Cyient Limited (CYIENT) Q2 2027 Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the SCIENT Limited's Q2 FY27 results conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Please note that this call is being recorded. I now hand over the conference to Mr. Krishna Bodanapu, Executive Vice Chairman and Managing Director. Thank you, and over to you, sir.

Thank you very much, and good evening, ladies and gentlemen. Welcome to Science Limited's earnings call for the second quarter of financial year 2027. I'm Krishna Hodanapu, Executive Vice Chairman and Managing Director, and present with me on this call are Sukumal Banerjee, Executive Director and CEO, and Srinivas Kulkarni, Chief Financial Officer. I would like to mention that some of the statements made in today's discussions may be forward-looking in nature and may involve risks and uncertainties. A detailed statement in this regard is available in our investor update and has been emailed to you and is also posted on our corporate website. This call will be accompanied by an earnings call presentation, the details of which have already been shared with you. We are reporting group performance under four segments, DET, DLM, Semiconductor, and others. The focus of this call, as always, will remain the DET segment, and the group numbers will include performance of all four segments. I will start with a brief update of our Semiconductor business and our DLM business before Sukumal and Srini walk you through DET's performance. Firstly, I would like to take a minute to give you a bit of background on the semiconductor business and how we work there. The Science Semiconductors operates through two businesses. The first is our custom basic business, where we take a customer's requirement for a chip from specification to silicon and then supply it in production in volumes. These programs give us long-term customer relationships and the designs that carry into volume supply, which means that there's an annuity-based revenue stream. The second, and very important for our long-term strategy, is our product or ASSP strategy in business. Here, we develop our own chips and sell them to multiple customers so the IP is fully owned and reusable by sign. This includes the low-voltage portfolio that we acquired through the acquisition of kinetic technologies and the high-voltage products we are now developing. Applications include AI, data centers, industrial, and automotive. The quarterly performance for the business was very, very strong. Revenue for the quarter was $193 million, which was up 8% quarter-on-quarter. This is our sixth consecutive quarter of sequential growth, a record we are proud of, and one that reflects the breadth of our portfolio. Order momentum remains healthy, and the audit intake on our customization business is up more than 50% compared to last quarter. EBIT margin improved against previous quarter, even as we kept funding R&D, talent, and go-to-market much ahead of the revenue curve. The EBIT loss this quarter reflects entirely our investment in product R&D. Excluding this investment, the core business is generating money at an EBIT level and is self-sustaining. These are deliberate choices that lay the foundation for a company of meaningful scale, and we will continue to make them in line with our strategy. In our custom ASICs, we closed a large turnkey projects and have a very healthy pipeline in excess of $100 million. Our power product business, or ASSP, which is central to our long-term strategy, we continue to invest in product development for the high-voltage and low-voltage. Our process wafers and probe test flows have been qualified, and we are working with the leading ecosystem partners to log specifications ahead of our first customer samples, which will happen towards the end of this year or early next year. Let me give you a brief outlook of what's happening in the semiconductor industry. The industry is in a strong demand cycle driven by AI, but supply is tight. Foundries are running at full utilization and capacity is constrained across the ecosystem, which is leading to higher wafer prices and longer planning cycles. We expect this to continue to weigh on our margin in the immediate term. The shortage and rising cost of memory is also affecting end demand in consumer and edge AI applications, which are our focus areas. As a result, we expect some softening in the pace of growth in the coming quarters, though we're quite confident that the growth demand remains strong and that the markets will continue to support our strength. In DLM, we delivered another very strong quarter, supported by a sustained order momentum and disciplined execution. The business has maintained positive order book momentum for six consecutive quarters, with a book-to-build ratio in excess of 1.6 times. The order book surpassed the record level achieved in the previous quarter and is highest it's ever been. Revenue grew more than 26% year-on-year in INR, and we continue to meet customer requirements despite supply chain shortages, longer league terms, and geopolitical uncertainty. DLM has significantly strengthened its sales leadership and continues to invest in strategic capabilities and operating foundations to support the next phase of growth. While these investments have a near-term impact on margin, they are important in building a scalable, sustainable, and stronger business. The focus firmly remains in profitable growth, operating leverage, and sustainable margin improvement for the medium to long. Looking ahead, the structural drivers across BLM's target markets continue to remain very favorable, Including rising electronic content, growing AI infrastructure demand, global supply chain diversification, and broader outsourcing trends. With our differentiated design-led manufacturing model, strong customer relationships, and expanding execution capabilities, SCI and DLM is very well positioned to capitalize on these opportunities. And overall, we delivered a very strong first half with revenue more than 30% over the first half of last year. And we entered the second half of the year with a very strong order book, a robust pipeline, and a very strong and motivated sales force that will continue to deliver into the future. The board also took cognizance of the cash generation and the strong operating performance, and we will continue this momentum into Q3 and into the rest of the year. Our approach to capital allocation, as you know, remains balanced and disciplined. We will prioritize investments that drive long-term load, keep financial flexibility to pursue strategic acquisitions where they make sense, and will continue to pay dividends in line with our policy. Consistent with this, I'm pleased to share that the board has declared an interim dividend of rupees 12 per share. We remain focused on sharp execution and on creating sustainable value for our shareholders and are very confident on our ability to generate cash as a group. At a group level, looking ahead, our focus is on opportunities that bring strengths to our business together. Defense, semiconductors, and AI are the industries that present the highest growth opportunities, and I'm very pleased and proud to say that science is strongly positioned and is pursuing significant strategic opportunities in all these areas. We bring customers an end-to-end proposition spanning engineering, silicon, manufacturing, lifestyle support, reinforcing the compounding value of our complementary capabilities. I want to reiterate that the three fastest-growing sectors of defense semiconductor and AI are where we, as a group, have significant capabilities that nobody else can match within our competitive sector. With this, I hand over the call to Sukhmal, who will take you through the business performance of BGT. Sukhmal, over here.

Thank you, Krishna. Good evening to all of you, and thank you for joining us today. At our Investor Day in August, we shared our perspective on the opportunities ahead for SIGN, the role we see for lifecycle engineering in sharing our future, in shaping our future, and the priorities that will guide our next phase of growth. We also introduced our new brand promise, nothing less, giving a clearer voice to the exemplary outcomes that have shaped our work and our customer relationships. As we look at our second quarter performance, I am encouraged by strong progress we are making to drive predictability and profitability across the business. We delivered growth during the quarter, recorded our highest ever order intake for quarter two, highest EBIT in 10 quarters, and remained focused on building the capabilities that support our long-term strategy. An important part of that capability expansion was welcoming the Tau Digital team to sign. Their expertise adds depth to what we can do for our customers, and our teams are already pursuing opportunities on the same together. Let me now take you through our financial performance first across four metrics. Revenue for the quarter was US$174.2 million, which was up 7.5% quarter over quarter and 6.3% year over year in constant currency. This includes one month of revenues from the Tau digital acquisition. On an organic basis, the revenue grew 1.6% quarter over quarter and 0.4% year over year in constant currency. Our EBIT margin stood at 14.2% up 107 basis points quarter over quarter and 206 basis points year over year. We recorded highest ever Q2 order intake of 158.4 million dollars up nearly 21% year over year with positive momentum across both new businesses in existing and new customers from an order intake perspective. This doesn't consider any order intake from Tau consolidation, which we'll start talking about and announcing in the near future. In addition to the order intake in this segment, we signed a multi-year frame agreement with a potential to execute up to euro 50 million annually as the upside potential for a global leader in consumer product groups. This particular contract, we have not included as part of our order intake, and the work that they have signed up with us consists of a broad range of engineering services, which will be contracted through future SOWs, and the frame agreement provides us a significant position to execute on the same, on a go-forward basis. I wanted to highlight this contract because of its significance, but also wanted to share that we remain consistent on how we announce our order intake at Sine versus how it may get captured by some of our peers. Technology order intake stood at $10.3 million, up 39.7% year-over-year, reflecting the demand we are seeing for the capabilities we are building in data, AI, digital engineering, and intelligent engineering solutions. The strength of our order intake, together with continued growth in our pipeline, gives us a greater confidence as we enter the second half of the year. Focusing on market clusters and market units, transportation and mobility again grew strong at 4.5% quarter over quarter and 16.5% year-over-year in constant currency terms. It's the sixth consecutive quarter of growth for this particular segment. The shining light of this quarter and over previous couple of quarters has been our performance in automotive and mobility. Despite the challenges in the market, we continue to see robust growth in this market segment for science. Growth is supported also by continued momentum in commercial aviation, where our focus on aftermarket services and helping customers improve operating efficiency is delivering results, alongside a greater emphasis on systems and avionics. We see medium to long-term opportunities emerging in defense, supported by sustained geopolitical demand or demand created by geopolitical actions, while rail continues to demonstrate moderate recovery. Despite potential pressure from aviation, fuel prices and inflation, our strategy, customer-based capabilities and the industry standing gives us confidence in sustaining this business performance. Networks and infrastructure was flattish with a slight degrowth of 0.3% quarter over quarter in constant currency and a 1% year-over-year growth, largely reflecting completion of certain project-based engagements and some weakness in our utilities business. We continue to reshape the portfolio towards longer-term growth, more recurring programs, and we hope to make some announcement on these lines very soon. Even so, the underlying demand remains strong. Continued fiber rollouts and the global build-out of AI data centers are sustaining wireline demand while raising power needs and grid modernization are driving investment in network design, asset data, And special intelligence. Strategic markets degree 1.5% on constant currency basis quarter over quarter. However, at the outset, let me state we are at the bottom of our business in some of these markets, especially energy, where we see growth ahead in energy and process industries. The go to market teams we rebuild are starting to deliver. We have steadily pivoted the business towards annual We have enhanced our position across several existing customers. Our recent wins reflect that shift with customers increasingly embracing long-term strategic relationship built around recurring value rather than one-off projects. The consumer goods framework agreement I mentioned earlier demonstrates the reach of our process industry's capability beyond The traditional energy market as well, and is a clear demonstration of the impact this team is creating while it's early, while it's early, the traction we are seeing reinforces our confidence in this direction in nuclear energy, where we bring more than a decade of experience, customers are increasingly increasing their spending plans, and we are already seeing early ramp up demand in that direction. AI infrastructure is creating additional opportunities, particularly around data centers and supporting infrastructure. And over the medium term, we want to at least half this, want at least half of this business to be recurring revenue. And that's our ambition and goal that we are working with. Switching over now, talking about capability development and making sure that we continue to invest in the future, the opportunities we see across our business are closely linked to the capabilities we have been building to support customers more effectively across the lifecycle. We are continuing to strengthen those capabilities, the integration of Tau Digital adds depth to our platform software and data engineering capabilities, and our teams are now taking this combined expertise to the customer engagements. This expands the support available to build stronger data foundation and enterprise AI adoption, complemented by our understanding of customer engineering environments, products and operations. It further strengthens that we can offer in automotive, high-tech, and health tech, and adds delivery capabilities in Greece and Taiwan. We are also bringing our engineering knowledge, data, and AI expertise together through newly established business unit, intelligent engineering solutions, to develop and commercialize repeatable and scalable solutions for our customers. Sai Engine, our agent AI-enabled lifecycle engineering intelligence platform, brings together governed industrial data, deep engineering domain knowledge, and modern AI stack to help customers improve outcomes across engineering, service, and quality. It enables three playbooks in engineering, three playbooks in terms of the value that we deliver to customers across engineering means faster design life cycles and better first time rate rates. In service, it means higher asset availability and fewer unplanned outages in quality and regulatory world. Well, it means faster certification with audit-ready pressibility. Each is measured against the customer's own KPIs, which positions us well for long-term outcome-based engagements. Our progress in this area has received several recognition. One of them in Q2 was the Frost and Sullivan, who awarded science with 2026 Global Technology Innovation Leadership Recognition in the Intelligent Lifecycle Engineering Services space. Looking further ahead, we are evolving our technology organization through the creation of a CTO office with a focus on research and development in Horizon 2 and Horizon 3 technologies. This spans technologies at different stages of maturity with opportunities to create advantage over the next one to five years. Its initial focus areas will be around physical AI and robotics, AI in co-arranging, advanced domain-specific AI, and some look ahead at quantum and other emerging technologies. This office will work across the group, companies of DED, DLM, and semiconductors, identifying technologies with relevance across the group and building capabilities through collaboration with startups, academic institutions, and research universities. This creates a clearer bridge between innovation and commercialization between the two groups that we have set up. So talking now about lifecycle engineering, which we introduced as a concept to the market, as well as we touched on in our investor day, together, these capabilities strengthen our ability to support customers across the products and the asset lifecycle. We already work across all nine stages, building on our engineering relationships to take on broader role through longer term engagements. This is central to our position as the lifecycle engineering partner of choice for our customers. Our presence across this lifecycle also creates significant opportunities to expand in the aftermarket. While we already support service lifecycle activities in 58% of our accounts, we remain underpenetrated relative Customers over these long operating life cycles carries a responsibility to understand the outcomes they depend on our promise. Nothing less expresses that standard. We bring that responsibility exemplary outcomes and the result to reach beyond them sustained through engineering discipline and an understanding of what each customer needs. The goals we set in Mumbai stand. I would like to thank all of our associates for their efforts this quarter and our board for its continual guidance for the results we have delivered. With that, let me invite Srinivas Kulkarni, our Chief Financial Officer, to take us through the financials in more details.

Thank you, Sukumal. Ladies and gentlemen, thank you for joining us today. I will now take you through our financial performance for the second quarter of FY2027. Before I get to the numbers, there are a few points on how this quarter's results are presented. First, the Tower Digital acquisition was closed during the quarter. Our results include one month of Tower Digital's PML for September 2026. Second, Kinetic, or part of our semiconductor segment, is now in its second quarter of consolidation. And to separate the underlying performance from the effect of these two acquisitions, we will present results on two bases. One, Organic. For DET, this will exclude Tau Digital, and at the group level, it will exclude both Tau Digital and Kinetic. And the reported number will include all the entities. Also, as you all know, Q&A figures were normalized for M&A-related expenses tied to the tower digital acquisition. There are no such adjustments in Q2, so the reported and normalized figures are the same this quarter. Quarter-on-quarter comparatives remain on a normalized basis. I will focus mainly on the DET performance, followed by a brief look at the group performance. A couple of quick capital allocation updates as well before we move on to the financials. First, we completed the buyback of 720 crores, covering 6.7 million shares earlier during the quarter. This affects our results in two ways. It adds to EPS based on a reduced, you know, paid up share capital, and it reduces our cash balance, which also lowers our other income. Second, we financed the TAO digital acquisition through an external commercial borrowing. The debt and finance costs appear in the DEET's reported numbers. And as Krishna mentioned, the board has approved an interim dividend of Rs. 12 per share for FI 27. This signifies our confidence in the free cash flow and the business outflow. Moving on to Deity's performance, Deity reported a revenue of $174.2 million. That is up 7.5% sequentially and 6.3% year-on-year in constant currency. In rupee terms, revenue was $1,664 crores, up 8.1% quarter-on-quarter and 15.7% year-on-year. Tower Digital contributed $9.6 On an organic basis, DET revenue was $164.5 million. That is up 1.6% sequentially and 0.4% year-on-year in constant currency. In rupee terms, organic revenue was 1572 crores, up 2.1% quarter-on-quarter and 9.3% year-on-year. The gap between the constant currency and the rupee growth rates reflects the currency elements. DET's EBIT margin was 14.2%, up 107 basis points sequentially and 206 basis points year-on-year. This is DET's highest EBIT margin in the last 10 quarters. In absolute term, EBIT was 237, up 16.8% sequentially and 35.3% year-on-year. The sequential improvement came mainly from our cost optimization initiatives over a billion days. Tower Digital added to both margins and PIT in Q2. And that holds after all the related costs, the borrowing costs, the fair value changes, and the earn-out liabilities, amortization of acquired intangibles are all taken into account. Our cost optimization program is well underway. We expect it to keep supporting margins through FY27 and to help offset the wage increases we are expecting in Q3 and Q4. We remain committed to the margin expansion roadmap we presented in the investor day and provided there are no major surprises on the exchange rates. D.E.T. PAC was 153 crore, up 8.7% sequentially and 11.9% year-on-year. EPS was 14.59, up 14.2% sequentially and 17.4% year-on-year. This is helped by the buyback. Other income was lower, mainly because of the fair value change on the earn-out liability. Finance costs includes the interest on the external commercial borrowings raised for the towel and digital acquisition. The effective tax rate for the quarter was 38.3%, including tower digitally. That's down about 90 basis points sequentially because the adverse one-off items from Q1 did not recur. We continue to expect the ETR to be around 28% for the rest of the year. On cash flow, DUT free cash flow was 214 crore for nearly 140% conversion of PAT. That is up 87.9% sequentially and 36.3% year-on-year. The drivers were higher operating profit, a three-day reduction in the net DSM, and favorable working capital movements. I'll now go on to the group performance. At the group level, Q2 revenue was $233.9 million. That is up 7.1% sequentially and 15.3% year-on-year in constant currency. In rupee terms, revenue was 2,235 crores, up 7.7% quarter-on-quarter, and 25.5% year-on-year. This includes 9.6 million from Tower Digital and about 11.9 million from Kinetic. Group EBIT margins was 10.2%, up 52 basis points sequentially and 83 basis points year-on-year. EIT's margin improvement was partly offset by continued R&D investments in the semiconductor business. Group Pat was 121 crores. EPS was 11 rupees 54 paise, up 11.8% sequentially. For the first half of 527, group revenue was 452.9 million, up 12% year-on-year. EBIT margin was 10% up 52 basis points year-on-year. To sum up, this was a quarter of progress on two fronts. DET delivered year-on-year growth and its highest EBIT margin in 10 quarters. Tower Digital is already adding to both margin and profit after tax. With the buyback completed and Tower Digital closed and consolidated, our focus is now on integrating Tower Digital, continuing our cost optimization work, and expanding margins further through sustained organic growth. With this, I will now hand the call back to Sopni for the Q&A.

Thank you so much, sir. Ladies and gentlemen, we will now begin with the question and answer session. Anyone who wishes to ask a question may click on the raise and icon from the participants tab on your screen. We request participants to restrict to two questions each and then return to the queue for more questions. To rejoin the queue, you may click on the raise and icon again. We'll wait for a few minutes until the question queue assembles. We're taking the first question from Sandeep Shah of Equirus Securities. Sandeep, please go ahead.

Yeah, thanks for the opportunity and congratulations on a strong set of numbers, especially in DET. So, the first question, Sukumal, just wanted to have a view. What proportion of DET revenue is more sticky annuity now versus when you join? Any target in future? And this question is to understand the growth strategy.

Thank you, Sandeep, for the question. So I would probably defer answering a question on exact specific numbers. What I can say is that we have a goal to get to about 70-30 mix, 70 being more sticky, long-term annuity revenue versus project-based or short-term revenues. I think we probably are, and this is the best estimate I can share with you, is probably about 200, 300 basis points away from that, or rather 20, 30 percentage points away from that. And that is the work that we are working on with some of the deals we have in the pipeline and some of the recent engagements we have won. And the nature of the way we have structured the engagements, it gives us confidence that we get there relatively soon.

Yeah, yeah. And just a clarification on the EET organic. This quarter has been good despite some holidays in Europe, which impacts the sustainability as a segment. And is it fair to assume this growth on a Q&Q can continue on organic basis in the second half? And on Tau Digital, the run rate on a yearly basis looks like $115 million, which looks like again 40-50% growth in Tau in the CY26. So is it the analysis or numbers are correct or if you can provide a clarity?

Okay. So, firstly, on sustainable energy segment, as we call it, your reflection is correct, and the data point you highlighted that, yes, summer holidays does impact our revenue in Q2, and we do have some return of that in Q3. As you know, we don't share guidance. All I can share is that we feel confident about second half of the year, which I already shared in my commentary. So I'll leave it at that. In terms of the question on TAO, I could not very clearly get that question. So in case, Sweeney, you have understood. Yeah, I can answer that.

So, Sandeep, I think when we acquired Tao, they were at a run rate of about 80 million a year. And I think what we have seen is growth in their business to close to about 100 million a year. I think extrapolating one month would not be accurate. I think we'll wait for their Q3 performance. But definitely, they are on a very high growth trajectory. My sense is they'll, for the next 12 months, I think they could be closer to 100 to 110 million. But this is just a very rough order magnitude estimate at this point.

Yeah, yeah, thanks. Just a clarification, the confidence on second half in DUT is even for the organic basis, not including TAU, right? Absolutely. Yeah, yeah. And just the last question, then I will come in a follow-up. So, this new deal worth 50 million euro, what is the reason not to be included in order intake? And will it ramp up immediately from second half or it can ramp up from the next financial year?

No, we will see some ramp up in second half of the year. And the reason is there are many such contracts which get signed, which I mean, I would refer to them as framework agreement. So, that essentially gives you the opportunity to write that revenue, does not give any kind of signed commitment or a signed plan for that level of revenue. And that is why we kept it out of the order intake numbers. However, as we start booking specific SOWs against this frame agreement, we will start including that in order intake numbers going forward.

Okay, thanks. We'll have more. We'll come in the follow-up. Thanks.

Sure. Thank you so much, Sandeep. We'll take our next question from Gokul Honda of VTH Capitals. Gokul, please go ahead.

I am audible.

Yes, please.

Yeah, I just want to understand. So, you know, in your transport and mobility segment, the growth has been impressive compared to other segments. Could you give us some more color on this? What is leading this? And geography-wise also, what is driving this? Because I think Europe has been a point of sort of difficulty in this space. So I just want to understand if you could give us some more color in this segment.

Sure. So as I mentioned, while there is generally a challenge in the market for automotive and mobility, we have been fortunate in terms of our customers and the areas of work that we do to continuously see growth in that segment, which is definitely been helping us in our growth in transportation and mobility. Of course, from an absolute growth perspective, majority of that weight is carried by the work that we do in aerospace. And as I mentioned, while there are no new programs, except for some regional carriers or private regional jets, we have built a very strong capability about aftermarket and how do you essentially provide a full lifecycle support to aerospace customers, both tier ones, as well as airframe manufacturers. And given the volume increase of number of aircrafts driven by sheer growth in consumer traffic, we are seeing that demand reflecting in our numbers. We continue to see that. Yes, potentially there's a headwind with what's going on with oil prices and potentially a negative turn for commercial aviation in the future. But these are risks that are out there. But for the time being, we continue to see that momentum, and we probably will for the next couple of quarters in terms of visibility. We are also planning in terms of hedging against potential downturn in commercial by making strong investments in the defense space, where the capabilities that we leverage are the same. So that's what I would say to your question.

Got it. And in your semiconductor business, could you give us the number for kinetic that we have in this quarter? Like, last quarter, I think it was some 10.6 million. So, has there been any growth in, like, could you just give us a breakup of how much is kinetic this quarter?

Kinetic is roughly 11.5 million or so. 11.9, almost 12 million. So, there's a significant growth in kinetic.

11.9. Got it. And also, just one more thing. Could you help us on how many employees have been added as a result of the TAO acquisition?

So, we'll roughly come to about 3,000-something is the number. Right now, all in all, as a group, we're at 19,500.

Sorry, is that 3,000, you said?

Yeah, roughly 3,000-something is the number.

Got it. Thank you.

Thank you, Gogol. We are requesting participants to please click on the raise and icon from the participants tab on your screen if you wish to ask any questions. We'll move to our next participant. We have Dipesh Mehta of MK Global. Dipesh, please go ahead.

Yeah, thanks for the opportunity and congrats for our strong execution. A couple of questions. First, about the margin side. You indicated about wage hacking actually. Can you help us understand how to look it in terms of whether it will be phase manner or how it will play out and likely impact from it and considering the wage rate and overall growth momentum what we expect plus the cost optimization program which we are having. How one should look your EBIT margin trajectory. In second half as well as over medium term that is question 1. Second question is on the strategic unit growth. You indicated about energy to return to growth. What about mining and HLS, if you can give some sense, how to look holistic, strategic, unit growth trajectory. That is second question. Third question on the sour digital profitability, if you can give some sense, because revenue seems to be on the upward curve, how it is playing out at margin level, if you can give some sense. Thank you.

Okay, Dipesh, I'll answer the first and third question and maybe hand over the second question to Sukuman. Is that okay? So, on the margins side, I think we are doing the wage hikes in two phases. I think it will be done over Q3 and Q4 with roughly an equal impact in terms of the headwind that it will create for us on the P&L. And what we are doing right now is, you know, we have a visibility on the optimization, cost optimization program. So, we are very confident of being able to retain the margins at the current levels and as we grow through the year, despite the wage height. So, and on the second question on Tau, I think after taking into account all the intangibles and amortization and interest costs, etc., their margins are very close to our margins. So, more or less, they will be at the same level as what science is operating at. Sukhwal, you want to take the second question?

Sure. So your question was on mining and minerals, and all I would say is at an overall level, we have already seen some progress in Q2, and we'll continue to see it in Q3. We have won some strategic programs, and it remains one of our smaller units at this point in time. But to come back to the overall view of strategic units, we definitely should be expecting better results going forward.

So broadly, there's a from composition of mixed perspective in strategic market. How one should look at it? Because mining and mineral energy, HLS, these are the three constitutive of it. If you can give some sense about composition of it. And among these three buckets, where you are more positive from growth recovery perspective.

Sure. So it is roughly 65 and the other, you can split the other 35 between HLS and mining and minerals, HLS being probably more 22 and the rest being mining and minerals. We are, we definitely remain positive longer in the midterm on energy and HLS. Yes, mining and minerals, we are still working through some portfolio aspects that we need to work through. But in the near term, which is next one or two quarters, we have enough visibility for growth.

Thank you. I can come in for that. Thank you. Thank you.

Thank you, Dipesh. We'll move to our next participant. We have Kavuljit Saluja of Kotex Securities. Please unmute your microphone and go ahead. Yes, thank you.

Hi. Good to see you. A very nice print for the quarter. Sukumal, I have a couple of questions for you and then a question for Srinivas as well. The question for you, Sukumal, is that you mentioned about a 50 million euro framework contract in Europe. Sure. Typically, in these framework contracts, I mean, you know, in your experience in engineering services world, do they translate into an expected revenue? And typically, what I've seen in the past is that such framework agreements do not realize the full value. If that happens, you know, what are the typical reasons why it happens here? And, you know, in this particular contract, how have you arrived at, let's say, 50 million euro estimate of the contract as such here?

Sure. So, Convergit, thank you for your wishes, and you are absolutely right on your observations. One of the reasons we do not include in the order intake. The reason we came to the value is because it's mentioned in the contract.

Can I ask a question?

Yeah, but typically to realize this to the expected value, what needs to happen, and when does the ramp-up start, and what's the sequence of ramp-up? You know, does it start off at an expected run rate or, you know, is this a part of a larger program which will take a lot of effort to build up?

It will need some effort to build up. I'll not say a lot of effort to build up. And it does not start at run rate level. If it is at a run rate level, we would have probably announced it as part of order intake. It will take one or two years to ramp up to full expectation. That is the realistic view that I can share with you. But obviously, our attempt would be given the opportunity has been presented to us is to see how we can maximize ramp up as soon as possible.

Got that. The second question is around, I mean, I could see a lot of various increases around the numbers in the sense that top five clients and top 10 clients ran down. And, you know, there was a massive growth outside of top 10. We can just explain, you know, on the composition of numbers, anything that we should know.

I think the top five, top 10 is probably more just an aberration for the quarter. There is nothing material or strategic that is going on in these accounts for us to consider per se. I think overall, our top accounts remain healthy and you will see substantial year over year growth by the time you are done with the financial year. There may be one or two accounts which may become flattish for next year, but that's still further away from a discussion perspective. But right now, this may have been an aberration of the quarter and not something holistic.

Got that. Just a question for you, Sukhaman, there's a transportation and mobility, again, fantastic quarter, you know, growth from a quarter-on-quarter year in your perspective. If you can just, you know, give me a strategic view about the legs of the sustainability and drivers for growth, leave us in the quarter, but let's take care to lay out the roadmap for the next two to three years, right? How do you see this segment growing and the drivers for idea?

Sure. So there are two scenarios, Convaljit, that we should be conscious of. One is the continuation of the war and continued increase in oil prices. And one is a cessation of the war in the near future, which can be in the next three, four, five months as well. We're not talking about just this one. So in scenario one, while we do not see any near-term impact to our growth trajectory, we definitely will have to start working towards pivoting more towards defense and expecting the results in defense to protect us against potential slowdown in commercial aviation, which is bound to happen.

Thank you for that. A question for Srinivas. You know, what's the kind of hedge book that you're running at an average rate for the hedge book?

So, we have covered roughly 50% of our net hedge for the next 12 months. I don't have the average rate of lack of hedge. I can separately tell you about it.

You know, okay, it's just the context is that, you know, there have been continued hedging losses, which means that you're earning a fairly high cash flow hedge book. So I guess, you know, it will just help us model numbers better, if you can just share that rate. And secondly, more important, you know, I mean, you know, why, let's say, hedge your net cash inflows, other than possibly, you know, Having some quarter or two uncertain, you know, one or two quarters of certainty about your net realization of FX. Any other reason why you are taking those long-dated hedges?

No, we have actually a staggered hedge, Kabalji. I think what we do is, for the near term, we hedge 100%. And then for the four quarters, we don't hedge anything beyond the four quarters.

And what are the connected hedges? You're talking about balance sheet as well? Yeah, yeah, both. Okay, what's the quantum, and if you can, what's the quantum of hedges that you're running?

I think it's close to 70 million, the hedges, and then the average, by the way, is about 95.6 months.

Okay, so 95, okay, so 70 million at 95.6 over the next 12 months. That's right. Okay, got that, yeah. Thank you so much, yeah, and wish you the best, yeah.

Thank you so much. We'll take our next question from Vibor Singhal of Nuama Equities. Vibor, please go ahead.

Yeah, hi. Thanks for taking my question, and congrats on a very solid performance. Sukumal, just a couple of questions from my side around the TAU digital performance. So when we announced the acquisition, as you mentioned, as we had seen, the revenue run rate was around $18 million. And in the opening remarks, we discussed that it's kind of close to $100 to $110 million that the company would end up at for CY26. So that's a very solid growth of almost 25% on a Y-on-Y basis. So just wanted to understand, what exactly is this growth driven by? Were there some big deal wins which were there in the book, which kind of grew this growth? Or is it the kind, and also is this kind of a sustainable run rate that you can expect for this business? Just some color around that would be really helpful.

Sure. So just so you're aware, we are managing this business for one month now. Obviously, we do have a visibility a lot on the numbers. Having said that, do we see the sustainability of the growth in this business? The answer is yes. It is driven by having offerings and capabilities which are driven from a timing perspective right for the market, significant investment in capabilities which are critical in enterprises today about how you earn We have pollinated this into all of science account, which was the hypothesis on which we built this acquisition and the rationale for this acquisition. So what we are talking about right now is pretty much what can be driven by Stow standalone. As we start getting more integrated in terms of these offerings to our customers, it will be another source of how we can sustain this growth going forward. On the margins, if you want to comment, Srinik.

What are the questions on the margins? Sorry, I missed it.

No, I think the question was just on the revenue part. But, yeah, since I have you here, I can probably check on the margins part also. You mentioned that including the depreciation and amortization, the profitability of the Tau business is very similar to the signed DT business. So does that mean that at EBITDA level, which would not include the incremental amortization of the intangibles that we would have acquired with the company, The EBITDA level of this company would be higher than what our signed DT margins are?

That is correct. I think my comment was at the EBITDA level, so therefore the EBITDA, they are at a much higher margin than the signed DT.

Got it, got it. And Sukumal, just one more last thing on the, again, on the TAO business part. So, as we understand, the TAO business was present in mainly in automotive, high-tech, and healthcare verticals. And now we would be looking to cross-pollinate and probably cross-sell this to the other verticals in which DT has its presence. Is that the assumption, is that assumption right?

That is correct. And of course, expansion of those verticals as well.

And expansion of those verticals as well. Got it. And just one last question here again. So we acquired this company for around $218 million. So what is the quantum of debt funding that we have available for this? And what would be the interest rate repayment period? The details if you can share, please.

Yeah, so this is, while the acquisition price is to 18 million, that's at the, that is, the upfront payment is only 130 million. That is a performance based on, or not for two years. And we have 100 largely through debt. I think 120 million debt is on the books today because of this acquisition. So we're at a very attractive interest rate. And we also, it's linked to SOFR plus the spreads that the bank has given us. We have also taken interest rate swap so that there is a lock-in of those rates for the next five years. It's a five-year.

Five-year. You mentioned SOFA plus how much BIPs?

No, I mean, the spread is from the bank. It's a competitive rate. I don't think it's...

Got it, got it. Those are all the questions from my side. Thank you so much.

Yeah. Thank you, Bipur. We'll take our next question. We have Shraddha Agarwal of AMSEC. Shraddha, please go ahead. And a request, please, please rest it to two questions. Thank you.

Yeah, hi. Congratulations to the team on a great quarter. Two questions. First is, we've seen a decline in number of clients across all client buckets in our DUT business. So any reasons you would assign this to? And in terms of semiconductor business, which has raised $30 million, So, how has that been accounted for in the balance sheet?

Shini, you want to take the second question first?

The semiconductor, how did we account the semiconductor?

No, I think that there are, the fundraiser in semiconductor and two elements, there is a, you know, a 20 million worth of debt and a 10 million worth of equity. So, it's accordingly, you know, position in the balance sheet. The 10 million is a convertible preference sheet.

On the question regarding accounts, as I was explaining earlier, I think it has more to do with more near term results in our top accounts. While the number of accounts may also be overall reduced, it is driven by two factors. One, in certain market segments, we did have a long tail of accounts, which we have been consciously rationalizing, I'm not at the middle of our program, of course, but as programs come to an end. But in terms of how we see this trajectory going forward, we do see in certain market segments, number of accounts would reduce and in our scalability in certain accounts has to go up. It is part of our overall approach as to how to make the business more sticky and more consistent in terms of revenue generation and visibility.

Right. And just one last question, if I can squeeze on the semiconductor business. So you said that because of increased prices of chips, the margin target for semiconductor might be a little deferred. So you were earlier targeting a break-even in FY28. So what is the, you know, margin timeline that you're looking at for break-even?

So the break-even timeline remains intact. We will break even in somewhere in FY28, which just might be deferred a little bit. It's just the great news there is the demand is very high. The challenge is really in the supply. So in that sense, yeah, we're not seeing a significant challenge. It's just it might get deferred a quarter or two within our calculations, but we will break even in FY28.

Great. Thanks, Rishan.

Thank you, Shraddha. We'll take our next question. We have Amit Chandra of HDFC Securities. Amit, can you squeeze in your two questions, please? Amit, please unmute your microphone and go ahead. Sorry, we are unable to hear you, Amit.

Hello. Can you hear me now? Thanks for the opportunity. The first question is the continuation on the semiconductor business. Obviously, you mentioned in the opening remarks that there is slowdown in this semiconductor that you're seeing. And the second half could be softer. So, is it something that has changed in the last two months, or is it more company-specific, or is it more macro? And where we are in terms of the targets for a semiconductor business in terms of longer-term targets, and what kind of organic growth rate we can expect in FI 27-28 for this semiconductor business? Thank you.

So firstly, let me clarify that I did not say that there is a slowdown. I said because of the supply situation, there is a mismatch between supply and demand. The demand continues to be very, very strong. I mean, the business is growing at a macro level, not sign, I'll come to sign, but at a macro level, the business is growing 30% year on year. So there's no slowdown in the industry. It's just that the supply has not still caught on to the demand. And that's where there are certain programs that are slowing down, which will come back. So the demand is there. It's just the supply has to catch up to the demand. Coming to our situation, we are obviously very, very confident. I mean, of course, there will be pushes and pulls. It's just the nature of that industry. We will have certain supply-side constraints. Right now, the demand is not the constraint. It is supply-side constraint. And we are confident that we will see very strong growth. I mean, the kind of growth that we've seen in the industry. I just want to be very careful that that industry is also very – it's not a quarter-on-quarter growth. It's a year-on-year growth because there are certain, for example, we supply a lot of chips from Kinetic to the laptop industry. Now, the laptop industry has certain quarters which are very strong, certain quarters which are not. So, in a year-on-year perspective, we expect the growth momentum to continue, at least for the foreseeable future. We don't see any challenge there.

Okay. And, you know, in terms of the mix, you know, within the semiconductor business, what would be the mix of custom S6 versus ASP chips and where we are in terms of, you know, launching the high-voltage and low-voltage chips that we are investing into? And, you know, in terms of the investments that you also mentioned that the investments will be elevated for, you know, some time. So, by when we can see that, you know, like, picking up?

So, in terms of, sorry, in terms of where we stand, our chips are in the design process. We will have the low-voltage chips are already available. I mean, this came through the acquisition of the Kinetic portfolio. The high-voltage chip will take out, as it's called, which is basically released for production early next year, and we should start to see substantial revenue from that chip during the course of FI-28. And the break-even will also be in FI-28, as I said earlier. Again, the core business, which is the custom ASIC business, is generating crunch. It's just that whatever loss we're seeing is because of the investment in the high voltage and also some of the low voltage. The core of the low voltage is available through the kinetic acquisition. We're investing further, and we're investing in high voltage.

Okay, sir. Thank you and all the best. Thank you.

Thank you, Amit. We'll take another question now. We have Ankur Pant of IIFL. Ankur, can you please squeeze in your two questions quickly?

Hi, everyone. Congratulations on a good set of numbers. My first question is, Sukamal, at the end of 1Q, we were a little wary about how 2Q would pan out, and it has certainly been a good quarter. So, from your vantage point, what was it that surprised you positively? Anything that stood out that you were not anticipating? That would be my first question.

I think it is a lot about execution and how fast would some of the customers start working, start to start the work that they had paused because of the Middle East war starting off. That is what triggered a lot of the work stoppages and caution, I would say, from our customers. I think that rebound was much quicker than we expected. Second, we definitely did much better in certain segments where the book and bill within the quarter itself was higher than we expected. So those were the two reasons of how we saw the positive. And yes, we brought significant focus on execution, which ensured that we maximize the outcomes on what we had in hand.

Sure. And secondly, after 1Q, your commentary was that you expect an acceleration in growth in 2H from 2Q. That was the comment that you had made out. So does that still stand, given that this has turned out to be a pretty good quarter? So I understand that 2H, you have the confidence from the order book. But do you expect an acceleration in growth from here that you expected from in one queue?

So we remain confident about growth in Q2, sorry, in H2. And that confidence is what we expressed in our commentary. Does Q2 performance change that either positively or negatively? The answer is no. It depends on some other deals that we are working on, Including the one we announced the framework agreement, how fast we can ramp up. Those are the things which can positively impact our confidence even further.

Thanks. And just finally, if you could help me with the net new number within the order in book order or order intake.

So we maintain pretty much the level of percentages that we talked about that we should be delivering, which is in the mid 30s. So, in terms of the ordering tick, it continues to be in the mid-30s as a percentage. Sure. Thank you. All the best. Thank you.

Thank you. Ladies and gentlemen, due to positive time, we will take this as the last question. I will now hand it over to the management for closing remarks. Over to you, sir.

Thank you very much, and thank you, everybody, for your support. I want to paraphrase Arnold Schwarzenegger from Terminator and say, We believe we are back. We're back with a renewed leadership team. We're back with a much stronger and relevant portfolio. We're back with a renewed focus. And more importantly, we're back with a renewed commitment to execute. We are committed to the strong execution and nothing less will be accepted. Thank you very much for your support.

Thank you. Ladies and gentlemen, on behalf of Science Ltd., that concludes today's conference call. Thank you for joining us, and you can now click on the leave icon to exit the meeting. Thank you, everyone.