drive sustainable margin improvement and long-term value creation for our stakeholders. Thank you, and we can now open the floor for questions.

[Operator Instructions] Our first question comes from the line of Ravi Menon with Axis Capital.

I thought that we had an expectation that margins could expand each quarter as we go through the year this quarter, it looks like that's happened I know that we had a very tactile despite is, I think there was an expectation that we will be able to expand margins because we did have the impact of ramping up the last year in the previous quarter. So I just wanted to ask on that what led to the significant increase in subcontracting this quarter? And when can we expect that to normalize?

I think in terms of margins, we were very pleased with the progress in Q2, largely because we rolled out salary increments, and we were able to squeeze out it was only a 10 basis point improvement. But for us, given the the circumstances in the context, we were very pleased. We were also pleased with the -- again, our performance on margins is something that we are proud of. As far as the subcontractor costs are concerned, maybe Uttam, you want to pick that up?

Yes, sure. So as we ramp up a lot of our programs globally, this is a fine balance we are maintaining as we are working towards discharging the work that we have to do to support the program that we have. this -- as we scale better, this cost will further go down and will be replaced by the permanent employees that we have. However, -- this is a very conscious call we take to maintain a fine balance between the permanent employees and the subcontracting staff to support the peaks and troughs that might come in during the course of the program and the execution of the business. So this is a very balanced call balancing the headcount capacity growth and the temporary cost pieces which can come in.

And Warren, you spoke about how stated to be a good growth driver for you longer term. And since these aerospace programs are, if I might say, longer duration compared to automotive -- could we say that this would also be helpful in stabilizing our revenue growth and doing more predictability?

I think that there is a level of predictability in aerospace that perhaps we don't have in other sectors. Most of the aerospace programs are 8, 10 years in duration. And I think that also from a macro perspective, we are seeing a massive uptick in demand for commercial aircraft. The some 25, 26,000 commercial aircraft in productive use at the moment. That's likely to scale to over 40,000. And the likes of Airbus and Boeing are not in a position to be able to build quickly enough aircraft to satisfy the demand. And so we are certainly intersecting with that at the moment. and we expect to continue to double down on the aspect of the opportunity. But I think what you're also going to see in the coming years. And I was in to lose last week at the Airbus supplier event is that there hasn't really been a new aircraft program at either Boeing or Airbus for the last 10 years. There's been improvements that have been made to the legacy fleet, but there's no new programs. Airbus have come out publicly now and stated that they will launch the new single-aisle next-generation aircraft. And given the incumbency that we've established at Airbus, we are very, very excited about the contribution that we're going to be able to make for that program. So that there is predictability to aerospace, and we certainly expect the tailwinds that are there today, not only to grow, but to work to somewhat scale somewhat exponentially.

Our next question comes from the line of Tushar Khurana with East Wealth.

Okay. So I have just 1 question. So this Tata Group taking a leading role now in India semiconductor value screen all the way from fab to chip. And I believe most of these would also be catering into automotive chips -- so I just want to understand what's energies for Tata Technologies being we are in the whole value chain of design to build, including in value electronics. So do we see this as a new area of growth for our company within automotive segment? And how would it overall Tata product technologies to go up the value stain in form of services that we cater to?

We're very fortunate that in the group in a number of areas. The group's assets and capabilities that support the entire value chain associated with the sectors that we are involved with. And you point out automotive. Not only do we have the capabilities of Tata Electronics and the support that increasingly, the group is expected to make towards the technological evolution of the mobility sector. We've also got organizations like Taco that provide the ability to bundle build support in terms of the propositions that we extend to the market. So we're very much committed to the independent relationships that we have with customers in automotive. But where it makes sense, the consortia proposition that the group has available to it is a key differentiator in terms of the relationships and the partnerships that we have. with some of the more progressive companies in the space.

And just a follow-up on that, Warren. So do you see also this becoming a new area of growth for us where we can have incremental growth coming from the space itself? And just correct me if I'm wrong, but when these tips that are being made by Tata Electronics on the OSAT side that also needs some kind of validation. So -- are we also going to play any role in that process?

Really, we're already supporting Tate Electronics. And again, I think as the full coverage for the automotive value chain, expense, I would expect that consortia opportunity that I referenced before to become increasingly relevant. Our belief in our ability to sustain strong double-digit growth, not just this year, but in the future, is informed by the differential capabilities that we have inside of Tata Technologies but also where it makes sense, the differential capabilities that the group can bring to bear. So our expectations in terms of growth and relevance are all based upon the things that I've just referenced. It will increasingly make a contribution to our value proposition but the expectations of momentum and scale in quantum terms are all informed by that in terms of our business plan, not just for this year but beyond.

Okay. Okay. And my second question and last question is regarding this order win for this $138 million that we have done for a new full vehicle program for a European OEM. So what is the time line for this execution by when this will be going into development stage? And just to reconfirm this is from non-auto OEM client, right?

The $138 million is for a luxury European automotive OEM. And we are, as we speak, beginning the ramp up of that pop program. That will make a contribution towards our second half and will also inform the order book for next year and the year after that. I think what's significant, it's 1 of the reasons that we are so excited about the responsibility that we've been given is that this represents real turnkey ownership that Tata Technologies have for the entire product realization process from concept all the way through the launch of the 2 vehicles that are part of this program will represent. I think it proved positive it's proof positive of the thesis around which we're building the company. We believe, as the competition from China accelerates as the disruption from AI continues to impose itself upon the OEMs. We believe that the OEMs will likely reduce their core and we'll focus upon the elements of their brand proposition that defines their competitive position. We think that everything else is going to be outsourced, and we think that the the primary winners of that structural change in the industry will be those companies like ourselves that can own outcomes. And this is a testament to the market's confidence in our ability to own outcomes with the live in our full products. And so it is a very proud moment for us to be entrusted by a company that has been in the industry for decades and operates at the top end of the passenger vehicle market.

Our next question comes from the line of Ankur Pant with IIFL.

I was just trying to understand the near-term softness coming. So this is something that you highlighted in the last quarter as well that Germany continues to remain weak. So in that context, if the weakness or the softness that were expecting something more than that what we expected in 2H? Or it is fairly -- this is just a repeat of the comments that's been made in the previous quarter and nothing really changes in the outlook for towards attain we look during the previous quarter.

I think if you're following the news in Germany, the reference that I made before to the structural changes going on in the industry. I think that's clearly underway in Germany. I think BMW have announced that they are looking to reduce head count by 100,000 people between now and 2030. And more recently, BMW have announced a VRS scheme in Germany. I think what's significant is that despite the fact that BMW are reducing headcount in Germany, they continue to invest in their global R&D footprint that includes the joint venture that we have with them in India. And as far as our acquisition is concerned, we anticipated that there would be some headwinds in the first 12 to 18 months. But we continue to believe that STec specifically represents a platform from which we will be able to support the R&D globalization aspirations that the VW Group has. So we are working very, very hard to support them through what is difficult market conditions, but this in no way tempers our confidence in strong double-digit growth this year and our ability to be able to expand margins in the second half of the year.

So just again following up on this..

Sorry to interrupt you on request you to please check the mode and switch base.

Is that better?

Yes. Please go ahead.

Just wanted to follow up on that. So I understand that Germany has been weak. It's been there in the news. But just from a quarter-to-quarter perspective, what you were seeing in 1Q versus 2Q, towards the 2H outlook? Has that deteriorated in terms of what you're seeing on the client side? That is what I wanted to understand.

The business delivered what we guided in Q1. We fully expected the market conditions to play out as they have, and we were ready for that, and we're supporting again our activities in Germany that extends beyond sTec. We have relationships with all 3 of the large OEMs in Germany. And again, we are committed to stay in the course there, primarily because of the inflection point that we are convinced will will see these organizations extend their R&D capabilities beyond Germany. If you look at the German market over the last 50 years, most of the R&D work has been done in Germany itself. We are starting to see now the change that's happened in other regions happened there, and we are absolutely convinced that we others like us will be the beneficiaries of that change.

And just a small question. I see that there is a drop in the $50 million-plus client bucket. If you could help understand what's happening there.

The primary change relates to our anchor customers. And the change that we're seeing in one of those anchor customers in advance of a major -- a relatively major structural change that will happen within their business. We see that as tactical we expect to bounce back in the second half of the year. It was planned. It was anticipated. It's not something that we are concerned about.