Tata Elxsi Limited (TATAELXSI) Q1 2027 Earnings Call Transcript

Ladies and gentlemen, good day and welcome to the Q1FY2627 earnings conference call of Tata LXA Ltd. hosted by E&Y. 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. Should you need assistance during the conference call, please signal an operator by pressing star and then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Shashank Dinesh from ENY. Thank you and over to you, sir.

Thank you very much. Good evening to all the participants on the call. Good morning if you're logging in 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 was reviewed in conjunction with the business risk that the cost for the result performance or achievements that differ significantly from what is expressed or implied by such forward-looking statements. To take us through the results and answer your questions today, we have the Senior Management of Tata LXK, represented by Mr. Manoj Raghavan, Managing Director and CEO, Mr. Nitin Pai, Chief Marketing and Chief Strategy Officer, Mr. Nalir Rana, Chief Financial Officer, and Ms. Neha 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. We would appreciate your cooperation in the rest of the Q&A for two questions to allow participants an opportunity to interact. If you have any further questions, you may join the queue and we will be happy to respond to them at time for this. With that, I would like to hand over the call to Mr. Manoj Raghavan. Over to you, Manoj.

Thank you, Shashank. Very good evening to everybody who has joined us today for the Q1 FI27 investor call. I hope all of you are fine and doing well. I am pleased to announce that Tadalexi has passed the key milestone of causing more than 1,000 crores of quarterly reporting operating revenues by delivering 1,021.1 crore in the first quarter of FI27. In constant currency terms, our revenue grew by 6.5% year-on-year and 1.3% quarter-on-quarter. The growth was led by a major vertical, which is transportation and media and communication, which grew 6.7% and 11.5% respectively year-on-year in constant currency. We see this performance as a reflection of the strength and relevance of our unique design-led and AI-enabled engineering capabilities. Supported by large strategic engagements in the chosen industries. We posted an EBITDA of 216 crore, which grew at 15.7% year-on-year and an EBITDA margin of 21.2%. The media and communication business delivered robust growth of 4.7% quarter-on-quarter in actual currencies and 2.9% quarter-on-quarter in constant currencies. Which translates to a year-on-year growth of 22.2% in natural currencies and 11.5% in constant currencies. The strong performance was enabled by the ramp-up of key engagements, which we announced in the previous quarters, and large programs with global operators and broadcasters. A transportation business, which contributes more than 55% of the SDS segment revenue. We reported a resilient performance in an otherwise challenged macro environment with a growth of 6.7% year-on-year in constant currency and 13.3% year-on-year in actual currency. This was led by large automotive OEM engagements and strategic off-road and aerospace deal wins. We continue to strengthen our pivots towards OEM, and today, 78% of our automotive revenues is from our OEM customers. The healthcare business exited near flat with a minus 0.3% quarter-on-quarter in constant currency, reflecting the muted global healthcare business environment. The anticipated momentum was staggered by the delayed deal awards from some of our key customers. We, however, remain excited about the long-term prospects of this segment. We continue to invest through scaling our newly launched platforms such as Vital, Anatol. Reimagining our offerings with AI Gen AI, and taking center stage in medtech and healthcare events, setting ourselves to capture emerging opportunities. In the quarter gone by, we have accelerated our efforts to expand platform-led offerings. Our Neuron platform portfolio has enabled Sky in Europe to transition towards zero-touch network operations with enhanced cybersecurity, delivering up to 30% to 70% efficiencies in various parameters. Our AI-led material intelligence platform, Vital, also inks a strategic deal with a global medtech company. We are executing upon a future-focused strategy and will continue to intensify our investments in specialized talent, rigorous upscaling, AI-powered platforms, tools, and infrastructure that strengthens our human plus AI plus domain proposition. These forward-looking investments will enable us to stay at leading edge of technology advancements while accelerating value creation for our customers. The U.S. region performed well for us across verticals led by new deal wins and deal ramp-ups. Some of these strategic programs demand quick ramp-up at onshore for transition, support, and initial stabilization. We have incurred additional costs of deploying forward teams as well as specialist third-party contractors to help accelerate transitions. And mitigate visa delays for our engineers. This is partly reflected in our on-site offshore ratio and bottom-line performance and should ease over the next two to three quarters. We are firmly focused on sustainable growth, deepening our engagements with key customers, and positioning ourselves to shape and win strategic long-term deals and add marquee customers. We look forward to carrying the growth momentum to subsequent quarters. While remaining steadfast on our operational rigor and business discipline. Thank you and over to Shashank for the Q&A session.

Thank you very much.

We will now begin with the question and answer session.

Anyone who wishes to ask a question may press star and then 1 on their touchtone phone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Again, to register for a question, please press star and 1.

Your first question comes from the line of Bhavik Mehta with JP Morgan.

Please go ahead.

Hi, thank you. A couple of questions. Firstly, I don't know if you can give some outlook on your three verticals given, you know, the middle is concrete, still remains in place. So, you know, how are the discussions with clients involving on spending intentions, you know, for the next few quarters? And if you can, you know, see verticals, how they're different. And secondly, is on margins. You did talk about, you know, some onshore investments and subcontractors as well. So how should we think about the margin trajectory going forward? I mean, is this like a one-time thing which is in the base now or is this fighting for the next few quarters? So, you know, any color on the margin outlook for the year?

I think, I mean, up front, let me tell you, I think it was a reasonable quarter for us because two of our larger businesses, which is transportation and the media and communication vertical, had a pretty decent performance, I think. Media and communication vertical has been sort of underperforming for quite some time, and I think some of the deals that we have closed in the previous quarters, we've finally able to ramp up and achieve the full, you know, ramp up situation. So I think there are, as we speak, you know, there are deals that we are chasing. There are some pretty large, you know, consolidation deals in the, you know, media and telecom space, and some of these we are very, very confident that, you know, we should be able to, you know, swing in our favor. So I think over the next two to three quarters, we strongly believe that we will be able to continue our growth in the media and communication vertical. From the transportation vertical, yes, I think the Europe situation is a little, you know, we have to wait and watch the challenges in the German market and so on. We have not been affected, you know, as much, and the deals that we have closed, we continue to execute. There is some slowdown in the new deals. But having said that, I think for us, you know, the U.S. market, Thank you. You know, a couple of quarters, and these ramp-ups are happening as we speak. So I strongly believe that, look, for both our media communication and transportation, we should see, you know, growth over the next two to three quarters, right? That visibility is coming as we speak. Healthcare, again, you know, it's a little bit of a, you know, it's like a moving target. It's a smaller business for us. Less than 10% of our revenues, you know, come from healthcare. But it's a very, very important business for us because we strongly believe Fantastic capabilities, including a lot of, you know, AI, Gen AI-related tools that we have built for this particular, you know, market. And that is a good, you know, when we talk to customers and, you know, as you know, in this particular industry, the deal pipelines, you know, the deal closures, you know, would take some time. There are some very good conversations happening. I wish we had a better, you know, story to say. We are really hopeful that Q1 would be a growth story. Unfortunately, some of the deals that we have been discussing, we have still not been able to close it and complete the paperwork and so on. So having said that, we are still in the mid-term to long-term. This is an area that we are investing in. We have built fantastic capabilities, and we strongly believe that this will. Eventually, you know, in this financial year, we will see growth in the healthcare and life sciences space. So this is somewhere where we are definitely continuing our investments and so on. On the margin side, you know, maybe I will request, you know, Nalan to give you an overview. Yeah, I think we have, you know, some one-timers that have hit us in the quarter, but definitely we have a plan to, you know, grow back and, you know, and if you look at it over the four quarters, really look at how we can get back to our margin profile. So I will hand it over to Nalan to answer that question.

Thanks, Manoj. So if we look at our EBIT margin, so our EBIT margin has decreased 330 BIPs on a sequential basis and increased 80 BIPs on a YOY basis. So looking at the change in margin in three buckets, right, to give you some color. So the first bucket is cross currency gains that we have got in the quarter. That's about 40 to 50 BIPs. Then we have, in this quarter, around 150 BIPs of one-off costs or short-term costs. And there's a third bucket of 220 BIPs, which is towards investments in people, go-to-market, and capabilities. Now, taking the second and third buckets one by one, right? So, 150 BIPs. So, 150 BIPs, this quarter, you know, we had to incur some transition costs. For some of our large consolidation deals that are taking place. Second one is there were some one-time costs that we also took towards retention of select employees who we believe are sort of critical for the business. Third one here, there were costs in relation to a particular customer that we had to incur in this quarter, which we do not anticipate going forward. And the fourth is upfronting of certain annual costs. So these are absolutely standard costs, pretty much fixed on an annual basis, but we had to, for various reasons, upfront some of these costs in this quarter. So this bucket, the way we should think about it is most of these would go away in the next quarter. Some of these will transition over the next couple of quarters. Then there's this third bucket of about 220 to 230 BIPs. Now, this is on account of few factors. One is investment in on-site sales and delivery. In this quarter, we saw, you know, significant ramp up in some of our U.S.-based deals. So, we had to ramp up our delivery there. A lot of this ramp up we had to do through subcontractors because of, A, you know, the short timelines. B, also visa restrictions that are existing in the industry. In addition to this, we have applied for visas of our own people who will sort of supplement these contractors or replace them over a period of time, right? Then there were costs, again, for these deals, there were costs related to ramp up of these deals. Then we are, as mentioned by Manoj earlier, ramping up our investments in specialized talent, AI tools, and infrastructure. And lastly, we had, you know, very recently a Chapter 11 in one of our customers, which sort of led to higher provisions for the quarter, which you can also sort of see in the, you'll be able to see sort of in the financials. Then the second bucket, this bucket, the way I would think about it is, you know, these are little more secure, but also should go away over a period of time, right? So subcontractors, we look to make, you know, optimize those by, you know, moving some work streams offshore, or our own employees replacing the subcontractors over a period of time, and finally leave only the critical sort of resources that are there. And, similarly, you know, customer-related ramp-up costs, you know, as sort of our deals get ramp-up and stabilized, I think these should also stabilize over a period of time. So, these, just to recap, around 150 BIPs, you know, they should go away more quickly. Second bucket should move away, should sort of improve over a period of time.

Okay, got it. That's awesome. Thank you.

Thank you. Your next question comes from the line of Bimal Jamnadas Kohil with Alchem Capital Management Private Credit. Please go ahead.

Yeah, thank you so much. Sir, just one follow-up on the margin question. In the other expenses line item, which is about 135 Watt Crore, Are there any forex losses also that are being, that are built in this particular quarter?

Yeah, so this is what actually I referred to, you know, there's other expenses largely increased because of two, you know, I would attribute it to two items. One is a chapter 11 at one of our customers where we had to provide for, you know, the receivables on a conservative basis. The second one related to upfronting of certain sort of annual cost. So, I would say not a big forex item, but, you know, these are sort of the two main drivers.

Okay. Fair enough, sir. Sir, I missed out on the auto OEM contribution in this quarter. How much was that?

78%.

78. All right. And so lastly, we've been talking about revenues from adjacencies. When can we possibly see some sort of quantification of disclosure as to how much are we getting from these adjacencies?

I think in this financial year, at some point in time, we will definitely be able to disclose. Hopefully, by the end of the financial year, we should be in a position to tell you exactly.

All right, awaiting that. Thank you so much and all the rest.

Thank you. Your next question comes from the line of Ravi Menon with Axios Capital. Please go ahead.

Thank you for the opportunity. And congrats on a really good performance in the media and communication segment. So it's important to check what's the pipeline like in transportation and are you seeing automakers especially look at new hybrid platforms? What sort of role can you play in that? And in the medium-term engagement segment, one of your top customers is undergoing a corporate restructuring. Any changes to your engagement that might come either positively or negatively from that?

I think coming to the MCV, yeah, I think we are discussing with our customers at this point in time. There is no clarity in terms of is it going to affect our business or not. So, if you ask me, I would say that, you know, it will only help us. It could be positive because there are, you know, we have not deeply penetrated, you know, the NBCU, you know, piece. So, that is an opportunity for us to really go there. So, at this point in time, there's nothing that we can, there's nothing to inform in terms of is it going to affect us or not. We are keenly watching that space. From an automotive, you know, customer's perspective, you know, we've already discussed, I think, globally, yes, both in the U.S. and in APAC, Japan and India, I think we've seen, you know, traction is definitely there. There are large deals that we are waiting for. Continental Europe is a little bit of a, you know, wait and watch, you know, as we speak. We're not sure on the pace at which some of these decisions will happen. So I think there's a little bit of a wait and watch there. But otherwise, the overall automotive industry, I think, you know, we should see some good, you know, growth coming in minus Europe.

Thank you all, sir. And the overall headcount is down a little bit. So what's the sort of hiring plan, especially for fresh college graduates this year, and how does that compare to the last year's fresh college graduate hiring?

I think we are on a, you know, wait and watch, right? I think our utilization is just about 95% or so right now. We still have some leeway to go. We have been hiring, you know, freshers as we speak, but the numbers have been pretty small. So, I think, you know, we will, hiring Fresh Reads, we will only look at it as our, you know, what do you say, the growth momentum picks up, right? So it will be very, very, you know, moderated the way we go ahead and, you know, especially with now AI engineer also coming in. That is, you know, we wouldn't want and go and, you know, hire a huge bunch of, you know, freshers. So, as I said, it's a wait-and-watch. We are hiring freshers, but it's a very moderated level. I think last quarter we would have added about 100-150 engineers from the colleges. So, it's a small number that we add.

Thank you. Given the current market, you think it's actually preferable to hire laterals because it's still fairly easy?

Yeah, laterals are only very, very, you know, specific, you know, where there is a need, right? Most of our focus is utilizing our bench and utilizing our existing team members, and of course, you know, focusing on retaining our key talent, right? That's what we are focusing on.

And could you talk a bit more about the sales investment that you made?

So, I think, you know, both in U.S. as well as in Europe, we have added, you know, sales headcount. We've also added advisors, you know, to support us in some of the large deal, you know, pursuits. Apart from that, we've also spent, you know, in terms of events that we participated in to build our brand and also to gain visibility in the larger, you know, market space. These are specialized events. We're not going after those large events and so on. There are, for each of our industry verticals, there are those specialized events which are there, and that's something that we are focused on and we're spending money.

Thank you so much.

Yeah, thank you.

Thank you. Your next question comes from the line of Moesh Chindani with Ambit Capital. Please go ahead.

Yeah, hi. Good evening, and thank you for taking my question. My first question was on your overall growth expectations for FY27. I think you had said last quarter that you probably would be aspiring for a high single-digit sort of a number. Is that something which is still the aspiration given issues that you've outlined in transportation? Or do you think it would be more closer to the mid-single-digit number for the year?

No, so our aspiration continues to be the same. We just need our healthcare business also to fire up, right? And then I'm sure that we will be able to get to that sort of a growth rate that we are aspiring. So I think we're not changing our aspirations.

Okay, understood. And then secondly, just broadly on, I think in a previous question, you briefly touched upon AI and that's impacting some of your hiring, but how have your conversations with clients been on the AI implementation? What are your clients saying? And is that impacting, say, your volume growth or your TNM project going forward?

So maybe I'll take that question. I think AI in general, on one hand, in product engineering, given the fact that the industries that we operate in are largely mission critical, especially automotive healthcare, has been very careful and measured in the first place, especially when it comes to implementing it into the SDLC process, into products that will deploy in the future. So there is a certain amount of care and caution that is being exercised. Having said that, I think we are driving a very strong path of providing a path of transformation, aided by two parts. One is the platform-led offerings that we are building. So what we are saying is it's not so much about AI for itself. Each of these industries require solutions that are tailor-made to their context that provide for coverage of certain aspects of cybersecurity, of FMEA and so on that are very specific to those industries. So to that extent, I think what we're doing is we're taking a very domain plus AI, if I may, view of each of these industries, and we're saying, look, you don't have to transform all at once, but we will provide a platform-led approach that allows you to take the SDLC part by part and still connect it up at the end. So what we're actually seeing is that kind of a measured, calculated adoption. And I think we're doing very well there. So to that extent, I don't see deflation, I don't see shrinkage, I don't see any of that. We'd rather see opportunities. But having said that, I think the overriding problem is, and point is, the spend that is being earmarked for AI, unfortunately, is also kind of curtailing R&D spend, if I may. I think that's the larger perspective rather than anything else.

Go ahead. Thank you. That's all my questions.

Thank you. The next question comes from the line of Amit Chandra with HDFC Securities. Please go ahead.

Yeah, thanks for the opportunity. So my question is on the increased investments that we have been doing. So if you can elaborate more on what are the investments around? So these are mostly like platform investments or more on R&D, or is it more related to the client-specific engagements that we have? As you said, we are investing more in subcontracting, investing more in on-site, and is it fair to say that the new deals that we are taking, And they are like, you know, initially lower margin deals.

Yeah, so these investments definitely are around, you know, building specialized talent pool, right? That is definitely there. We talked about the AI infrastructure that is needed that we are building. So, and also all the tools and the cloud investments that are needed to deliver, you know, value to our customers, right? So, it's a combination of, you know, all of that, which are the investments. And, of course, you know, in some of the large deals that we have... Transition costs, right? Because these are typically three- or five-year deals, wherein in the... All the investments that...

Okay, and in the transportation vertical, obviously, OEM is now 78% of the automotive revenue. So, like, you know... Within the OEM bucket, how we're seeing the top client and the non-top client moving, and also if you're seeing some softness in some of the OEM accounts, especially what is happening in the European region. So if you can, I'll provide the commentary on what is happening with the OEM.

Yeah, so the top customer has been pretty steady for us, so that's definitely a positive. And I've already indicated the softness in the OEMs in Germany. I mean, we have, there are large deals that we've already closed. Those ramp-ups are going a little slow there. So as a result of which are what we would have expected that we will achieve in Q1, we have not reached that. But I'm hopeful that, you know, over the coming quarters, we will be able to ramp up, you know, to the expectations, right? The good part is we've had a good, you know, recovery in the U.S. as well as in the APAC region. And all that has actually contributed to the growth in the automotive segment for us.

Okay, and so lastly on the subcontracting part, if you can quantify the subcontracting cost and, you know, what is it, what it is or the positive revenue in this quarter versus last quarter.

I'm not sure whether we can give, you know, specific details of the subcontracting, you know, costs.

Amit, maybe, this is Nitin here. I can just provide one slice, which is, if you look at our on-site offshore ratio, you'll see that the ratio has shifted by about a percent, about 90 basis points, like 0.9%. So you can kind of, and this all happened within one quarter, So, you can look at that part and assume that the fair part of that is... Yeah. What we contracted out, and that has an associated impact on margins.

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

Thank you. The next question comes from the line of Carpet with RK Investments. Please go ahead.

Yeah, thank you. Thanks for the opportunity. A couple of questions. Maybe you addressed the first one a bit earlier. So, first is there is this growing concern, right, of the detail fact on software coding. Maybe, especially on engineering R&D, it might hit much harder than traditional IT. So what, I mean, is there a pressure, and how are you ensuring that the data like these margins are protected? And the second question is related to your slide on transitioning to platform-led engineering in terms of these proprietary platforms.

The line for the management has been disconnected. Please stay connected while we reconnect the line for the management. Ladies and gentlemen, we have the line for the management reconnected. Karthik, sir, could you please repeat your questions once again?

Yeah, okay. Thank you. And I was talking about the whole, you know, deflactor, respiratory fact of using AI autonomous tools on the software coding and the fact that it might hit the engineering R&D higher than traditional IT service. I wanted to understand how Tata and Lexi is protecting their margins in such impact cases. And the second question is on the slide-on transitioning to platform-led engineering. I wanted to understand how aggressively you are deploying these platforms like Neuron and here in terms of addressing this pricing pressure. Anything more on how the clients are using these proprietary platforms?

So, Karthik, this is Nithin here again. Maybe I'll take those two questions. So, on the first part, as far as the impact of AI on the SDSC, I think the point that I was trying to make is when you're working with B2B customers in the chosen industries that we operate in, which is healthcare, media, telecom, as well as automotive and transportation, you tend to have one very large Two, these have been built over many, many, many years, so this is not fresh code. Three, these are fairly complex and built by multiple teams, right? So first, you have to understand the scale, size, and complexity of the problem. Like they say, a car has 100 times more code than a Boeing, Samsung, 747 does, right? So that's the complexity you're talking of. Part 2, while we tend to think of... Software coding is the biggest part of what work is done. The reality is that product planning, feature planning, architecture, requirements capture, requirements mapping, regulatory alignment to the multiple countries that these products were deployed in actually is a bigger part of the problem than actual coding. Coding is just one part of the whole cycle. And that is where we believe that while AI can come in and you can say that, look, software code, I can write C++ code, I don't know, 20% faster, 30% faster, and so on, but the net impact of that part of saving in the entire lifecycle is not too high. That is part one. Part two is customers are not as much focused on cost savings as they are on whether it delivers productivity or quality. Because in the ranking of CTQ, cost, time, and quality, right? I think the industries that we operate in, invert it. It's quality, time, and then cost comes last. So to that extent, I think the proposition stays strong, which is Tata Lixie, leading edge technology capabilities, deep domain expertise, now backed by AI. I think that is the proposition that we're offering. All, of course, delivered. From India at scale. I think this is the real, if I may, tagline that we are delivering on, right? I believe that is still very, very relevant now and going forward. Your second question was to do with our own platforms. If you think about it, there are two types of investments that you're making. One is in platforms like Tether and Neuron and so on, which go into the customer. It's transforming products and services because it's transforming their products and services. And I think Neuron, that's why we took a lot of time to craft the value that our customer is driving. So the press release that we made with Sky, I think, absolutely clearly calls out multiple dimensions on which we are delivering value, whether it's efficiencies, whether it is autonomous operations, whether it is customer experience, and so on. The same is with our connectivity platforms, right, because these are customer-facing. Investments that we're making in platforms like Vytel or Anatel or DevStudio are more to do with how do you accelerate the software development lifecycle of a customer. So this is something that end consumers will not see. This is something that provides efficiencies but more focused on quality and time savings rather than on cost, right? So that is the view we are taking. Adoption, traction is fantastic. Reception is fantastic. Adoption, we believe, will be thoughtful and calibrated simply because customers are not going to jump at the first platform they see. I think they're taking a very careful long-term view of what are we doing, who are we working with, how do we make sure that what we're taking on and adopting is supported for the long term. So I think these are decisions that customers take very thoughtfully and carefully and hopefully. The proposition that Tonalicy provides, both as a brand and as a capability, stands as well.

So if I have to summarize, you're saying the first one is not much of a deep impact as such because the cost of the R&D stuff is much, much lesser in the whole pipeline. And so the second one, you're saying it's a long-term view. It doesn't have anything to do with the winning rate right now. It's really a long view.

But it definitely is making a positive impact on our win ratios and winability. We're definitely having a definite halo effect, even as we speak on what we offer to customers and what customers believe we are capable of for their long-term transformation. Okay.

Thank you, Nikita.

Thank you so much, Patrick.

Thank you. Your next question comes from the line of Sulab Govila with Morgan Stanley. Please go ahead.

Yeah, hi.

Am I audible? Yes, you are. Yeah, thank you for taking my question. So, I had two questions, both on the investments that we made in the quarter. So, one is on the on-site investments and delivery that you spoke about. So, historically, we've excelled at an offshore-centric delivery model. So, should we see that? This investment on the on-site front as a change in the nature of demand versus what we used to do earlier, and this is more structural, or you would say that this is more technical and specific to a few projects.

Yeah, I think, you know, as you said, some of the large consolidation deals that we want needed, you know, on-site resources to be available, but over the long term, the business model is to, you know, move a lot of that work offshore, so we're not moving away from a business model perspective. If, you know, we would be in the, you know, 75, 25, 75 being offshore and 25 being onsite. Today I think it is 74, 26 or so. It's just 1% that we have moved. But we will, over the subsequent few quarters, as Nalin explained, you know, we will be able to, you know, move a lot of this work back offshore. And, you know, we are not changing our business model, if that is the question.

Okay, understood. And secondly, you know, a large part of the cost that you mentioned, they were either transition related or ramp up related. So one is that is this specific to a particular vertical or is this broad based? And the benefit of this investment on revenue, have we already seen that in this quarter or should we see that in the coming quarter?

So we've seen, you know, partially we've seen the uptick in revenue, both in media and communication vertical, as well as in the transportation vertical, primarily if you look at it from a U.S. geography perspective. I think we have been able to, our U.S. geography has grown, you know, pretty well, and I think that is one of the reasons, you know, subsequently, you know, over the subsequent quarters, you will see us, you know, moving back to an offshore, you know, offshore-based execution.

Thanks for taking the question. Thank you.

Thank you. The next question comes from the line of Current Opal with Philip Capital India. Please go ahead.

Yeah, hi. Thanks for the opportunity. Just a question on the transportation vertical. So, last quarter, U.S. OEMs have commented pretty strongly in terms of high-end investments either on HDBs or investments in hybrid platforms. Are you seeing any traction on these areas from the U.S. audience? And secondly, do you expect the transport vertical to start growing from Q2 onwards sustainably?

I think definitely on the SDV, a lot of the deals that we are discussing and a lot of the deal pipelines is based on SDV. So that continues. As I explained earlier, both U.S. and APEC regions, we are seeing good deal pipeline and good conversions as we speak. Europe is a little moderated right now. We would wait and watch in terms of especially continental Europe, given all the troubles that OEMs are facing. But having said that, I think overall, both automotive and adjacencies, we see growth happening in subsequent quarters.

Okay, got it. Manoj, can you just help us with the broad split of the transport vertical within US, Europe, and APAC, if that is something which you can share?

I think for us, still, it is Europe-heavy. If I'm not mistaken, 40% of our revenues would come from Europe, and roughly about 25-30% coming from U.S. and remaining from APAC. Europe is still the number one geography for us from an automobile perspective.

Got it. So, despite the pressures in Europe, you are still expecting the U.S. and EAP to basically upset and still. Yeah, yeah. Thanks. Thanks. And just on margins, shall we expect 90% EBIT margins as a floor from here on we should expect?

So, Karan, as mentioned, you know, there is one bucket of costs which we would see, which should go away, you know, in the next one or two quarters, around 150 bps or so. Although this will be partially offset by, or this will be offset by, you know, wage hikes that we have planned. So, you know, we have done a cycle of wage hikes last year in October for juniors and in Jan for seniors. We are implementing a company-wide revision in Q2 to remain competitive in retaining our talent that we are investing in and that we want to retain, who have done projects, valuable projects, etc. So for the next quarter, I would say the margins will be sort of a combination of two things, impact of wage hikes coming in, but also impact of some of these one-offs going away. So it will be sort of a balance of these two things. Post that, you know, once the wage hikes are fully sort of baked in, we should sort of see a ramp up in margins as we go through the rest of the year as sort of our revenues pick up and wage hike is sort of already built in. So that there should be a sequential ramp up as we move towards Q4.

Great. Thanks. Thanks a lot and all the rest.

Thank you. The next question comes from the line of Abhishek Shindadkar with InCred Capital. Please go ahead.

Hi, thanks for the opportunity. My first question is regarding, you know, this one-time cost that we had to pay for the customer. Uh, um, probably I missed the, uh, customer vertical, but I presume it is U.S. and, um, uh, transportation. Uh, but what I wanted to understand, is this a generic trend that, you know, customers are asking, um, you know, the vendors to onboard subcontractors? Because we heard a similar trend in one of the other IT companies as well. Uh, and, um, you know, just wanted to understand what could be our, uh, reaction in case, you know, there are other customers who come back, uh, with some similar demands. Uh, that's the first question. The second question is on the beach hikes from 2Q. Can you just quantify, given that we are doing it for a company-wide versus staggered last year? And the third one is for Nitin. Nitin, you mentioned that the AI spend is curtailing ER&D. I mean, that was a comment you made. Can you just elaborate in terms of what are the clients thinking, given that the perception was that ER&D is something that, given its revenue generating, may not be paused immediately? Thank you for taking my question.

Yeah, I think I'll answer the first question in terms of contractors and so on. Let me, I think, correct or make it clear. Customers are not asking us to take on contractors. I don't think that is right. What is happening is in the U.S., as you know, with H-1B visas, you know, hard to come and so on, when we win a large deal, we need to, you know, for transition and so on, we need to have our own people, you know, out there, you know, maybe for one quarter or a couple of quarters, and then move work offshore and so on. So, at any given point of time, we have a limited set of visas that are available. So, to augment the team, we always, we have to, on a short-term basis, we need to, you know, augment the team with contractors so that we do the, you know, due diligence and we really, you know, do the transition within the timelines and so on. So, that is what this increase in, you know, one-time costs are, right? You know, I've seen customers asking us specifically, Other question on margins, right? On the wage hikes.

On the wage hikes, yeah. So wage hikes, you know, I would say that... So, at this stage, we are still sort of, you know, working through it, right? And there are a couple of elements there. So, A, while we are doing it, it's a company-wide hike. You know, it's a company-wide hike for all eligible employees, right? And given we have a lot of employees who have sort of joined us at different points of time, there is a set of employees who are not eligible for a wage hike as of now. Again, this wage hike is a combination of variables and, you know, fixed, etc. So, you know, there is that element as well, but I think we'll get

back at the end of Q2, right? We don't want to give you a number at this point in time.

And on the last question, Aveshek, on the point about whether AI has an impact on curtailing R&D spend, I mentioned in the context of where budgets get allocated. So ultimately, R&D, some of it is strategic, some of it is decisionary. So when you are... So, spending money, and you have to now decide where you want to spend money, I think you see certain companies prioritizing AI, because obviously, it seems like the flavor of the day, the need of the day, the priority of the day. So, to that extent, it does have a little bit of an impact on how much budget is being allocated R&D, right? So, that is the point that I was trying to make.

This is helpful just to follow up on that. So, this is more about ride-shifting of the budgets rather than, you know, deferment or let's say perpetually deferment, right?

That's correct.

Thank you for taking my question and pass this for the year.

Thank you.

Thank you. Your next follow-up question comes from Sulab Govila with Morgan Stanley. Please go ahead.

Yeah, hi. Thanks for the opportunity again. So, my question was on the wage eggs. You also mentioned when you talked about the investments, you also mentioned that there were certain interventions that you had to do for retention of select employees during the quarter. And now we're also talking about, you know, preponement of wage hikes. I'm just trying to understand the attrition in the industry right now doesn't appear to be high. So I'm just trying to understand, you know, what you're seeing differently, which is, you know, leading to, you know, some of these initiatives, you know, at your end.

Yeah, so, you know, our attrition is around, you know, 16% today. Okay. So, you know, as you know, right, It's not about, you know, how much your attrition is, it's also about You know, are you able to ensure that all your key critical talent, right, are taken care of, right? So I think with the number of GCCs coming into India and the sort of, you know, aggressive hiring and so on, especially for AI-ready talent and, you know, talent that really understands domain and digital technologies, you know, there is still a huge demand. So though you might say at an overall level in the industry, the demand is muted, but for very, very niche, specific talent that we carry, I think there is still a huge demand. So we need to ensure that we take care of that talent, and what we are doing is to ensure that, you know, while our revenue clock picks up and we are seeing traction in the market, we don't want to be in a situation where… We are struggling to service them, and, you know, we have to go out and hire, right? So we really want to retain the key talent that we have.

Understood, sir. Thank you. Thank you for taking information.

Thank you. The next question comes from Rishi Modi with Modi Advisory. Please go ahead.

Hi, can you hear me, guys? All right, great. A couple of quick questions. On the media and communications piece, in the previous quarter, you mentioned that the industry growth had not yet picked up. We've done well in this quarter. Just wanted to know whether the broader industry has picked up or it's largely us outperforming. Thank you. If it's not the industry pickup, when do you see the industry picking up, and how much Delta can we capture this from the industry growth?

I think, yeah, I think the media and communication industry in general and the vertical for us, I think over the last, in a few quarters, I've been going through, you know, a very, very turbulent sort of, you know, ups and downs and so on, right? But I think, you know, over the last two quarters, what we have seen is we have seen some large... You know, consolidation deals from some of our customers, and, you know, this industry is also going through a lot of M&As, right, as we speak, and a lot of, you know, strategic decisions that customers are taking and so on. So what has helped us is in two such transactions where we were the incumbent and we were, you know, providing a significant engineering, you know, outsourcing. We were the prime vendors in a couple of these deals, a couple of these customers. There were significant M&As that have happened, and as a result of which, suddenly, we had access to a much larger, you know, pool of, you know, projects to focus on, right, and when an M&A happens, of course, the customer is trying to, you know, see how to optimize and how to move work to vendors that are a lot more offer-centric so that their overall cost can come down. So I think our value proposition in terms of domain, you know, digital, as well as offshore-centric, really clicked with some of these, you know, customers that have gone through these M&As and so on. And I think that has helped us really win some deals. So essentially, we have been able to eat into a competition pie of business by showing superior execution and superior offshoring and offshore capabilities. And that has helped us in the business.

Right. So, Manu, just to get my understanding right, we were already onboarded with the companies which acquired other companies and rather than got acquired by other companies and hence the new target company, we were able to replicate the same thing.

Exactly.

So, on the larger front, would you say more of our customers have been acquirers in this consolidation phase or? Now, do we see our companies getting acquired, and hence, we have to get re-evaluated by the acquirer?

It is both, right? In many cases, our customers were the acquirer, but there were one or two cases where our customers have also been acquired, but that also has, so the acquiring company did not have a footprint in India. Okay, so that helped us because they looked at our operations, they looked at how we are delivering, and suddenly they realized that, yeah, you know, that is a valuable partner which they want to engage with.

Okay, so we are not being re-evaluated in largely any of these acquisition-led re-evaluations that normally happen.

Yeah, so all that has happened, we were able to show a superior value, right, through our offshoring.

Got it, got it. On the recent, all of these immigration changes that keep happening, right, you know, visa fees keep getting altered, H-1B quotas keep getting altered. Do we have provisions in our contracts with our customers that, say, if there's an unreasonable amount of change and act, you know, you have to bear, like, who absorbs the hit on these externalities? Because, so this, if you could give me an understanding of how that shapes up.

You know, the usual visa fees that, you know, go up and so on, right, not just in the U.S., but in U.K. and Germany and many other places, right, that, you know, we have to absorb, right? When I say absorb, of course, you know, there is a COLA increase that we negotiate year on year and so on. So in some way, we do get to be, I mean, in quite a few customers, we manage to get some amount of increase and so on. It is not as if that, oh, okay, you know, your visa fees has gone up by $2,000, so, hey, customer, customer will pay exactly that $2,000 to us, right? It's more than overall, you know, it is bundled into our cost of operations and it's bundled into our rate, right, hourly rate, and that's how we manage it. But however, when you talk about H1B, like $100,000 and so on, no customer is willing to pay that. So, that is something we can't go back to customers.

Right. So, then we will have to increase our onshore mix as we go ahead, right? If we get higher growth out of the U.S. market.

That is where we, if we don't have the visas, we depend on third-party contractors and so on. We have a, you know, MOUs and partnerships with a bit of companies. We depend on them to really help us in the short term.

And these US contracts that we currently have, I'm assuming the new contracts you would price in say a higher onshore mix, but the existing ones I don't think you can alter. Would they be largely long-term contracts and hence our profitability on these existing contracts reduce versus our estimate when we bid in?

No, so just to clarify, existing contracts where you already have on-site people deployed, there is no change in cost. It is only where you are trying to win new contracts or you are winning new projects, which then demand new people to be sent for the transition phases. That is the only point where you would have all these questions raised. Rishi, therefore, I am not very clear what the question is about.

So basically, let's say, I'll just explain it quickly. We assume, let's say, 80% of our offshore mix, 20% would be onshore for a contract, for example. But because of, say, these visa issues, you are required to have more onshore employees, and the mix turns from 80-20 to 75-25. Does that happen?

No, no, sir, Rishi, I think you're getting it wrong. That's what, we operate 90-10. We are the best offshoring metrics anywhere. Our intent is always to keep it there, because that is the proposition. So, for a given contract, ratios will not increase. It's not that customers are starting to prefer more on-site. Please understand. This is not a COVID reversal, where I think customers are not starting to prefer more on-site. Nobody is. The need for on-site is demanded by the kind of deal that you're picking up, the complexity of what you're trying to take on, the transition time that it takes to capture knowledge, whether from the customer itself or from somebody else, and ability to architect and bring it back. Just to be clear.

Okay. All right. Finally, just a quick one. Utilization rate, if you would just spell it out for this quarter.

It's around 75.4%. Seventy-five points? Sorry, 74.7%. Yeah, just getting to 35.

Okay. All right. Fine. Yeah, that's it for mine. Thank you.

Thank you, Rish.

Thank you. Your next question comes from the line of Randeer Kumar Singh with Randeer H-U-F.

Please go ahead. Yes, sir. Please proceed. Thanks for taking my question, sir. Almost all

the questions and answers have been missed, but I am going to summarize a little bit, which I have understood. YouTube can also impact the margin on H2, and the margin on H2 means the margin will ramp up.

A small difference to what you are saying. Q2, we will see a wage hike impact, but that will also be offset to a large extent because of some of the one-time, you know, the higher costs that we saw in this quarter going away. So, there is an offsetting element to a large part of that cost. Now, How much gets offset, you know, where exactly we land up is a function of what exactly the wage hike numbers ends up being, how much sort of costs go away, our own revenue growths, which will be a combination of a few things.

Thank you, Sush.

Thank you. Ladies and gentlemen, we will take this as a last question for today. I now hand the conference over to the management for closing comments.

Yeah, thank you. Thank you for the time. Interesting times, and I think at least from our, you know, major markets and major verticals that we have, I'm very happy that we have been able to show, you know, growth, decent growth, especially in the media and communication business, and I mean, if you compare with, you know, competition and what we hear is commentary from a lot of our competition, I think our automotive or transportation business has also done, you know, reasonably well. So our focus is to really continue growth on both of these large verticals for us, and at the same time focusing on our healthcare business to see, you know, how to get it back to a growth path, right? So that's the focus for us. And, of course, margin improvement and, you know, seeing how we can, you know, digest. The wage hike at the same time, and also look at, you know, seeing how we can do all the work. So that's going to be the focus for us in Q2 and subsequent quotas, Q3 and Q4. So I think Q1 has gone reasonably well for us. Even if you look at comparatively Q1 of last financial year, I think we have done pretty well, and I hope that we'll be able to continue this growth path in the subsequent quotas. So thank you, and look forward to talking to you again in Q2.

Thank you. On behalf of Tata LXE Ltd, that concludes this conference. Thank you everyone for joining us and you may now disconnect your lines. Thank you.