Operator
Ladies and gentlemen, good day, and welcome to the Q2FY2627 earnings conference call of Tata Elixi Ltd. As a reminder, all participant clients will be in the listen-only mode. 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 Ganesh from E&Y. Thank you, and over to you, sir.
Thank you very much, Sadhu. Good evening to all the participants in 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 no forward-looking statements that may involve known or unknown risks, uncertainties, and other factors. Therefore, it must be viewed in conjunction with the business risk that cause significant result, performance, or achievements that differ from what is expressed or implied by such statements. To take us through the results and answer your questions today, we have the Senior Management of Prata LXE, represented by Mr. Manoj Raghavan, Managing Director and CEO, Mr. Nitin Pai, Chief Marketing and Chief Strategy Officer, Mr. Nadim 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 cooperative investing, taking us up to 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, if time permits. With that, I would like to hand over the call to Mr. Manoj Ravavan. Over to you, Manoj.
Thank you, Sushank. Good evening, everybody, and thank you for joining us today. I hope you and your families and your teams are doing well. We appreciate your continued interest in Tata Legacy. And I'm pleased to connect with you to discuss the performance for the second quarter of F5-27. During the quarter, we remain focused on deepening customer relationships, strengthening execution, advancing our strategic initiatives, and investing in capabilities that position us for long-term growth. I'll now take you through the key highlights of the quarter. In the second quarter of financial year 27, we reported an operating revenue of Rs. 1055.7 crore, growing 2.3% in constant currency. We reported an EBITDA of Rs. 231.4 crores, growing 7.1% quarter-on-quarter and 19.7% year-on-year. Our EBITDA margin for the quarter was 21.9%, a 70 basis point improvement over the previous quarter. The transportation vertical reported a quarter-on-quarter growth of 2% in contingency terms, aided by new deal wins. A notable win is a strategic multi-year deal from a leading automotive OEM for a next-generation cloud-based telematics and connected vehicle ecosystem. In the aerospace segment, we continue to see business traction, albeit on a small base. I am pleased to share with you the strategic collaboration with Sarla Aviation to support the development of Shunya, a pioneering step towards India's first indigenous electric vertical takeoff and landing, Evitol's aircraft. We also won a strategic engagement from a global aerospace supplier for development of a test rig and validation of our commercial aircraft systems. Our media and communication verticals registered a quarter-on-quarter growth of 3.4% in constant currency. This growth was driven by sustained ramp-ups across key engagements and AI-led deal wins. During the quarter, Tardalexi secured a strategic AI engagement with a global technology leader to develop a Gen AI-powered virtual assistant focused on multilingual intelligence and delivering digital experiences at global scale, further strengthening our position in the rapidly evolving Gen AI's ecosystem. Our healthcare and life sciences vertical, too, recorded a healthy growth of 3.5% quarter-on-quarter in constant currency terms. One of the notable deals in the quarter was a win from a global renal care leader to develop its next-generation home dialysis systems, spanning end-to-end product engineering from user experience and mechanical design to embedded systems and regulatory compliance. During the quarter, Tardallix implemented a wage increase across its workforce as a part of its continued commitment to retaining, rewarding, and nurturing top talent, recognizing that its people remained the foundation of companies' long-term growth and innovation. A continued focus on delivery excellence enabled us to expand EBITDA margin by 70 basis points sequentially, despite the impact of the annual wage revision. Overall, during the quarter, we delivered strong operational execution and resilient growth across customers and in all industry verticals. In terms of regions, U.S. and India did very well for us, while Europe was soft with the predominance of automotive revenues in that region. While the global business environment continues to evolve, we see sustained opportunities is emerging from our clients' priorities around innovation, digital engineering, AI adoption, and product modernization. Having said that, Q3 is typically a short quarter with fewer working days. While we await customer-specific direction and possible furloughs, we remain focused on sustaining growth in the second half while continue to invest in our differentiated AI-first offerings and driving operational excellence. With that, let me conclude my remark. Thank you for your continued support and confidence in Tadalexi. We will now be happy to take your questions.
Operator
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 is assembled. Again, to register for a question, please press star and then 1. Your post question comes from the line of Bhavik Mehta with JP Morgan. Please go ahead.
Hi, thank you. A couple of questions. Firstly, you know, good to see broad-based growth this time. I just wanted to understand how sustainable is this growth momentum over the next couple of quarters? What I'm trying to understand is what is held by certain large big ramp-ups which won't repeat when COVID-19 was more broad-based and hence you know with the positive growth momentum continuing is higher you know this time around. And the second question was on the margins again good to see margin expansion despite wage hikes but how are you Anything about margins in the second half, you know, from a headwind and daywind perspective, and also you had a lot of one-offs last time. How much of that has reversed this quarter, and, you know, how much of that is yet to reverse, you know, in the next quarter? Thank you.
Okay. Thanks, Bhavik. So if I take that question from a growth perspective, if you look at our, you know, transportation and automotive vertical, I think we're fairly, you know, confident of growth in the U.S. geography as well as the India geography that has, you know, grown smartly for us. Japan is something which has been pretty flattish, but we are hoping that that will continue to grow. Europe continues to be soft. There are deals. There are large deals. There are opportunities. But again, deal closures, we are still – it's a wait and watch. So, I mean, the situation I don't think has changed very much from the last quarter, especially from a Europe perspective. But, however, I think, you know, other geographies, we are pretty confident of continuing the growth path. So that is, from a H2 perspective, we are still, you know, positive, and we hope we'll be able to continue that momentum. From a median communication, you know, vertical, I think over the last two quarters, we have shown, you know, consistent, you know, growth. And as you rightly said, some of that is due to deal ramp-ups for the deals that we have already closed. And having said that, again, even in the media and communication, you know, vertical, we are seeing some sizable opportunities that are there, and we hope we will be able to continue. From a health care and life sciences perspective, I think we bottomed out last quarter, and finally we are able to show growth. And again, we see a good visibility of, you know, deal pipelines and so on. So I'm hoping that even in the H2 will be better than H1. So overall, I would say, yes, the only worry still seems to be the slowness in Europe from the automotive perspective. But other than that, I hope that, you know, all other businesses, H2 will be, you know, better than H1 for us. On the margins, Nalan, if you could take that question. Sure. Thank you, Manoj.
So, on the margins, just to give you a quick sense of where the growth came from, so about 60 to 70 bps was the cross-currency benefits that we had in the quarter, and the balance, you know, 10 to 20 bps is basically operational leverage that has played out, as well as, Bhavik, to your question, a lot of the one-timers which were there are sort of, most of them have gone away. Now, this was obviously, large part of this was offset by the wage hikes that we undertook. So, but, you know, the operational leverage and the one-timers going away was sufficient to sort of mitigate the wage hike. From a margin trajectory perspective, what we expect is, we expect operational leverage to continue playing out through the rest of the year. So, while, you know, obviously, there will be associated costs increase with revenue increases, we do see a slightly upward margin trajectory that should be playing out in the rest of the year.
Operator
Thank you. A reminder to all the participants, if you wish to register for a question, please press star and one. Your next question comes from the line of Rishi Modi with Modi Advisory. Please go ahead.
Oh, yeah. So, just first, I just wanted to harp a bit on the employee cost, right? So, you mentioned, yes, that all the one-time benefits, that one-time expenses, which are going to go away, you're going to use it for wage hikes. Now, this is a structural wage hike, which will continue going forward. It's not a one-time bonus, it's my understanding. What I wanted to understand is that... Hello? Are you saying something? I can't hear you.
No, no, please go ahead. We have not said anything.
Okay. So, from what I want to understand is that going forward, I'm trying to understand the scope for employee utilization going up. Is there a mindset of also seeing how we can control the employee wage hikes? Because our employee count has been reducing, while employee cost as a percentage of revenue has been largely higher and now stabilized. So, the salary per employee has grown ahead of the revenue, which means that our profit percentage or margin per deal has come down today. Or is this actually going to increase as we are taking longer time? I'm just trying to understand, is there scope? Is there a mindset for employee utilization and employee salary coming down as a percentage of revenue?
Yeah, so I think there are two points here, right? One is we still have some more, you know, levers from the utilization perspective to go up further, right? So that will definitely, you know, help us. Second is, yes, what your point is correct. So what, you know, over the next half year, we really have to now focus on our, you know, pyramid management, right? And that is something that, you know, we are going to focus on to see how we can, you know, manage the pyramid actively by, you know, Moving, you know, some of the, you know, engagements that we have started, kick-started, where we needed to bring in, you know, very, you know, senior resources and technical experts and so on. Over a period of time, we need to, you know, manage with, you know, more junior staff and so on. So there is a plan in actively seeing how we can, you know, sort of, you know, look at a pyramid and correct some of the related changes that have happened over the last, I would say, four to six quarters, right? And to that extent, you know, we have a bench that we have been training and, you know, something that we have to work on actively over the next half year to see how much we can, you know, benefit from that. That's something that we will be actively tracking.
Okay, and if I have to, you know, just understand where we are in the, say, the market hiring cycle for the talent that we require, we've seen the, you know, post-COVID boom in salaries for IT sector, then there's been a lull period over the last couple of years, and now, but for us, it's not come through that lull period. So, I'm just trying to understand where we are for our talent. Are we at the tag end of the cycle where now demand is, our talent is kind of reducing, or is it still going strong and hence we will have to compete on salaries? Secondly, just when you said, right, you brought in senior leaders to acquire new business, is there a potential to increase the variabilization for such talent linked to, say, business, or are we looking in that direction so that, you know, the operating de-leverage in the business ramp-up phase fits our P&L lesser going forward?
That is already in play, you know, so, Rishi, so, you know, in the organization, right, right from the middle management to the senior management, you know, a sizable percentage of the salary is variable, right, based on performance and so on. So, that, you know, So, we've sort of, you know, already, you know, implemented. So, yeah.
Rishi, just one additional point to give context, right? So, I think we are currently seeing a period where, you know, the salary hike has taken place now. And if you recall in the last financial year, you know, the salary hike was not in the similar period. It was a bit more back-ended, which is why also you are seeing probably this trend in the last two, three quarters of salary per employee. For the next, like for the rest of the year, we are done with the salary hikes, right? So the idea is that the operational leverage should play out for the rest of the year as we sort of, and, you know, there shouldn't be any material movement in employee costs except for where we are investing and selecting
Yeah, and back to your first question regarding talent and so on. I think, you know, we need to differentiate from the larger IT industry. I think the talent that we have and the areas that we are focusing on is still, you know, that is a huge demand with the GCCs and, you know, continuing to, you know, set up shops and ramping up, you know, resources. So, especially in the R&D space, you know, we need to work hard to retain our talent. Let me put it that way.
Okay, got it. And finally, just one request, if you could start mentioning just the utilization rate in the PPD so that I don't have to ask you every quarter. And if you could just provide me the utilization rate for this quarter.
So, utilization is about 78%. So, we have sort of moved up from the last quarter. There's still possibly some room to grow, and in parallel, we are also calibrating, you know, junior hiring, but, you know, we still see some room for this to improve.
Okay, thank you. That's it for mine.
Operator
Thank you. The next question comes from the line of Sulab Kovila with Morgan Stanley. Please go ahead.
Yeah, hi. Thanks for the opportunity, and congrats on a good quarter. So, my first question is actually on the quarter itself. So, just wanted to understand, versus the start of the quarter, where we ended up in the quarter, did the quarter pan out as per the plan, or were you positively surprised during the quarter?
No, I think given the deals that we were tracking and so on, you know, we were pretty confident of, you know, our MCV numbers, right, media and communication numbers. And healthcare also, we were very confident because of the deals that we had closed and so on. It was only the automotive we were, you know, because of the situation in Europe and so on. We were not fully confident that we'll be able to show this growth, but I think some of the deals that we closed in the U.S. and India geography actually helped us to show the growth. So, yeah, I think automotive, in some sense, I wouldn't say, you know, it was not unexpected, but I think we were pretty happy with what we delivered at the end of the quarter.
Okay, understood. And secondly, within the auto vertical, just want to understand that the deal that we have announced this quarter, has that ramped up already in this quarter? And also, what was the growth in the aerospace part that you saw in this quarter?
No, the deal is not, you know, it just started. It's not fully, you know, ramped up yet. So, I think the aerospace business, the volumes are still small, and I think it showed a smart, you know, growth. But I think it's too early to report it because it will be misleading if I say we grew, you know, X percentage.
Lastly, when you think about the future, let's say the next one to two quarters, the growth is typically always driven by what you've already won as a deal and what you will win in the coming days. So, where we stand today, what deals we already have in the bag, do you think that those deals are sufficient for us to continue on the growth momentum, or we'll need support from the newer deals to be won during the quarter?
Yeah, typically in our business, if you ask me, right, you need both. You need, you know, existing customer wins and, you know, ramp ups to happen. You also need, you know, some percentage of it to come from new deals, right? So it's a combination of both that really, you know, delivers for us, right? So just only based on the deals that they've closed, because the deal ramp-up takes time. It is not an IT deal where you can put so many resources and so on. It's a very, very specific talent that we need to onboard and so on. So it takes that time. And usually the deal ramp-up takes a couple of quarters, three quarters, and so on to reach the full level of ramp-ups and so on. And at the same time, you should also understand that because still a good portion of our revenues come from project-based business, there are also ramp downs of projects that are ending closures and so on at any point in time. So we always need to plan for that replacement projects and so on, which is why we also need new projects to come in.
Lastly, maybe on that point, when there is, you know, a typical leakage in the business, given, you know, there is this nature of the business, the rate of this leakage, I'm trying to understand the rate of this leakage today versus the last, you know, one year or so, do you think that that leakage rate is stable or it is improving or it's coming down? Just trying to understand where we are.
Yeah, so maybe I can comment on this. I think in general, I think we have seen an improvement on that position from a year back. Simple two facts. I think you have seen large deals that have built the revenue base across both automotive as well as media and communications. So they typically are multi-year deals, they say, protected. So in that sense, you have better foundations. And in many ways, that itself provides that year-on-year, quarter-on-quarter improvement on the foundation. And part two is, I think, you have to remember that over the last five, six quarters, we have leaked quite heavily on the supplier side of the automotive business. They were the first and the most badly hit. And you have seen the swing of revenues from suppliers to automotive, OEMs. So, once that base gets protected, the leakage coming from the rest of the portfolio becomes smaller and smaller. I'm just illustrating the fact that the Bakke Ediput is leaking heavily because of the weight of the water there coming from the supplier base. That itself is reduced.
Understood. That's very clear. Thanks a lot for taking my question. Sure.
Operator
Thank you. Your next question comes from the line of Shivam with DT. Please go ahead.
Yeah, thanks for taking the question. Maybe the first one, I think the last quarter we did comment that AI expenditure was a little bit stepping into the ER&V budget cycles, and given the background of the quarter and the confidence we are showing now, do you want to update that comment and maybe give a little bit of a color on how that dynamics is playing out?
I think that continues, right? Because I think enterprises are committing AI budgets meant for enterprise transformation, not necessarily only for R&D, right? And to that extent, that does take away from what could otherwise be discretionary budgets. So I don't think there is a big change in that signature to say enterprises are no longer earmarking budgets for AI, for AI transformation, and so on. They continue to. But I think there is, to some extent, I think there's a little more pragmatism that is starting to flow into what enterprises are earmarking a sponge. I think experiences of burning out tokens too fast with no value returning and so on, I think it started to make enterprises wiser. So, on one hand, it does continue. It does have an impact. But I think it is starting to become a little more thoughtful and a little more ROI-based. So, we believe that there's a slight qualitative improvement coming forward.
Yeah, that's helpful. Maybe just a small follow-up there, Nitin. The little bit of a movement away or a little bit of prudence that enterprises are showing around demanding ROI from the spends, Is it, like, at the end of the day, who do you think will ultimately be responsible for kind of, you know, helping them determine or, you know, outline the ROI that actually AI can deliver for them? I'm just asking, like, you have different stakeholders in that equation. You've got the enterprise internal IT teams, internal engineering teams. You have the whole LLM stack vendors, and then you have all service providers. And when you hear each of them, everybody is kind of passing it around that, yes, the ROI needs to be figured out. But if you are to take a step, who's in the driver's seat to, you know, help enterprises get this equation?
I think the answer lies in the heads of the functions, right, ultimately. Because if I think about it, where are the largest costs? Especially if you look at our business, we work with companies that build products and sell them in the market, right, products or services. So if I look at car companies, where is their largest cost? It is not in people. It is not in R&D. It is in your supply chain and manufacturing. So to that extent, I think the ROI is linked to where are your costs the greatest and where is your volatility the greatest. If you ask me, in automotive business, it's the highest in supply chain because you have material costs that are moving, you have tariffs that are coming in, you have questions on the country of origin and where is this coming from. So they had to sort that part out. In my mind, I would actually double-click on my business, what matters most, What contributes to cost and my margins most, and how do I make an impact there? Everything else becomes secondary, and we're hoping more and more people start to look at it that way and spend more on R&D, so I have a vested interest in promoting this view, too. Nalin, if you have any other point to add.
So maybe, so looking at our projects, right, so in our projects, of course, where we are involved, We would be discussing with the customers, you know, on the project cost, et cetera. And if there is AI required, we would build it into our costs for those projects. But obviously, customer is operating on a much larger AI landscape, right? So most of that will be outside our purview. That will be their own internal sort of product.
And just one last kind of a data kind of question. So, when you mentioned the 78% kind of utilization number, historically, could you contextualize it that maybe, you know, pre-COVID, what this utilization peaks used to be, and where does the 78% number square up on that band? If you can get any color, I just want to know where this number is.
I think we peaked at around 81-82% utilization. Higher than that, yes. Yeah, so I think we still have some headroom from that point of view.
Operator
Thank you. Your next question comes from the line of Amit Chandra with HDFC Securities. Please go ahead.
Yeah, thanks for the opportunity. So, the first question is on the transportation vertical. Obviously, we have seen some early growth there. So, if you can provide some more color in terms of the sub-verticals within transportation has been driving growth. And also, if you can give some more color in terms of the demand environment, But especially on the transportation side, what kind of change in demand you're seeing, especially in the last one or two months, especially in the U.S. auto, like European auto, is there any kind of a change in terms of stance of the OEMs and later ones? And also, you mentioned about the drag that we're seeing from European OEM. If we can, you know, just, you know, quantify X of that, what could be the growth in the transportation, what could be helpful for us to understand what is the extent of drag there?
Yeah, the growth in the transportation industry, you know, clearly has come in from the auto OEMs, you know, very clearly, right? And, of course, as we also discussed, adjacencies, including aerospace and defense, have also helped, but at a smaller base. So, and this growth has come in primarily for us from the U.S. geography as well as the India geography. The rest of, you know, Asia geography has been, you know, pretty flat, I would say. And same, I would say even in Europe, we have seen a little, you know, flattish tendency. Here in the call, we are, you know, pretty confident to continue the growth in U.S.-Asia piece, right? We would definitely continue to see, you know, sort of sustained And we are hopeful that the adjacency piece will also pick up, whereas from a Europe geography perspective, there are large deals that are in play, and that has been in play for, I would say, the last few quarters also. Unfortunately, because of the situation with the OEMs there, especially the big OEMs, we are seeing a delay in decision-making and so on. We are there in the final shortlist in many of the deals there, but, however, these deals have not been signed, and it is still a little bit like a wait-and-watch in terms of when those decisions will be taken and so on. So, it's very difficult to give a timeline or, you know, at this point in time, but, you know, we are closely, you know, working with these OEMs, working with these customers, and hoping to see, you know, that to take some of these to a closer, right? It could happen in this quarter. It could happen in the next quarter. But, yeah, so that's the color that I can give you at this point in time.
Okay. And, sir, the aerospace and the large, like, you know, deals that we have signed in defense in aerospace, typically, you know, for such a deal, how many quarters or how many months it takes for it to reach, you know, to the scale that we want it to, or is it more like a kind of deal where it will take enough time for, you know, you to scale it up or we can scale it up in one or two quarters?
No, it will take at least two to three quarters is what I would say. It's not an immediate, yes, you know, these are pretty complex deals and so on. So you need to resource, ramp up the right teams. You need to, the initial stages of these programs are very crucial. We need to get it right. And then, you know, once we deliver those initial, you know, milestones and so on is when we will be able to, you know, ramp up and, you know, move forward. So, yeah, I would say we are still very early in the deal cycles, execution cycles of these deals.
Okay. And most of these large deals that we have signed, these are mostly outcome-based or fixed-price kind of a contract. So, if you can give some color in terms of how the margins, so we can see is it initially we have low margins and then maybe the margins will scale up. And overall, in terms of the company margins, obviously, we, you know, Bejag is behind, and we are seeing all three segments now, you know, like getting back on track and the overall growth getting back on track. So, in terms of the margins, where are we heading? You know, in terms of the historical margins, we were operating much higher. So, you know, what's the steady state kind of margins we can work with? Thank you, Tamar.
So maybe I'll take the first part of the question, right, and maybe I'll lean on Nalan to take the margin part. If you look at the deals that we're signing now, these are not – or the deals that we've announced and we have won. You'll note that these are oriented towards doing the new. These are innovation, these are product engineering, and so on. So to that extent, they are not consolidation deals that get backended in terms of margin improvements and you will build and improve margins over time, like typically IT deals do. These are, in that sense, reasonably flat. So I would not expect that there is margin improvement that is going to follow simply because you want deals now and you will continue to improve margins over time. If at all there is margin improvement, that may come more from what Manoj talked of, which is how do we rebalance the pyramid and you do it carefully in a calibrated manner, and that will happen across the organization, not so much for only the deals that we have won. That would be my commentary on at least the new deals.
Yeah, I think from a margin perspective, I think, you know, as I said, right, There are steps that we need to do, and of course, you know, operational leverage that, you know, Nalin talks about improving the utilization further, as well as, you know, correcting the pyramid, you know, over a period of time, right? We have to do it very carefully, and this can't be done, you know, at one shot, so this can progress, but, yeah, we will have to progressively move towards, you know, gradual improvement in our margins, right? We don't want to give a number at this point in time, but, yeah, we are working on it to see where we can reach at the end of the financial year. Okay, sir. Thank you and all the best. Thank you.
Operator
Thank you. A reminder to all the participants, if you wish to register for a question, please press star and then one. Your next question comes from the line of Gaurav Vashog Bansali with Augmont Enterprises. Please go ahead.
Hello, sir. Am I audible?
Yes, you are. Please go ahead.
Yes, sir. I just wanted to ask, are we doing any guidance revision? As compared to H1 last year, we've already grown around 15 percentage, 14.5-15 percentage. So, do we have any guidance revision for the rest of the year, FY27?
Yeah, so maybe I'll just answer that right away, Gaurav. As a policy and in general, we don't provide guidance at all. So, therefore, there is no guidance. So, therefore, there is no revision to guidance.
Okay, sir. And the next question was, can we see EBITDA margin improvement in H2? Because in H1, both the quarters, you said we've taken it for one-time costs. In this quarter, it was employee subsidies. So, what could be the margin profile towards the end of the F5?
Yeah. So, from a margin perspective, right, so in Q2, just to clarify, there was no sort of one-time cost. It was more a bridge that I was providing versus Q1 movement bridge. Going forward for Q3 and Q4, what we are basically saying is that as sort of our revenues continue to improve, there will be operational leverage at play, right, with the wage hikes already having been done. And that is what we are targeting. We are targeting to keep our costs under control and let the operational leverage play out, as well as make some other interventions, which Manoj just spoke about.
Okay, sir. Thank you so much. That helps.
Operator
Thank you. Your next question comes from the line of Shankara Narayanan S with I Thought PMS. Please go ahead. Shankara Narayanan S, your line is unmuted. Please proceed with your question.
Operator
Yes, sir. You are audible. Please go ahead. Yeah. Yeah.
Thanks for the opportunity. I have a few questions on our new growth vectors that we have talked about a couple of quarters ago. So maybe you can, like we have stated that aerospace and defense, battery energy storage systems, and off-wayway and few manufacturing verticals that we are keenly focusing on. Can you talk about the opportunity across these three sub-segments, and can you provide some color on it, like how will these three verticals will scale over the period of next, Three to five years.
Yeah, so, hi, Shankar. This is Nitin here. Maybe I'll take that. If you look at aerospace and defense and off-road, you will see that that growth is baked into the automotive growth that we are showing. While it is dominated by the revenues and the growth from the automotive business, pure play, passenger car, and so on, commercial vehicles, but we are starting to see traction, And you will see that reflected in the deals that we announced, too. The kind of MOUs that we signed, the kind of deals that we announced, you will see that reflecting, and that always has a bearing on the future. Because like Manoj said, some of these deals take time to deliver revenues and scale revenues on. I think the good part is that we are seeing that traction and we are seeing that momentum. As far as other areas like smart manufacturing, best, et cetera, is concerned, you will see that that is actually, in many ways, and we have said this even before, that we typically provide for almost like a skunk works. We experiment. We experiment with a set of customers. We make sure that we're cutting our teeth. We understand what is needed to create differentiation there, what creates margin there because we don't want to do low-margin business. All that is reflected in the others part of our LDS. And if you actually look, you will see that while quarter-on-quadrate may be volatile because it's a very small number, on a year-on-year basis, you will see, I think, about a 75% growth in that piece. So on one hand, it is just about 2%. But if you look at it on a year-on-year basis, you will find that it has grown 60%, 70%, right? That should give you a directional view that, yes, we are continuing to build that muscle and continuing to experiment deeply, continuing to engage with more customers. But it is still early days. And that is why we are very clear that we are not calling them out.
Pramod, sorry to interrupt, sir.
Operator
The audio from your line is not very clear. Is it clear, no? No, sir. There is a lot of static.
Operator
Yes, sir. This is much better.
Yeah, yeah. So, sir, my second question is on our group customers, especially Data Motors and JLR. So, specifically from these two customers, like, what kind of opportunity are they seeing in terms of their spending on SDV? And I think there are a lot of news going on around these companies regarding the challenges that they are facing and also the pipeline that they are going to see in DBs. So, especially from these contexts, like, what kind of opportunity is currently visible for NXC over the next two to three years?
Yeah, I think both are, you know, important customers for us, you know, and, you know, JLR is going through its own challenges in terms of, you know, their own business performance and, you know, layoffs and, you know, and so on, right? So we are watching that, you know, pretty closely, and we will get to know about it, you know, maybe, you know, across H2, right? So having said that, you know, it's an important customer, and we are, you know, closely engaged with the R&D teams and, you know, the engineering teams at JLR, and in most of the, you know, new programs and new car releases, there is an element of Tata Lexi in each of the cars that they have, you know, that they're launching. I think similarly is the case with Tata Motors, especially on the electrification journey that they have on the, you know, both from a design perspective, you know, the cockpits and, you know, entertainment and, you know, all of those designs that you see, also on the connected car perspective and a big piece on the, you know, the electronics and the engineering. So, these are definitely important customers for us, and as, you know, they launch new programs, launch new vehicles, launch new variants, these are all, you know, opportunities where, you know, we can get engaged, and some part of that, you know, R&D or some part of the development is actually done by, you know, Todd Alexey. So, I think, yeah, I think we continue to closely monitor the situation at JLR and continue to see, continue to be engaged with Tata Motors at a very senior level. From there, you know, new programs, new vehicle programs, and R&D spent. And I think it's been a pretty good relationship with both the companies.
In our automotive vertical, what is the contribution of revenue that we are
currently receiving from these two clients?
We don't really, you know, disclose that information, but let me tell you that, you know, I would say a lot of the growth that, you know, we are seeing in automotive business is sort of minus the group customers. So a lot of the growth has come in from outside the group customers, especially in the U.S. and in India and Asia.
Operator
Thank you for taking
my question. My first question is on the healthcare vertical. Now, because this vertical is quite concentrated, we have seen in the past that it has turned unfavorable all over the world. And so, the health of all clients in this vertical becomes extremely important. So, with respect to that, how confident are you that all clients now are healthy and we would not see an impact like we have seen in the past in the healthcare vertical? That would be my first question. And my second question would be on the sustaining growth comment. Now, how do we see growth from here? Because there will be furloughs as well in 3Q. And when you say 2H better than 1H, is that on a Y-on-Y basis? Is that the CQGR that you are taking for 1H? And yeah, with the furlough there, how do you see the trajectory going? And those are my two questions.
Yes, Ankur, maybe I'll answer the first one with respect to HLS. We did recognize the risk and the issue that we see with client concentration because I think we have said that, look, this is a small business. We built it around very high-quality customers among some of the best and the leading medtech companies in the world. And it was very U.S.-centric in terms of the revenues. The last five, six quarters have been largely a journey about how do we add more customers, and we have talked about this too, right? So, therefore, I'm reflecting on what we have publicly disclosed to, which is very smart addition of customers, both in terms of number of customers as well as regions. And I'm just quoting names because they are, again, in the public domain. While everything was U.S. in the past, you will find a buyer that we announced from Germany. You will find a Terumo that we announced from Japan. So you're seeing diversification both in terms of the geos as well as in terms of the customer base. And I think that is the confidence that we carry beyond anything else. That would be the simplest answer that I would provide for HLS as a business.
And, Ankur, I think I discussed this topic on growth very early in the first or the second question where we talked about growth, you know, business by business, right? It's how we see automotive, you know, growth being sustained by growth in both the U.S. and India and Asia geographies. Yes, Europe being a little bit, you know, uncertain at this point in time. We're still uncertain at this point in time. We're still waiting and watching. But however, the other businesses, median communication and the healthcare businesses, we, based on the deals that we have signed and so on, we're pretty confident that H2 is going to be better. So that is how we see two of our businesses, we will continue to grow. And on the transportation business, we are, it's a lot dependent on, you know, on how Europe turns and how we are able to sustain the growth.
Thanks. Just a clarification, 2H better than 1H on a Y-on-Y basis?
What, 2H better than? Second half better than the first half.
So we are referring to, just to clarify, we are referring to this financial year only. And we are sort of, on a YOY basis, yeah, I mean, for 2H to be better than, you know, 1H, it would imply that our revenues would be higher even on a YOY basis in H2. So, margins, of course, as you are aware, right? So, last quarter, the H2 margins of FY26 were at a certain level, and now we are coming off a certain base, and we are talking about a gradual calibrated improvement. So, yeah.
Thank you. And just one last bookkeeping question, if you can disclose, in the automotive vertical, can you disclose how much of the revenue comes from Europe versus North America and Asia pack? That would be all. Thank you.
Yes, Ankur, we don't in the public domain. Sure, thank you all. You see a correlation to Europe, so you can derive it from…
I think the takeaway, Ankur, from our perspective would be, you know, what was being highlighted, right? That lot of growth is coming from U.S. and India over recent parts, While, you know, Europe by itself, you know, is obviously muted over the last few quarters. So as the quarters keep progressing, right, the proportion of other geographies are increasing. And we expect that trend to sort of continue. So the relative importance keeps decreasing with each quarter. Of course, continues being a very important part.
Sure. Thank you so much. All the best.
Operator
Thank you. Your next question comes from the line of Mayank Kumar with Prasoon Exponentials. Please go ahead.
Thank you for the opportunity. I just wanted to know what is the margin difference between the fixed price contract and time and material contract, and do we have any internal target for the split?
To margins and not proportion of fixed bid versus time and material. Is that correct, Mayank?
So, the difference in margins in the fixed-stress contract versus time and material.
Understood. So, I can take that. In general, we don't look at it that way, right? The idea is not to make fixed-stress better than time and material or time and material worse than fixed-stress. I think we always look at it from two lenses. One is, what is the overall And how does that particular project add value to the customer? So if certain projects mean that we'll have to do it at lower margins, even in the fixed bit, so be it, because that is what creates value and stickiness. While there will be certain areas where time material is a model to deliver, but the skills that are being utilized are very high end, in which case there will be a premium attached to the skills that we're delivering and nothing to do with the engagement model. So, I just want to make that point that, look, don't associate margins only with the model. Sometimes it's about what are you doing and who are you doing it for.
And, sir, can we also look at the on-site mix as a lever for margin or that might not necessarily play out?
Yeah, I think if you notice, I think we already are at industry-leading on-site-offshore ratios, right? Of course, there is always room to move that ratio further. But in our minds, I think we are at a reasonably good band, where we are, in terms of revenues, it's roughly about $25.75 that we've been running with for many quarters now, and I think that's a good place to be in.
Okay, sir. I've got it. Thank you very much. All the best. Thank you.
Operator
Thank you. Your next question comes from the line of Rohan Nagpal with Helios Capital. Please go ahead. Hello.
Am I audible? Hi. Thanks for taking my question. Just want to double click on the demand environment in Europe that you've been describing. So you said it was the same as last quarter in terms of decision making and things remaining slow. So, was there, I mean, but on the deals that have already been signed and were going on, has there been any change to those? Are there any ramp-downs, or are those also continuing to ramp up slowly, as mentioned last quarter?
Yeah, no, we have not had any ramp-downs there. It's more of, you know, it's more of, you know, a slow ramp-up or, you know, status quo, right? But at the same time, yeah, there's also been some of the projects that have come to a close and so on. So those deals, runoffs have also happened, right? So that's why we are still cautious about Europe.
Okay. Understood. And I think there was a recent announcement, the news during the rounds that there might be some limits imposed on the import of Chinese vehicles into Europe and sale of those. Do you think any development on that front will translate sort of quickly into spending by European OEMs, or that will just take its own due course and this is not really going to change trajectory in the near term?
Definitely, I don't think it will change any trajectory in the near term, Because the real issues that many of those OEMs are, you know, there are systemic issues, right, including the cost base and so on, right, that they have to address. The entire electrification, you know, they need to address. So a number of things they need to address. So the Chinese car companies, you know, coming into Europe is one of the many issues that they have to address. So I don't think it will immediately change anything for us in the near term.
On this one. Okay, that's it for Mayan. Thank you so much.
Operator
Thank you. Ladies and gentlemen, that was the last question for today. As there are no further questions, I now hand the conference over to the management for closing moments.
Thank you, everybody. And this was, I would say, a satisfying quarter with revenue growth across all the verticals. We hope to continue this trajectory and look forward to talking to you again next quarter. Thank you and have a good day.
Operator
Thank you. Ladies and gentlemen, on behalf of Tata LXC Limited, that concludes this conference. Thank you, everyone, for joining us and now disconnect your lines.
