Cyient Ltd

NSE:CYIENT

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the Cyient Limited's Q4 FY 2023 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Krishna Bodanapu, Executive Vice Chairman and Managing Director. Thank you, and over to you, sir.

[Bodanapu Krishna, executive]

Thank you very much, and good evening, ladies and gentlemen. Welcome to Cyient Limited's earnings call for the fourth quarter of financial year 2023. I am Krishna Bodanapu, the Executive Vice Chairman and Managing Director of Cyient. Present with me on this call are Mr. Karthik Natarajan, the Chief Executive Officer and Executive Director; Mr. Ajay Aggarwal, he just retired as Chief Executive -- Chief Financial Officer; and Mr. Prabhakar Atla, the new Chief Financial Officer for the company.

Before we begin, I would like to mention that some of the statements made in today's discussions may be forward-looking in nature and may involve risks and uncertainties. A detailed statement in this regard is available in our investor update, which has been e-mailed to you and is also posted on our corporate website. This call will be accompanied with an earnings presentation. The details of the same have also been shared with you.

Before I begin with the highlights, let me explain some of the terminologies that are used in the presentation. Much of it will be familiar, but we have regrouped a few things. So I want to make sure that we give a clear understanding of what these are.

When we say core services, that's the organic services business of Cyient. So this wouldn't include any of our acquisitions or the design like manufacturing business.

Consolidated services is the core services plus the acquisitions that were made in financial year '23. Group then is consolidated services and DLM is the manufacturing business of Cyient. Transportation is a segment that includes aerospace and rail transportation. Connectivity is a segment that includes communication. Sustainability is a segment that includes mining, energy and utilities, and new growth areas include medical, semiconductor, high tech and automotive, which are essentially the areas that we're investing aggressively for accelerated growth.

The markets regulator, Securities and Exchange Board of India, SEBI, has provided an observation letter to sign DLM Limited to go ahead with the proposed public offering. As you all know, we are in the steady mandatory quiet period, therefore, the management cannot respond to any queries in connection with the proposed IPO of Cyient DLM Limited or with DLM business and operations.

With this, let me take you through the highlights for the quarter. In U.S. dollar terms, we posted revenue of $230 million for the group. This represented a growth of 39.1% year-on-year in constant currency, 35.9% in U.S. dollars. This also represented a growth of 6% quarter-on-quarter in constant currency or 8.1% in U.S. dollars. I would like to highlight that what is especially impressive, in fact, there was no further acquisitions in Q3. So Q3 versus Q4 is a like-for-like comparison without any inorganic bump that we call.

In rupee terms, we posted a quarterly revenue of INR 1,751 crores, which signifies a growth of 48.3% year-on-year and 8.2% quarter-on-quarter. Consolidated services revenue stood at $176.2 million, which is a growth of 38.4% year-on-year in constant currency and 35% in U.S. dollars. This also represented a 3.2% quarter-on-quarter growth in constant currency.

Core Services revenue is at 12% year-on-year and 2.6% quarter-on-quarter in constant currency.

Normalized group EBITDA margin was at 18.4%, which was up 118 basis points quarter-on-quarter and 30 basis points year-on-year. Normalized group EBIT was 14.2%, which was up 136 basis points quarter-on-quarter, but down 21 bps Y-o-Y. And I'd just like to highlight that much of this is because of the amortization that has come in, in the last few quarters because of the acquisitions. And therefore, if you look at the group EBITDA margin, things look quite good and look quite healthy.

Normalized consolidated services EBIT margin was 15.1%, up 117 bps Q-on-Q and down 27 bps Y-on-Y, and again, for the same reason I mentioned because much of these were services acquisition.

Normalized free cash flow generation for the quarter stood at INR 261 crores or INR 2,614 million a conversion of 81.8% on a normalized EBITDA basis, and this represents one of the highest cash conversions that we've ever had.

Normalized PAT stood at INR 1,760 million or INR 176 crores, which represented a growth of 14.1% year-on-year or 8.1% quarter-on-quarter. Given that this is the end of the year, can I also give you a quick overview of the highlights for the full year.

Revenue for the first time crossed INR 6,000 crores and stood at INR 6,016 crores, a growth of 32.7% year-on-year. In U.S. dollar terms, this was $746.3 million, a growth of 26.9% Y-o-Y in constant currency or 22.7% in U.S. dollars.

Consolidated services revenue stood at $632.4 million, which is the highest ever and represented a growth of 30.2% year-on-year in constant currency or 25.6% in U.S. dollars. The core services revenue growth is 12.1% year-on-year in constant currency. Normalized group EBITDA margin was at 17%, down by 110 bps year-on-year. And normalized group EBIT was at 12.8% or down 113 bps against the reasons that I mentioned.

Normalized consolidated services EBIT margin was at 13.7%, down 160 bps year-on-year. But normalized free cash flow generation for the year was at INR 547 crores, a conversion of 50.8% on EBITDA, and almost 100% conversion on normalized PAT.

Normalized PAT for the year was at INR 565 crores, which was up 8.2% year-on-year. I'm also delighted to inform you that we declared the highest ever dividend for the year at INR 26 per share, which included an interim dividend of INR 10, which was declared in October.

I would just try to quickly highlight two things for the quarter. The partnership between Thingtrax, which is a partnership, which adds to our digital ER&D focus and help our customers improve efficiency and reduce operational costs and our partnership with IBM team to inaugurate the center of excellence to drive digital innovation, especially in aerospace and heavy engineering industries.

With this, I would like to hand this call over to Mr. Ajay Aggarwal, who will take you through the detailed financial performance for the quarter. Thank you, and over to you, Ajay.

[Ajay Aggarwal, executive]

Thank you, Krishna. So I will also present two segments, one is quarter 4 and one is the full year. If you look at the group revenue, Krishna already talked about the number of $213 million and how we have done compared to the last quarter and how we have done from where we were about a year back at about $156.7 million. This means in constant currency, 39.1% growth year-on-year.

And quarter-on-quarter, we are looking at 6.6% constant currency growth. In terms of the breakup of that, you will see that in the current quarter, we have done about 3.2% -- 3% kind of a growth that has come from services, and we have got about 8% of growth that has come from -- 28% kind of the growth that has come from DLM.

Overall, if you see in terms of the share of the geographies, I would say there is some impact of the acquisition. And also, I think the revenue has been strong. That's what we've shown in the end when you look at the bottom of the slide.

For the full year, as Krishna said, we crossed INR 6,000 crores, $746 million for the full year as against $608 million. And we all were very concerned that we -- if you look at the '19, '20, '21, '22 years, we were stuck at that $550 million to $560 million kind of range. It's quite a nice 27% jump year-on-year, and that takes us to the lead, and I'm sure Krishna will talk about it and Karthik will talk about it. I think whatever expectations we had said looking at the good quarter of getting to the run rate of $1 billion, I think we are in line with that.

In terms of the consolidated services growth at constant currency, 30.2%. Yes, there is an impact of acquisition. And if we were to exclude that, the core services have grown by 12.1% in constant currency.

In terms of hedge book, I think quite familiar with what we have been presenting, no change in the policy. And total Forward Contract as of now are about $154 million. And at the current spot position of 31st March, more or less, we are neutral, and I will talk a little bit more about it when I come to the other income. As of now, the gain is about $1 million on the total hedge book.

If you look at the income statement, I think really, we take pride in the fact that we have reached 16.1% EBIT margin and there's been tremendous effort in the last few quarters. We have talked about various initiatives even in the Investor Day and the year call. And that's showing up the impact and we are really looking at good trajectory, 16.1% for the core, which is an improvement of 103 bps quarter-on-quarter.

And I think a number of levers have played. We have got some price hikes. We are seeing in the environment. We are able to take some customer price increases, volume impact of SG&A. And of course, we continue to spend on some investment, whether it is technologies or other things that are required. Group EBIT, we have seen 14.2% and one more thing you will see that we -- at EBITDA level, we are at 18.4%. And acquisitions, again, I think what we said earlier, we are accretive at EBITDA level.

So when you look at the number of the services, you will find that the EBITDA is targeted for acquisitions compared to the core, but it's a bit low due to the amortization of the investment that we have made, there is a gap at EBIT level. So that's why we started presenting both EBITDA and EBIT to you so that you can see the operating performance. And as we proceed on those acquisitions, we will see I think year 2, year 3 when we start getting the benefit of synergies as well, I think the gap on the EBIT level will also go down.

Some comments in terms of the other items, I would say on tax. This is the last quarter. So we had a true-up in terms of the benefits of our special economic zone and other things around the global taxation. And while you look at the tax of 21.3%, I would say there are one-offs. And what we have to really look at is the tax rate of 24%. And that's what is the right tax at current level. And next year, I think there's a slight change in the taxation in U.K. Apart from that, our intent will be similar and the tax for India, the overall thing is to look at 25.1%, which is the ordinary rates for the next year.

In terms of the full year, I would say the full year core margin at 14.2% is definitely lower than quarter 4. But as I said, the trend is really increasing. And whatever we are looking at the various initiatives, we feel that there is further route that Krishna will talk about guidance for the year. There are multiple levers, which have acted in quarter 3 and quarter 4, be the cost program, be the pricing, be the automation. I think we will continue, and you will see these numbers to be very nice.

In terms of PAT, as Krishna said INR 565 crores is the profit that we have delivered for the full year at a normalized level and just as an exposure, and the statements that are there, we have given the EBIT margin bridge. We've also provided the classification between the reported metrics and the normalized metrics. Some of you who are regular on these call are already familiar with what have been these items, and there are no new additions during this particular quarter to that category of items.

I would take them, yes, you can read them. And if you have any questions, one of us can take them in terms of the change quarter-on-quarter and full year in terms of profit, in terms of the margin.

In terms of cash generation, you will see that both the last quarter and this quarter has been very healthy. We have generated a cash of [ INR 266 ] crores during the quarter. And our conversion almost we are close to the net profit, 100% conversion.

We have a cash position of INR 1,077 crores. And in terms of the total debt that we have is about INR 900 crores. So on a net basis, we are cash positive. So the net debt for the company is 0. Actually, we are in excess in terms of cash. And you will see our debt equity ratios are coming down. And you will see that here, we are very safe on the balance sheet in terms of the debt, also there is enough room on the balance sheet to be able to take care of any investments that come our way.

With this, I'll hand over to Karthik to provide the business update.

[Karthikeyan Natarajan, executive]

Thank you, Ajay. Good evening, everyone. I want to start off by saying that it's been an all around performance across the sales delivery and the operational performance and happy to report that the core services have shown a successive quarter of growth. And if you really look at based on the business units that we operate and the transportation, which has shown the growth of 12.9% in terms of quarter-on-quarter in constant currency and 13.1% year-on-year, and we kind of guided that we will have a double-digit growth, I think that's definitely panned out.

And connectivity and there is a dip of minus 3.3% quarter-on-quarter in constant currency, while year-on-year, we reported 27.7% constant currency currently. Sustainability business, which is comprising of Mining and Energy & Utilities, have shown 3.1% constant currency quarter-on-quarter growth and 125.1% year-on-year with [indiscernible] included as part of this group.

And new growth areas, which includes automotive, high-tech, medical devices and semiconductor, has supported a mild de-growth of 0.8% in constant currency, and which has shown 34% year-on-year growth.

Interestingly, even the organic core services have shown year-on-year growth across all the four business segments that we operate in, resulting in consolidated services at $176.2 million and 3.2% constant currency growth. And core services growing by 2.6% and including acquisitions grown by 3.2%. And in terms of year-on-year at 38.4% in constant currency.

If you look at the order intake, we have done about $212.7 million, and this showed about 13.3% from Q4 of fiscal '22. In constant currencies, this is about 19% growth.

And we also announced about 5 large deals, and this is covering all the four business segments. I think the large deal sets the concept, the panning out across our business units. I'm happy to report that to a total contract potential of $185 million in Q4.

So if you look at the full year and similar to what I just covered a few minutes ago, the transport unit, which has done about $188.9 million, has shown year-on-year constant currency growth of 2.6%. Connectivity at $181 million, 32.1%; sustainability at $139.5 million, at 86.7%; and new growth areas at $122.6 million, at 39.2% growth.

I think this also gives us a very balanced portfolio of four different business segments, and we are really poised for accelerating our growth over the next few years. And for the full year order intake, which is at $720.5 million and in constant currency, this is about 18.5% higher than what we have done in fiscal '22. We have won about 18 large deals through the year and totaling to about $412 million, and this is up by 50% compared to what we have done in fiscal '22.

Move forward to give a larger business outlook, while the challenges continue dominated by geopolitical issues and wage inflation, interest rates and also potential signs of economic slowdown. And we do feel that our customers intend to invest on technology and innovation continue to be high. And we do believe with the technology disruptions that are happening around us, including the generative AI part, which has picked the momentum in the last 3 to 6 months, we are really getting ourselves aligned to address the market needs through what we call the mass technology-led growth and which is going to be supported by Integrated Products & Platforms; Digital Enterprise, which is about Digital Engineering & Technology; and Sustainable Infrastructure & Decarbonization.

We believe these three technology groups would accelerate our growth moving forward. And we believe this particular concept of three technology groups will drive growth through this decade and not just for a specific period of time.

To get down to specific business units, Transportation and the recovery of aerospace continue to be there through this year and also the increase in different spending and also some of the advance air-mobility solutions will continue to drive growth.

And some of the growth areas we are seeing from our customers include improving their operational efficiency through predictive maintenance and autonomous operations and how do you think we can really provide solutions on these areas.

Hybrid Propulsion Technologies continue to be critical for both aerospace and rail, and which will bring us additional opportunities for growth.

Connectivity, and we continue to see a demand even through fiscal '24. And as you remember, this has become the largest vertical for core services, 2 years ago. We continued the run and we still hope this will continue to be a growth engine for us even in fiscal '24. Some of the offerings that we have been able to strengthen in this area includes the Network Management, Network Operations & Optimization and digitalization are likely to drive growth in the segment.

Sustainability, probably we are the only Indian company which has really created a focus on sustainability as a core business offering. And by integrating various capabilities that we had and we also acquired over the last 24 months. And what we are really talking about in sustainability about the energy transition, which is requiring new materials in the form of zinc, cobalt, nickel and increased growth of copper and all this would require new minerals to be mined. And our offerings around Intelligent, Safe, and Autonomous mining operations, definitely helping our customers to improve their operational efficiency.

And also with energy transition, which is likely to put significant pressure on the utility companies to move away from being Distribution Network Operators to Distribution System Operators.

And this is being funded by various government agencies, and we are confident that some of our offerings would fit into these areas. Apart from what we call them as autonomous plant construction, AI enabled plant design, some of these offerings would really be something that customers would be excited to partner with Cyient.

Some of the other growth areas, which includes automotive and led by autonomous and electrification, I think we continue to see momentum in this segment, and we have grown even in Q4. We continue to be hopeful of this being a growth engine for us in fiscal '24.

And medical -- which is medical and health care, which has taken some pause in the last 6 months, we expect this to come back to growth path during this year and which is led by predictive, proactive and personalized patient care and connected devices. And semiconductors, which has done well for us in the last 12 months and probably may take some softening, and this is led by miniaturization and also creating AI enabled chips, and that's going to really drive growth for us moving forward.

And I also want to take some quick examples of what we have been able to work on driving the solutions led by technology and whether it is on intelligent products and platforms, through predictive maintenance solutions that are leading aircraft operators and working with hydrogen plant project to build on simulation of electrolyzer plant and carbon capture systems and power plant projects, which includes the digitalization of plant and helping them to enable 3D Encore as a service and this has been one of the asset management platform we build through [indiscernible] acquisition.

And Nextgen Connectivity, which includes building Design and Development of Security module or e-SIM to manage authentication and access management. And this is going to be useful for IT scale of one of our customers.

Autonomous Systems & Processes, which talks about our ability to build innate generated and integrated perception systems has been some of the offerings we have been able to build and demonstrate to our customers, and this is likely to create a large deal for us during this year.

And also in terms of digital platforms and customer experience, whether it is about big data management for one of the mining customers for Autonomous Excavators or Regulatory Compliance, which is around the medical device and health care. We've been able to bring in a technology-led robust solution platform, that really helps us to win more in the marketplace.

With that, I'll pass it on to Krishna for telling the guidance.

[Bodanapu Krishna, executive]

Thank you very much, Karthik. The outlook for the year is as follows.

[Operator]

I'm sorry to interrupt, sir, we are unable to hear you.

[Bodanapu Krishna, executive]

Sorry. Thank you very much, Karthik. The outlook for the year is as follows. In FY'24, we expect consolidated services revenue growth to will be in the range of 15% to 20% year-on-year. I understand that it is a bit of a wide range, but we're being cautious given what is happening in the market. We still have a very good line of sight within this range, but we want to make sure that we give a wider range, but we will, of course, narrow it down through the year. But I just want to say there is a bit of uncertainty in the market. And while we are positioned in some very good industries and we have a very balanced portfolio with the four pillars that we'll talk about the transportation, connectivity, sustainability and new growth areas.

I think it's just prudent to be conservative at this point, and that's why we're using a wider range, which we will continue to refine through the course of the year. We also expect the consolidated services normalized EBIT will improve by at least 100 to 200 basis points year-on-year. And again, that is the bit of the range, but we believe that with the uncertainty, we'd rather be prudent and work towards making the range narrower and hopefully changing some of the guidelines of the range, hopefully on the upper side. So I'll leave it at that. This is how we look at the year.

Before I turn it over to the questions that you may have I would like to take this time to just acknowledge a few people.

Firstly, I want to acknowledge Prabhakar Atla, who will join us now in these calls as the CFO of Cyient. Prabhakar is somebody that I've worked with for 17 years in Cyient, a thorough professional and somebody who understands our business better than anybody else. So he will really be able to give not only a financial perspective but also a very strong business perspective, given his understanding of the business.

I also want to thank Shrini Kulkarni, who many of you know, managed many things for in Cyient, including SG&A, M&A, but in the context of this call, Investor Relations. As many of you perhaps know already, Shrini moves on to DLM, Cyient manufacturing subsidiary as the CFO of Cyient DLM and obviously has a very exciting role with the impending IPO. And then hopefully, the very exciting growth trajectory that, that business is on.

But having said that, most importantly, I would like to thank Mr. Ajay Aggarwal. Ajay has been our friend, a philosopher, a guide and somebody who's worked very closely with me for the last 12 years as we went through this journey of making Cyient a best-in-class company. As many of you will agree, Ajay's dedication and professionalism are second to none and what he brought to Cyient has really been reflected not just in the performance and the numbers, but I hope in also the credibility that Cyient as the company holds with all of you. Thank you very much, Ajay. Ajay will continue consulting with the company on a few things. So we will see him, but perhaps less so with you.

So I will quickly hand it over to Ajay to say a few words before we open it up for Q&A.

[Ajay Aggarwal, executive]

Thank you very much, Krishna. I just would take two seconds for every quarter. So that makes it about -- I have a statement to say I'm honored to have the opportunity to serve as the CFO. I would say your CFO. To the people on the call, I want to take a moment to reflect the progress that we have made together.

During my tenure, we have focused on building a very strong financial function incorporating feedback from our investors. And this has been the best part, if you ask me and thereby implementing best-in-class governance practices. We also committed to transparency and disclosure and ensuring that you have the information you need to make informed investment decisions.

In the last 12 years, we had generated excellent returns for investors. Our market cap has gone on up by 6x, our PAT and free cash flow has increased by 4x and 13x. We are leading our mid-cap year in terms of dividend payout over the last 3, 4 years.

As a company, we have always focused on optimizing our tax rate and augmenting other income through treasury allocation and export incentives. Let may assure you that Prabhakar will focus on these initiatives with the same regard.

I'm proud to project we have made significant progress in each of these areas. We have built the financial function that is capable of supporting the strategic objectives of the company, while also awaiting to the highest standards of integrity and ethics. Of course, Shrini and Mayur here are the examples of 2 professionals here. We have listened carefully to your feedback. Many of you on the call have been my gurus. And I have used it to make decision making internally, and we have established robust governance practices that are designed to reflect the interest of all our stakeholders.

Perhaps most importantly, we have prioritized transparency and disclosure. We believe that providing time being, and accurate information to our investors were essential to building trust and confidence. We have been transparent about our performance, of our risk, and opportunity, and we have provided you with information, you need to make informed investment here.

As I hand over the back end to Prabhakar, my friend, secondly I want to express my sincerity to each and every one of you, your support and feedback have been invariable to me. And I'm grateful to the trust that you have placed in me and the company. I'm confident that the finance function is in excellent hands with Prabhakar, and I will continue to support Cyient and everyone to make it successful.

Thank you for your time, your trust and your partnership and will stay in touch. Thank you very much.

[Bodanapu Krishna, executive]

Thank you, Ajay, and we'll open it up for Q&A at this time.

[Operator]

[Operator Instructions] We have our first question from the line of Sulabh Govila from Morgan Stanley.

[Sulabh Govila, analyst]

First of all, I wanted to thank Ajay for all his help, all through these years, and I wish you the best for your future and your retirement. .

I have a couple of questions on the results. So one is that, first of all, congrats on a good set of results. The first one is with respect to the guidance range that is there of 15% to 20% on services business. I just wanted to understand very qualitatively, what are the areas where you would be more cautious through the year, which you have baked into the guidance? And through the last quarter or maybe in the first 20 days of this particular quarter, have you seen any instances of project ramp downs or client cancellations from the clients. So anything that you would want to highlight there? That's the first one.

And the second one, with respect to margin aspirations for next year, you talked about some price increases that have benefited through the second half of last year. So are these -- I just wanted to understand, are these already baked into the numbers? Or you're expecting some more in the margin expansion that you have talked about, plus what are your expectations for the wage hike going into next year?

[Bodanapu Krishna, executive]

So I can answer the first part of the question -- or the first question and then request Karthik for his views on that. But I'd say, I think, generally, there is cautiousness in the market, especially in some of the industries like semiconductor, where we are seeing a bit of slowdown in a macro perspective, and we're just being cautious and that's why we still kept the higher end of the range also because we are still not seeing a significant impact on our business or an appreciable impact on our business. But we believe that the macro will impact everybody at some point, and that's why we're being cautious.

So I think I'd say a couple of industries possibly. One is semiconductor. The second is medical. And the third is there's also a bit of a slowdown in some of the elements of sustainability. So I think it's just prudent given that what is happening in the world that we have a little bit of a pragmatic conservatism going on in the current environment. So that's why we've given that guidance, which is a bit wide. But again, that's how we're also managing the business because we don't want to let any of the growth goes, so we can't just take a very conservative view. At the same time, have the flexibility that if it is 15%, not 20%, then we can take some actions to make sure that at least these costs are under control.

Karthik if you want to add something to that and also the second part of the question on margins.

[Karthikeyan Natarajan, executive]

Yes. No, I think you covered the points, Krishna. I think we expect the large three verticals, which is the sustainability, connectivity and transport. We expect all of them to grow in double digit for the next year. I think that is where our optimism comes from. And we are also cautious of the fact that there could be potential issues on some specialty projects and programs that we don't have visibility yet, which may get impacted or which make it pushed to the right or which may get delayed to begin. And we do expect some of them to show up during the year. So we just want to be cautious.

While we are optimistic on our portfolio mix and where we are wanting to play, I think that really had shaped us well and we are just hoping for a positive optimism through the year and keeping ourselves grounded. And also on the margin question, I think whatever we have guided, which does include the price hikes, also any kind of wage hike that we have planned for this year.

[Operator]

[Operator Instructions] We have our next question from the line of Sandeep Shah from Equirus Securities.

[Sandeep Shah, analyst]

All the best, Ajay, for your retirement life as well as congratulations to Shrini and Prabhakar for the new role.

The first question in terms of FY'24 guidance. There, we have said the consolidated services growth of 15% to 20%. What could be the core services growth? Can it be higher than what we have witnessed 12% growth in FY'23? Or you believe it could be lower versus FY'23 because of the macro issues?

[Karthikeyan Natarajan, executive]

Yes. I think, Sandeep, we are not breaking down by core on consolidated. This was essentially provided to just get a color from Q3 to Q4. But all these businesses are run in an integrated manner, and it will be very difficult for us to separate it beyond Q4.

So our view is keeping all of them in play and this is how we have arrived at this 15% to 20% range. I know we said it's a broad range. And as we learn more about how things happened during the year, we'll try to narrow this range as well.

[Sandeep Shah, analyst]

And just a follow-up, what could be the outlook for the railways? Do you believe it's on a Q-on-Q growth recovery? And it can grow at a double digit in FY'24? And what would be the timing of wage hikes in FY'24?

[Bodanapu Krishna, executive]

Did you ask the first question to be on Energies?

[Sandeep Shah, analyst]

On railways. Growth outlook on railways.

[Karthikeyan Natarajan, executive]

I see, new growth area. I think we expect that automotive to continue to be a growth engine for us into the next financial year. And we expect semicon to be soft and at least for H1. We hope it recovers during the latter part of the year. And we expect medical and health care and licenses should start getting into the growth trajectory, but it would be muted. And Hi-tech could probably be again top.

So essentially on the new growth areas, we expect the growth to be led predominantly by automotive. And on the wage hikes, we have not quantified the number, but it should be in similar lines like what we have done for the last year.

[Sandeep Shah, analyst]

Yes, yes. I was asking about railways, actually.

[Karthikeyan Natarajan, executive]

Railways. Yes, I think we have turned the corner in Q4. And as part of what we have covered in our previous commentary, and we expected this to be recovering well in Q4. I think that has definitely happened. And we do expect it to be a growth engine, but it may not be something which will really drive our growth significantly higher. But the entire transport segment, like we have talked about, we expect it to be in double-digit growth for the year.

[Operator]

We have our next question from the line of Mohit Jain from Anand Rathi.

[Mohit Jain, analyst]

One is on the pricing. So there was a steep increase which you have shown in EBIT margin rate. And also, I saw the increase in on-site presence during the quarter. So when you say pricing, is it the blended rate? Or are you referring to like-to-like price hikes?

[Bodanapu Krishna, executive]

No, it's a like-to-like price hikes when we talked about that, and we have been able to see a strong intent from customers to support on the wage inflation. And this is something which is a critical part. I also talked about the talent shortages globally as a major concern. And they are supporting us with appropriate price hikes in the geographies that we operate in.

[Mohit Jain, analyst]

So 4Q is the new base for us from a price perspective?

[Bodanapu Krishna, executive]

That's right.

[Mohit Jain, analyst]

Okay. And sir, last question is, if you could help me understand the breakup because I think there's some reclassification. You mentioned about it in the opening remarks also, but if you could provide 4Q breakup in the old format like aero, rail, [ ARC ] et cetera? And if you can just explain which segment goes there in the new classification?

[Bodanapu Krishna, executive]

Yes, I think it is nothing but aero and rail gets classified under transportation. And communications is getting reclassified as connectivity along with Celfinet acquisition that we made last year. And sustainability is about mining, energy and utility. And the new growth areas are automotive and mobility, healthcare and life sciences, semicon and Hi-tech.

[Mohit Jain, analyst]

Okay. So to that extent, they are comparable with the past numbers?

[Bodanapu Krishna, executive]

Yes.

[Operator]

We have our next question from Shradha Agrawal from Amsec.

[Shradha Agrawal, analyst]

Congratulations on another good quarter. A question on Aerospace & Defense. We've seen many consecutive quarters of good performance out there. Is it more a widespread performance across client buckets? Or is it from 1 or 2 clients that is driving growth in this vertical for us? And how do you look at aerospace going to FY '24, given a very good exit in 4Q that we have delivered?

[Bodanapu Krishna, executive]

I think the recovery of aerospace continues, and we are also seeing the interest from customers to improve their manufacturing productivity and their ability to service the customers and aftermarket growth is strong. And we are helping them with some of our digital and technology solutions in this segment to help them to improve the productivity and ability to address the customer segment.

We do expect it to continue the growth in double digits for this year, but we do expect -- this segment also is due for a platform upgrade, which is expected to be announced any time in the next 3 years. We never know when it is going to be announced, but that is going to be the super site beginning of a super cycle in terms of how this will drive new product investment led by significant capital infusion, which is due anytime in the next 3, 4 years, and we hope something happens in the next 2 to 3 years.

[Shradha Agrawal, analyst]

Right. And sir, the other bit is on communications. After the very strong growth that we have seen in FY'22 and first half of '23, growth seems to be coming off, especially in the last 2 quarters. So I think you had alluded to some right shifting of orders in the last quarter, if I'm not mistaken. But what drove a decline in communication in this quarter also? And how do we look at the segment in '24?

[Bodanapu Krishna, executive]

I think it is more of the gap between some of the projects, which are closing in the quarter and the new projects getting started. And that is what is really showing in the Q4 results. If you look at full year on the core services part in communication, we have grown more than 18%. I think this is a strong year that we had on the communication or connectivity vertical, and we expect it to, again, build the momentum through the year. And this was more of some projects that we started working on during the course of last year, and they were coming to an end, and the new projects which started will probably have a ramp-up sometime in Q1 and Q2.

[Shradha Agrawal, analyst]

Right. And just one bookkeeping question. I think you had guided to ETR being 27% for '24 earlier. And are we now guiding to 24%? Is this understanding right?

[Bodanapu Krishna, executive]

As I said, I think in U.K. regions, there is a proposed tax increase. And also, we are planning to look at simplifying the fact and adopting the ordinary, say at 25.1%. I would say it could be more between 25% and 26%.

[Operator]

We have a next question from the line of Mihir Manohar from Carnelian Asset Management.

[Mihir Manohar, analyst]

Congratulations on a great set of numbers. And first of all, thanks to Ajay for all the support that he has given to us. Lastly, I wanted to understand the aero side of the business, and we are seeing good growth over the last 2 quarters, specifically. So wanted to understand fundamentally, how long are the cycles federally. And you mentioned about some upgrade coming in the next 2 to 3 years. If you could throw some more light around that, what kind of...

[Bodanapu Krishna, executive]

I'm sorry. His voice is not coming very clearly. Very gobble. Can you try something else?

[Operator]

Mr. Manoj, can you speak slowly as well?

[Mihir Manohar, analyst]

Is it audible?

[Bodanapu Krishna, executive]

This is better.

[Mihir Manohar, analyst]

So lastly, I wanted to understand the aero side of the business. I mean you mentioned as to which areas are driving their growth. I wanted to understand how long that sometimes your cycles on the aero side of the piece, I mean should we see good spend so there being existing for the next 2 to 3 years at least.

And you mentioned about some big upgrades coming on the new product side, which could happen in the next 2 to 3 years. So if you could throw some light around what kind of updates are you talking about? That was one question on Aero.

Second question would be EBIT side of the piece. I mean we are looking at 100 to 200 basis points kind of an expansion on the consol services side. So what are the tailwinds that you're looking at for the EBIT margin expansion?

And my third question was on the legal cost. I mean, we are having this lawsuit -- legal lawsuit in the U.S. and we have incurred roughly INR 45 crores, which is like $5 million, $6 million at this particular year. So what is the update over there? And how long could we keep on incurring this cost? Because that number is looking quite a big over there. Yes, so those were the questions.

[Bodanapu Krishna, executive]

So let me address the legal question and then I'll hand it over to Karthik on the aerospace. But we're still continuing to vigorously defend ourselves in the legal case. The legal case has gone for trial right now. We are defending ourselves with the joint group.

And I can say that we will know an outcome within this quarter. And at that point, based on the outcome, we can then give you a better view of the -- any continuing costs that may might occur with the case. So I would say, bear with us for another quarter or perhaps two quarters, and we'll have a much clearer view on the legal costs going forward.

Karthik, on the Aerospace business?

[Karthikeyan Natarajan, executive]

Yes. I think what I can answer that question, Manohar, based on what we have seen in the last 3 years. If you look at in fiscal 2021, there was significant dip in terms of revenue passenger miles. I think that is coming back to 90%, 95% for most of the domestic passenger miles. But if you look at the international passenger miles, significantly opened up after China's Zero COVID policy have been withdrawn.

And we do expect the growth to recover during this year and early next year. And we expect significant growth around the manufacturing part or around MRO or aftermarket side of the business and enable with some of the digital solutions to help them to accelerate that they need to produce more engines, they need to service more engines or aircraft, how do you think they really need to get up for it.

Having said that, I think the super cycle, we don't know when it is due and there is a significant pressure on the aerospace group to decarbonize the whole industry. And they are likely to be sustainable turbine air fuel, which is going to be another trial that is going to be put out by 2024, '25.

Hybridization of engine to reduce the emission that is being done by the aircraft industry today. And then the platform upgrade. So we don't know when it is likely to happen, and this is anybody's guess at this point of time. There'll be two large players. I think if one announces is [indiscernible] the other one also to announce. If you just take 737 or 320 and both are probably a 30-year-old platform, and both need some kind of an upgrade, it's only a matter of time during this decade.

And for your second question on EBITDA expansion that we talked about for 100 to 200 basis points, I think this is stemming from the confidence that we have on our execution capabilities in terms of really running at a very tight ship in the form of utilization level and also ability to really drop price hikes and hyper automation, which is one of the way to really run more fixed-price projects more productively and efficiently.

And how do you think we can really manage the cost under control and which is the wage inflation that's going to happen during this year. So we are confident about the range that we are providing here, and we'll kind of keep you updated as we make progress on this trend.

[Operator]

We have our next question from the line of Nitin Sharma from [ MCPro ] Research.

[Unknown Analyst]

Congratulations on the good set of numbers. Would want to understand what kind of headcount additions you are looking in FY'24 and then I have a book keeping question.

[Bodanapu Krishna, executive]

Sorry, it's not very clear. Could you repeat the question again?

[Unknown Analyst]

So what kind of headcount additions you're looking at this financial year?

[Karthikeyan Natarajan, executive]

Yes. I think I'll try to answer that, Nitin. I think you would have seen that we have added about 509 heads as for Q4. And we do have our current plan to fill in what is needed for the next 6 months. We are continuing to claim both on contingency as well as permanent hiring based on what makes sense.

How do you think we really see our demand panning out? And we are definitely looking at the headcount addition, similar to what we have done last year and which is, again, we cautiously triggered based on how the demand is shaping up. And you should have seen we have dropped about 3.5% on utilization. And we also added about 500 people anticipating growth. And we do have both utilization as well as headcount that we added as a lever for us to drive the growth in the H1 of fiscal '24.

[Unknown Analyst]

Sir, the current level of utilization is what you are keeping it around comfortable with?

[Bodanapu Krishna, executive]

Yes. I think we are comfortable with the current utilization level, and we have made some changes to our structure about 15 months ago. I think that's really helping us to drive the right levels of utilization by having the resources being fungible and flexible to be rotated around. And we have done an upskilling and reskilling program over the last 2 years. I think all of them are helping us to have the resources, which can be moved around the projects.

[Unknown Analyst]

Okay. And a book keeping question, can you please share the breakup between aerospace and railway -- rail transportation for the 4Q?

[Bodanapu Krishna, executive]

Sure, Nitin, I'll ask Mayur to be in touch with you to provide more details.

[Operator]

We have our next question from the line of Abhishek Shindadkar from Incred Capital. I'm sorry, sir, you are not audible. Please use you handset.

[Abhishek Shindadkar, analyst]

Can you hear me?

[Operator]

Yes.

[Abhishek Shindadkar, analyst]

Yes. I just have one question on the order intake. Just first, going ahead over the next 3, 4 quarters, do we have all the investments in place to kind of sustain the order book term?

And the second question is for the quarter reported in order book, is the acquisition order book -- I mean, how do we plan to club it or is it part of it? If that can be clarified. I missed it in the presentation. So if you can help me with that.

[Karthikeyan Natarajan, executive]

No, Abhishek, good that you asked a second question, I'll answer that. And current order book or order intake do not take any of the acquired entities into account. They are in the process of getting integrated. We'll provide better view during H1 of fiscal '24 as we integrate the processes so that we can get an apple-to-apple comparison. Currently, these are all core services that Krishna has defined in the initial part of the presentation.

And sorry, what was your other question?

[Abhishek Shindadkar, analyst]

The second question is now do we have all these investments in place to kind of sustain the order book momentum or do we have to [indiscernible]

[Operator]

I'm sorry, sir, your voice is breaking again.

[Abhishek Shindadkar, analyst]

Can you hear me now?

[Operator]

Yes.

[Abhishek Shindadkar, analyst]

My apologies. The question was about the debt financing [indiscernible] in order to sustain the current order book momentum. Do we have everything in place or would there be some interesting story for this?

[Karthikeyan Natarajan, executive]

Yes. No, I think -- I hope I understand your question, I think your question is do we have enough capabilities required to deliver for the order book? I would say we are more or less there. And wherever we see some gaps, we'll keep filling them as and when needed. And like we spoke about in the last two years, we have been investing heavily on our technology and digital roadmap. I think that's starting to yield fruits for us in terms of the order intake that we had.

And we hope our capabilities that we have already built and the teams that we have invested on reskilling will start helping us during the period. And if there are any gaps that we find as we start executing, we'll keep filling them as needed.

[Operator]

We have our next question from the line of Pratap Maliwal from Mount Intra Finance.

[Pratap Maliwal, analyst]

Congrats on good set of numbers. So I just wanted to confirm that last quarter, you have said that aerospace you expect 30% growth quarter-on-quarter. So has that been achieved because your product structure has been changed. So just wanted to confirm that.

[Bodanapu Krishna, executive]

Yes, Pratap.

[Pratap Maliwal, analyst]

Okay. We achieved that. Now I just wanted to look at in the past here in FY'22, we have said that digital and embedded software, that's where a lot of our growth has come and perhaps that's one area where maybe we were slightly late to the party. And I think the management has called out that we're giving up maybe 100 to 200 basis points of growth every quarter. So what is our progress here? And maybe could you call out some, when will these areas in [indiscernible] Just to understand if you've actually been made up on the lower ground here?

[Bodanapu Krishna, executive]

Sorry, Pratap, your voice is gobbled up. I'm not able to hear you clearly.

[Pratap Maliwal, analyst]

Yes, I will repeat the question that in FY'22, the management had said that digital and embedded software is an area where there's a lot of growth coming, but perhaps we were late to that party as we were late to getting to that vertical. So I just wanted to ask that as you were giving up maybe about 100 and 200 basis points of growth every quarter, so what is our progress here? And could you maybe call out some when will these areas, then actually been made up on that lost ground?

[Karthikeyan Natarajan, executive]

Sorry, Pratap, maybe we can take your question offline, and your question was not clear. And if I understand your point, are we growing on embedded digital and semicon areas that we talked about in fiscal '23? The answer is yes, I think these are the ones which have driven the growth for us in the last 12 months. And we also realized the margin improvement based on our price hikes and operating metrics like utilization and the pyramid and our ability to expand on the automation areas. I think these are the ones that help us to improve on the margin.

And we are continually working on ability to increase our offshoring and that has played out well for us in the last 10 quarters. I think we have improved by 10% in our observing. So wherever we see that there are opportunities for us to improve, we keep looking at our ability to improve on the operating metrics.

[Operator]

Ladies and gentlemen, due to time constraints, that was the last question. I would now like to hand the conference over to Mr. Krishna Bodanapu for closing comments. Over to you, sir.

[Bodanapu Krishna, executive]

Thank you very much. And I just want to thank everybody for your support. As you see, we've delivered a good set of numbers. We're also very confident in the momentum that exists for the business, even some of the verticals that were a challenge in the past like rail transportation have turned the corner and quarter-on-quarter, we had good growth.

As Karthik confirmed, aerospace is growing in double digits, even a shade over 10%. So we feel very confident, and we want to use this opportunity to thank you for the support and for the very good questions that have come up in the call today.

With that, for the one last time, I'll thank my good friend Ajay for the journey that he's been on and wish him the very best for the journey he's going to embark on in the second innings of his life. Thank you, Ajay, and thank you, everybody, for your participation.

[Operator]

Thank you. Ladies and gentlemen, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.