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Tata Elxsi Ltd
Earnings Call Analysis
Q2-2024 Analysis
Tata Elxsi Ltd
The company has taken strategic steps towards reducing reliance on third-party contractors by building a strong internal bench, which has been crucial in minimizing attrition rates and managing cost pressures. Including reductions in the third-party vendors, and discretionary expenses optimization, the management has cited savings of approximately 120 basis points (bps). They managed to normalize investments in various hardware and software tools, which were elevated in the previous quarter due to new deals, contributing to another 120 bps in savings. Despite facing a 210 bps cost inflation, these efforts have led to a net improvement in the EBITDA margin by 30 bps quarter-to-quarter. The overall profitability grew by 6.3% quarter-to-quarter and 20.4% year-to-year.
The Industrial Design business showed a remarkable scale-up from its inception just three or four years ago. Annual revenues are expected to hit around INR 500 crores soon, evidencing the successful return on investments in this domain. This segment not only stands out for its own performance but also strengthens the company's positioning and margin leverage in large deals across its portfolio. Management has built strategic partnerships to bolster their offerings in the media vertical, such as collaborating with INVIDI for targeted advertising technology, aiming to create new monetization opportunities in the OTT space. These partnerships are foundational for future growth even though they may not result in immediate deal wins.
The company's management appears cautiously optimistic for the second half (H2) of the fiscal year, especially in the Media and Communication segment. They expect to be in a stronger position with the deal pipeline showing improvements compared to the start of the third quarter (Q3). However, there are no concrete revenue projections furnished - instead, the focus remains on outperforming the first half (H1) results. Full quarter impact of the existing Employee Stock Ownership Plan (ESOP) costs is already factored into the financials, providing clarity on future expenses. In terms of taxation, the company expects the Effective Tax Rate (ETR) to remain consistent with the last two quarters as no new tax exemption schemes for the IT sector have been announced.
The company remains committed to its offshore execution model, capitalizing on its established systems and processes that maximize value from cost-effective regions. Management does not foresee a significant shift back to pre-COVID on-site work arrangements, and instead, continues to optimize and move more development work offshore. This commitment aligns with maintaining a strong deal pipeline, particularly in the automotive segment despite possible delays due to heightened scrutiny amidst macroeconomic conditions.
The executive leadership underscores ongoing investments in talent, even as the company prepares for the upcoming fiscal year and makes early headway with college recruitments. These proactive steps are aimed at positioning the company to capitalize on an economic recovery. Moreover, the management indicated that a significant IT deal by a peer with Tata Motors JLR does not encroach upon their operational areas, thus mitigating competitive risks or impact to their business.
With the geopolitical issues developing in the Middle East, specifically in Israel, the management is cognizant of potential implications for the business, especially if the situation escalates. While the company's direct exposure to Israel is minimal, it remains alert to any adverse developments that could influence client decision-making or result in economic consequences such as fuel rate spikes or currency fluctuations.
The healthcare business has exhibited encouraging growth trends, benefiting from strides made in digital and connected health solutions. With a number of deals currently in discussion, there is cautious optimism for the segment's performance in the coming quarters. Nonetheless, the management maintains careful anticipation due to the inherently lengthy decision-making processes associated with large-scale healthcare projects.
There have been some delays in project closures which could partly be attributed to the UAW strike in the U.S., although no direct correlation with this event has been confirmed by clients. The management is closely observing to gauge the impact in the current quarter. Comparatively, the automotive business is staying on course, and the UAW strike, similar to the semiconductor shortage, is not expected to halt operations given the company's focus on designing vehicles with a long-term horizon. Projections for revenue recognition from deal wins suggest a normal trajectory rather than the delays experienced by mainstream IT services, providing confidence in the company's sustained business growth.
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Ladies and gentlemen, good day, and welcome to the Tata Elxsi Limited Q2 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Shashank Ganesh from EY. Thank you, and over to you, sir.
Thank you very much, Tom. Good evening to all the participants on the call. Good morning, if you're logging in from the Western side. Before we proceed to the call. Let me remind you that the discussion may contain forward-looking statements that may involve known or unknown risks, uncertainties and other factors. Therefore, it must be viewed in conjunction with the business risk that could cause further results performance or achievements that differ significantly 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 Tata Elxsi, represented by Mr. Manoj Raghavan, Managing Director and CEO; Mr. Nitin Pai, Chief Marketing and Chief Strategy Officer; Mr. Gaurav Bajaj, Chief Financial Officer; and Ms. Cauveri Sriram, Company Secretary. We will start the call with a brief overview of the past quarter by Mr. Raghavan followed by a Q&A session. We would appreciate your cooperation in restricting yourselves to 2 questions to allow participants an opportunity to interact. If you have any further questions, you may join the queue, and we'll be happy to respond to them if time permits.
Having said that, I will hand the call over to Mr. Manoj Raghavan. Over to you, Manoj.
Thank you, Shashank. Good evening, everyone, and thank you for joining us for the second quarter earnings call. Today, I'm happy to report that our revenue from operations in the second quarter stood at INR 881.7 crores, which corresponds to 3.5% quarter-on-quarter and 10.1% year-on-year in constant currency terms. Our EBITDA margin for the quarter was just shy of 30% at 29.9%.
Our Transportation business unit grew at 6.9% quarter-on-quarter in constant currency terms. During this quarter -- during the last quarter, we won landmark, a multiyear large deal in the SDV space, which places us as a strategic development partner for one of the global automotive OEMs.
In the Media and Communication business, we continue to see challenges in both the key geographies of U.S. and Europe. And in such a challenging environment, our performance has been quite satisfactory. Our revenue from the business has declined marginally by 0.4% quarter-on-quarter in constant currency terms. We continue to engage with our key customers in helping them drive efficiencies in current operations and also help them create new revenue streams for their businesses.
Our Healthcare and Life Sciences business performed well, registering a 3.2% quarter-on-quarter growth on a constant currency basis. During the quarter, we won a multiyear innovation and reengineering project of a critical care device platform for emerging markets.
I'm happy to share that in the last quarter, our industrial design unit crossed revenue of INR 100 crores for the first time. The Industrial Design & Visualization business grew 4% Q-o-Q in constant currency terms.
Regarding our -- from an HR perspective, talk about our net additions, we continue to invest in building a talent pipeline with a net add of 585 Elxsians in the quarter. So we continue to invest in onboarding key resources. Also, our employee engagement and talent retention strategies have contributed to attrition further going down to 13.7%.
So as we move into the third quarter, we carry the confidence of our healthy pipeline and some good conversations, great conversations going on with our key customers.
And I'll now hand over the floor to Shashank from me and for the Q&A session. Over to you, Shashank.
Thank you very much, sir. [Operator Instructions] We have the first question from the line of Vimal Jamnadas Gohil from Alchemy Capital Management Private Limited.
Congratulations on a very strong comeback, especially in the automotive vertical. Sir, my question was actually -- and I'm also pleasantly surprised by the growth rates reported in health care. On the comms side, particularly, there has been some initial signs of revival in the semiconductor space globally. Semiconductor sales have picked up. Does that have any sort of positive impact on our comms vertical as a whole? Do we have some exposure there if you can just give us some sense? And I have one more follow-up after that.
We have a very small exposure to the semiconductor side of the comms vertical. A lot of our communications business is driven through either operators or telecommunication providers or the folks, who make devices that go into the telecom market, right? So these are the main focus area for us. Yes, usually, there is a lag between semiconductor sales and general market pickup. So I'm really hoping that what you say is true and maybe in a couple of quarters from now, we will really see the impact of that.
As of now, I think we don't have -- we don't see a great uptick, but we are very, very -- having all those conversations with some of our key customers, a lot of deals that we are pursuing, our closures have been very -- we can't predict the closure. So that is why we're not able to give you a very firm update that, look, next quarter, things will really look up.
Understood. Understood, sir. Some sense on auto [indiscernible] have been pretty strong...
Sorry to interrupt, one moment, please. Sir, we have a slight echo on your line. So I'll just need to reconnect the management. [Operator Instructions]. Ladies and gentlemen, we thank you for your patience. We have reconnected with the management. Vimal, you may go ahead with your question.
Yes. So sir, I just wanted some sense on the strong dealings that we've had in auto. What would be the size over there? Any sense that you can get? And lastly, a question for Gaurav, could you give us the margin loss for the quarter? What was the impact of wage hike or what were the other tailwinds that we had during the quarter?
Sure. This was a pretty significant win for us. It's a new customer that we have been pursuing for, I think, 18 to 24 months. It's been a long pursuit, and very, very happy to inform that, look, we have been able to close the deal in our favor. And it's a multiyear deal and a multimillion dollar, a large deal in our perspective, which will definitely add to our automotive revenues in the subsequent quarters. And more importantly, it's in a software-defined vehicle area, which is where we have also been investing significantly. So it's a validation of all the activities that we are doing in that area. And this will also be a landmark deal for us to really take it to other customers with the auto OEM space.
Vimal, this is Gaurav. I'm happy to share that our operating profit for the quarter increased by 4.8% on an EBITDA level and on a profit before tax level of 6.3% and on a year-to-year basis, it is 16.3% and 20.4%. I think we're able to drive overall optimization in terms of the cost and efficiency to various lever during the quarter. And this is in spite of the wage increased last quarter, we did only till the lower and the middle level. This quarter, we completed our wage hike cycle for the year, where we covered all the senior management and the executive of the company. .
So salary increase for the remaining management people for the quarter that has a cost impact of 160 bps. You also -- if you also recall, last quarter, there was a partial cost towards the RSU, which launched by the company last quarter. This quarter, we have a full quarter impact of about 50 bps compared to the last quarter. So both salary increase, thus the ESOP has an impact of 210 basis points. The net adds that we have done in this quarter, including the tailwinds of the net add done in the last quarter was largely offset by the utilization increase in the scale of the volume revenue growth plus the pyramid optimization.
So there -- it can kind of optimize and offset against each other. So 210 basis points from the salary increases plus the ESOP impact was largely offset by the other improvisation in the lever that we disposed of in this quarter, which includes the other expenses. So we continue to optimize, rationalize our other expenses, be it travel cost, visa costs, sales promotions. And we also significantly reducing our third-party contractors, because we have -- now have good strength in our bench, which we are put to the billable projects, which was one time at the last year, it was a bit of worry, because the attrition was high. Now attrition is also well under control. So that give us lever in terms of rotating people, third-party contractor with our own people.
So including a reduction in the third-party and other discretionary expense optimization, we have a saving of around 120 bps. And also, there is a large cost increase in the last quarter towards various hardware tools, because there were certain deals, which we kicked off in the last quarter at the end of the last quarter where we need to significantly invest as part of the lab setups, other cost towards the tool, hardware and software. Those get more or less normalized in this quarter, which gave us another 120 bps. So this 240 bps of improvisation against 210 cost inflation kind of give you 30 basis points of improvement over the last quarter. And then -- that is at the EBITDA level.
And then if you come to the EBIT level, there is an increase in the depreciation, because we keep -- we added to our facility capacity that we are having since we are adding people, we are growing. So we added a couple of facilities as required by the company to accommodate increase in the headcount since all the people have also started to come back to office. So at EBIT level that gives you almost knock off all the pluses and minuses and continue to operate at the same 27.1% of EBIT, what we operated in the last quarter.
So with the revenue growth, that gave you almost 3.7% kind of quarter-on-quarter growth. This quarter, on other income, we have a significant gain due to exchange gain, which came positive. Our hedging strategy worked well in terms of protecting us not only from the downside, but also provided some kind of exchange gain. Also interest yield on our investment also helped us in terms of increasing our other income.
So overall, with the other income better from the last quarter at the profit before tax level, we're able to increase our profitability by 6.3% on a quarter-to-quarter basis and on a year-to-year basis by 20.4%. So in spite of all the cost intake, including the wage hikes, including the RSU impact, but we have another levers at our disposal, which help us to maintain our profitability and rather improve in terms of the absolute terms.
[Operator Instructions] The next question is from the line of Ruchi Burde Mukhija from Elara Capital.
I have a couple of questions. Our industrial design revenue has crossed INR 100 crores milestone, but how does this change your market position and does this open new scale opportunity for you?
Your line was not clear. So the question was about industrial design, crossing INR 100 crores. And if this is going to help us grow our revenues and what is the question?
Yes, I'll repeat the question. Hope my voice is a bit better. So with this INR 100 crores milestone, how does our market positioning changes? And does this help us being eligible for new scale opportunities?
Sure. Okay. So I would say just about 3 or 4 years ago, the Industrial Design business was a very small business. Our run rate would have been INR 30 crores, INR 40 crores per quarter. And so today, I think we have invested significantly in the Industrial Design business. And happy to say that, look, that business has really scaled up. So hopefully, on a yearly basis, if you take it, we will soon reach about INR 500 crores of revenues annually. So that's the first target that we have.
More importantly, design is such a critical differentiator for us from a margin lever perspective, from a positioning perspective and any large deal that we usually bid for, there is a significant component of design and that capability definitely helps us position the company very differently as compared to competition. So I'm very happy that stand-alone that business is scaling. More important, the combination of design and EPD business is what will help us scale rapidly moving forward. And that is the focus of the company.
Understood. In media vertical, you have mentioned that you are working in collaboration with clients to develop new offerings and partnerships. Could you please elaborate on this? What we mean by new offering in partnership?
Yes. Ruchi, this is Nitin here. Maybe I'll take that question. Some of the partnerships are explicit. So you'll find that we announced 2 significant partnerships just leading into IBC, which is the global broadcasting trade show. We announced a partnership with INVIDI, which is the world leader in targeted advertising. What they do is essentially provide technology for targeting very specific subscribers, especially in the video, OTT as well as digital video ecosystem to deliver ads.
So the idea here is really that we are seeing the shift in OTT from subscriber-driven to advertising driven. And we believe that this will be the new revenue opportunity and the monetization opportunity for both broadcasters, who are running D2C businesses as well as operators, who are running an aggregation service for video.
So what we're looking at essentially is saying, look, there are 2 tracks that you can work with operators and broadcasters for. One is efficiency driven, which is to look at what are you spending money on now, how much of that is engineering driven, how do we help you through a combination of talent, capability products and offshoring, help you get to be even more efficient. I think the second strategy that we're deploying is growth and customer experience. The customer experience part will be driven by design and the growth part or revenue part for customers will be driven by how do you monetize the services better, can you look at ad deliveries, can you look at things like FAST, which is the free ad-supported television.
So essentially, those are the partnerships that we're crafting especially in the Media and Communications vertical. Of course, what you have not declared to the market is the partnerships that we're crafting, especially with semiconductor vendors as well as hyperscalers that fuels some of the digital engineering that you're doing for SDV for connected medical devices and so on.
Understood. So will there be a growth mover, let's say, in 12 months [indiscernible] time or you see the scaling up very gradually and will take its own time?
Yes. So Ruchi, the partnerships are not meant to deliver immediate deals. I think there are fundamental positioning tool, right? Because what you're trying to do is to trying to make sure that you're relevant in the context that is changing for our customers. So what's happening in the telecom industry is fundamentally you're being challenged for revenue, you've been challenged for growth. And therefore, you either had to focus on efficiency or on new revenue streams. And I think we are doing both in different measures. On the revenue streams, we are partnering. On the efficiency, I think we are the best in the business.
Understood. Now coming to deal in the auto segment. As my understanding, in your view -- in your way with incremental work, was the way to go and scale the customer. But this deal sounds like an exception to this trend. So do you see these kind of deals being more in market compared to past trend? Or this was one-off unique situation where you could break through with a large deal in a new client?
I think there's no one answer there. We do a mix of both types of deals. There are such large deals that even though we are not a part of that initial -- it's not a customer, it's a new customer, but there is a pursuit that goes on and we close such deals. We also have deals wherein there are consolidation opportunities where it's more about how can you bring, what is the value proportions to customers based on the capabilities that you have, right, especially from an offshoring perspective. And how can you take a larger pie of the current outsourcing from the customer. So you have both type of deals that are available. And a good part is, yes, there is a portfolio of such deals that we are going after.
And then as I said, this deal took a long time. So some of these large deals are not closing like earlier where it used to get close in 6 months or 8 months. Sometimes it takes 12 months to 18 months also for closure. But yes, but we have to be patient and to be focused on our objectives and especially when it is critical for us and an important customer to have, I think we have a very good track record in such deals.
So Ruchi, maybe I'll just add to what Manoj said. I just want to call out an important difference. You can think of in the IT context, renewal deals, where the contract given out to 1 vendor and when the contract period is getting over, you call out for a whole set of new vendors and look at who can do better. But that typically who can do better in terms of cost. The kind of entries that we are talking of are strategic entries where we are not replacing somebody else. We're getting all new because the customer is moving to an all new.
So in that sense, there is a critical difference between the kind of entries we talk of vis-a-vis a classical IT situation of a renewal deal where you may come in cold and win simply because you're delivering the best cost on the table. And I just wanted to leave that with you.
Got it. That's helpful. The last one, we just heard your...
[Operator Instructions] We have the next question from the line of CA Garvit Goyal from Invest Analytics Advisory LLP.
Congratulations for a good set of numbers. I have 2 questions. One on the media side, you mentioned we are closely engaged with key customers. So can you give some color like for how many quarters this slowdown is likely to be based on whatever communication we do have with those customers?
It's very difficult to tell you how many quarters and so on. But I would say, there are fairly positive signs in some of our customer discussions. There are deals in the pipeline. And we hope that we'll be able to show some kind of growth over the next half year, I would say. But again, it's very, very early times. And so I would be a little conservative on the Media and Communication side in H2, but we are closely working with some of our key customers. There are opportunities that we are going after.
And definitely as compared to, say, the beginning of Q2, I would say, beginning of Q3, we are in definitely a better shape as far as deal pipeline and the opportunities that we are chasing. So that gives me a little bit of confidence that look, yes, things could be better for us in the H2 from a Media and Communication perspective.
Understood. And sir, secondly, on the overall business perspective, so considering this lower growth in other 2 segments. So is it fair to assume this financial year is likely to end with lower double-digit kind of growth in top line? Or do we expect something good as compared to first half to improve our annual growth?
So every attempt will be made to continue the growth and improve on what we've shown in H1, right? So though we don't give projections and so on, but the focus for us as a management team is to see how we can better our H1 performance.
[Operator Instructions] The next question is from the line of Sanjaya Satapathy from Ampersand Capital.
Can I just ask the cost relating to ESOP? Is it like already provided for? Or is there something more to come?
It has already provided for. I mean, the way the accounting happens for the ESOP, it is basically the cost expected out of the grant option gets amortized over the vesting period. Last quarter since grant was only rolled out in the month of June, so it was a partial quarter impact since this quarter, we have a full quarter impact, but that is already part of the financials for the quarter.
Okay. Okay. So this kind of a quarterly expense will continue for next quarters as well?
Yes.
Okay. And sir, the other question that I wanted to ask you is that now that you have come out of this [ HCG ] trend and you're full tax paying now. Is there any kind of such investment opportunity available to you to kind of plan tax going forward?
No. We continue to explore and evaluate what are the possibilities and opportunities available. But please remember that government is not approving any new exemption for the IT purpose for the SEZ, right? So we have to wait and watch if there is any new schemes and the policy of the government comes out. But otherwise, we expect our ETR to continue at the rate what we have delivered in the last 2 quarters for the rest of the year. .
Yes. And sir, last question is that considering the new kind of deals that you are signing and you are also starting to have centers outside of India. Will your mix offshore to on-site change meaningfully from here or it will stay around this level?
No, I think the focus for us, Tata Elxsi, we are known for our offshore execution and our entire processor systems are built around delivering value from best cost countries, right, not necessarily our -- and our business model is also not about manpower, augmentation, on-site and so on, right? And over a period of time, we have really been able to move more work offshore and do a lot more development activities from our centers in best-cost countries. So I think that will continue. I don't see it moving back in a hurry to the pre-COVID times. That could be minor variations here and there, but our main business model is around our offshore execution. So that will continue.
And your deal pipeline macro areas looking pretty okay, because you are one of the very few company was really added employees again in this quarter.
Yes. So that continues, that shows the confidence that we can't take any shortcuts in our business, right? Because our business is all about people and you need to -- even if in certain areas, you don't have full confirmed visibility, you need to go ahead and invest based on your business plan and what you have. So we are sticking to our business plans. We're sticking to what we have laid out at the beginning of the year, financial year. That will be all these quarterly pluses and minuses from a revenue perspective, but from a resourcing perspective, we continue to go ahead with our original plan, because we're confident that, look, we are on the right path and the investments that we're making in our people will definitely yield us results in multiple ways once the economy picks up and so on.
So that's been our focus. And one of the few companies to already -- we are already going out and for next year, campuses also, we have gone out. We are talking to colleges and we are rolling out offers. So we continue to be focused on all of those activities.
We have the next question from the line of Ruchi Burde Mukhija from Elara Capital. Ladies and gentlemen, the line for the current participant seems to have dropped from the queue. We will proceed with the next question, which is from the line of Ajaya Jain from Astute Investments.
TCS has recently signed a $1 billion deal with Tata Motor JLR. How is it affecting us? Or is it coming into our area of operations?
No. It is not in our -- to the best of my knowledge, it's not in our area of operation. It's primarily on the IT and the manufacturing support side. So I think it's a great deal, but it doesn't affect us.
The next question is from the line of Ruchi Burde Mukhija from Elara Capital.
So We've heard from one of your larger peer about likely possibility of volatility in the coming quarters given the geopolitical situation developing in Israel. Do you see any effect in your early experience of this client going slow on conversation decision-making? Is this something that worries you near term?
We don't have an exposure to Israel or any -- I mean the country is there, right? Of course, we have a small exposure to Dubai and Middle East. Having said that, it is pretty early. We don't have any -- so far, we have not heard anything negative from our customers based on this. But if this spread is right, if the situation becomes volatile and if this war spreads, and there is a spike in fuel rates and all of that, associated foreign currency fluctuations, all of that could impact our business in some way. From an end customer's point of view, It's pretty -- it's too early. We've not heard anything so far. But I mean, if this spreads, I'm sure that there will be an impact, and it's hard to quantify that at this point in time.
The next question is from the line of CA Garvit Goyal from Invest Analytics Advisory LLP.
I just want your opinion on health care segment, like it shows some sign of recovery in this quarter. So how do you see the segment for upcoming quarters?
Again, I think some good deal wins and some positive -- and especially after a couple of quarters of relatively flat. I think we have been able to grow our health care business. That is definitely positive. So all the initiatives around our -- the digital space and connected health and so on. That's really helped us win new customers. Having said that, yes, there are a number of deals that currently we are talking to customers and so on.
And as I said, the medical space divisions are slightly -- I mean it takes time, especially those large engagements and projects. The decision making is pretty long. And that continues. We don't see that there is definitely a number of deals that are under discussion, but it's very difficult for me to comment at this point in time whether that will all close in the coming quarters. We are pretty hopeful, but I would still be cautious, I would say, next 2 quarters, and you will see the trajectory. We will see how those deals move forward. And then accordingly, we will act.
The next question is from the line of Bhavik Mehta from JPMorgan.
Manoj, can you talk about how the decision making by clients has evolved, last time, when we spoke in July versus now? Has there been an improvement or as a status quo? Or have you seen some more deterioration given the macro across [indiscernible] verticals?
And secondly, any impact of this strike in the U.S. by UAW, the auto union on your clients and your colleagues? So because this has come up only a couple of weeks back, so any impact we should see for your clients in this vertical -- in auto vertical in the U.S.?
Yes. Thanks, Bhavik. So I think you look at it from a segment wise and so on. Definitely, if you look at it, automotive business, we definitely to see continued traction. We definitely continue to see closures. We continue to see large deals, pipelines. So yes, the macroeconomic situation is causing some amount of, what do you say, some of these decisions are taking longer. There is a lot more commercial scrutiny. There's a lot more due diligence that is being done. But at the same time, customers are taking decisions. It's not as if that decisions are getting postponed indefinitely. They are taking decisions. There could be occasional deals where it slips by a quarter or so.
But in general, I think deal pipeline, the conversions are happening at a healthy pace in the automotive segment. In the media and communications space, as I said I won't -- I don't know whether to call it green shoots or not, but we do see slowly some confidence in our customer discussions and so on. So -- but again, I would want to wait for a quarter or so to really see whether this impact this growth. We'll be able to show growth or not. I've already answered the health care piece in the last question.
So I would say, overall, especially given all the macroeconomic uncertainties plus the war and all this happening, I think we've done well to be where we are, given all these uncertainties, and we continue to invest in our people. We continue to invest in providing solutions that is of interest for our customers, right, especially what Nitin talked about in the ad tech space in the Media and Communication vertical and so on.
So we continue to see what is relevant for the customers and proactively make those investments so that we are always in the line of sight for our customers, right? So that's been our focus. And I think there's enough moving parts that are available for us to continue to be optimistic about H2 for us.
Okay. Got it. And second question of any impact of the UAW strike in the U.S., any conversations with clients regarding that, which could have led to some project pauses or deferrals?
There has been some delays in closure of projects and so on. But I'm not sure if that is because of UAW or because of anything else. It's -- no customer has talked specifically about UAW and its impact. But I think it's an evolving situation. We'll have to wait and watch. I think this quarter, we will know exactly the impact.
But Bhavik, I would call -- this is Nitin here. I would call out a parallel to the semiconductor shortage. So if I look at semiconductor shortage leading to the delays in supply of vehicles to the market, union strike would have the same impact, which is to delay production and therefore, supply of vehicles. I'm just drawing a parallel that the semiconductor shortage did not stop us.
Got it. And lastly, any early signs in terms of what are you hearing from clients on furloughs for the December quarter? Are they expected to be higher or lower? Or as of now, it seems like it would be similar to last year?
I think it could be similar to last year. There could be some impact on some of our Media and Communication vertical. But otherwise, I think nothing unusual that we will have an extended furlough and so on. We've not heard anything of that sort from our customers. So fingers crossed because we know it is a short quarter. It's also a difficult quarter, especially from furloughs and a number of working days and so on. But we have done our internal planning and so on. So hopefully, we'll be able to mitigate that exposure that we have.
[Operator Instructions] We have the next question from the line of Nilesh Jethani from BOI Mutual Fund.
So my question is also on the strike itself. Just wanted to understand, is it client specific in Europe where a couple of clients or a couple of players, who are facing this, and we were not present there, is that a scenario? Or in general, you don't see impact of strike on our business, which is more of ER&D media?
The strike is in the U.S., not Europe, number one...
And I think like you said, because we are leading, which is the fact that what we're doing is helping design vehicles for 1, 2, 3, 4, 5 years down. So to that extent, sales and production, unless it has a direct impact on long-term, I mean, if it goes on for long and therefore starts to affect revenue significantly and therefore starts to look at discretionary spend and so on, we believe at this time, it is not relevant.
Okay. Got it. And second question was on deal wins to revenue conversion. So a lot of peers, of course, not in the ER&D side, but mainstream IT services have commented that deal wins may have a laggard or a lag impact on the revenue going forward. So given our strong deal wins, I see many of read-throughs in the presentation for Automotive segment, are we of the same camp where we believe revenue recognition would be delayed? Or do you believe normal course of business action?
I think -- I mean, including this quarter's growth has happened from the deal closures that we have closed in last quarter and the previous quarter, right? To that extent, I think each deal is different and I don't think that we will have a trajectory like what you saw -- you've seen with IT companies. It will be a normal trajectory. And typically, what happens is while you win deals and you close and you move forward, there could also be certain deals that are -- certain projects that come to a close, right?
So are you really adding -- are you really covering up for all those revenues that go away, because you have completed certain projects. So that is a critical point that -- so that's -- I mean that's how -- that's the planning that we do internally to ensure that even while projects come to a conclusion, deals come to a conclusion, that is enough of items in the funnel and enough of deal closures that are that, that can really take up that even the engineering resources that are occupied in those deals, can we move to these new deals, and that's how we operate.
Got it. And then last question from the margin perspective. Just wanted to understand the little softness in the media space, et cetera. Do we expect margins to remain in the similar trajectory? I'm not asking for an exact number, but color on the same or the other businesses have capability to drive margins from here on also.
Margins, if you have seen, right, as compared to last quarter, in spite of all the employee costs due to salary hikes and ESOP costs, number of costs that has come into the -- come in, we have been able to mitigate all of that, right, in spite of Media and Communication being pretty flat. So I think we've modeled our business around that. So we are pretty comfortable where we are.
So during COVID times, we saw margins in the range of 30-odd percent. So 27%, 26.5% is the new normal now that the understanding is taken?
Yes. During COVID, it was a different situation as all of us know. There were -- a lot of costs are not there, including travel and business expenses and even facility costs and so on. So that was unusual. But I think we have done pretty well. We are doing pretty well where we are today. And we have taken into account all the salary expenses and all of that. And I think as we grow our revenues and as we look at the utilization levers, we will definitely be able -- let me state that we have enough levers still available for us to mitigate any impacts that...
I think we are reasonably placed, Nilesh, in terms of the margin profile, I think we can continue to make the right investment that is required the people, technologies and developing new offerings. At the same time, there is a lever in hand in terms of the pyramid rationalization, utilization expansions and all. And I think the last 2 quarters has been a testimony to that in spite of all the salary increases, as Manoj alluded and all other costs, we're able to still mitigate and maintain our margin profile. That's the beauty of our operating model and connecting back to the verticals, I think some quarter, some verticals will fire. I mean that's how we have derisked -- diversified our portfolio in terms of having enough immunity in terms of all such kinds of ups and downs.
The next question is from the line of Salil Desai from Marcellus Investment Managers.
My question was on the client concentration mainly. We are at almost 44% in the top 5, how would you see this shaping up going forward maybe in the next 2, 3 years? Is there any conscious attempt to either increase it or to reduce it?
No. So our focus would be to definitely look at growing the top 10 and the top 20 customers, right? So we are not necessarily only focus on the top 10 -- top 5 customers. Top 5 customers are important, because they bring us volume, scale and we have a far more stronger management connect with those customers. So I think we'll continue that, because a lot of the growth of the organization come from these top 5 and top 10 customers.
So moving forward, 2 to 3 years down the line, I would really -- it's very difficult at this point in time to say that we don't have a target saying that, look, we have to maintain this and so on. But as we grow, definitely, the top 5 and top 10 percentages will come down relatively. That will be the focus for us.
But no deliberate attempts to...
No deliberate attempts. Yes, no deliberate attempts.
We have the next question from the line of Akshay Ramnani from Axis Capital.
So first one was on the auto vertical side. So while in the past, and this was about scale, I'm sorry my voice is getting echoing. So maybe I'll start again. So this was about scale of customers in the auto vertical. We've seen tremendous success with JLR. If you were to think -- take a look at your clients from a scale perspective, how many strategic customers would you think you have in your current portfolio for OEMs or Tier 1 suppliers to get to the similar scale or higher what JLR is currently at? And what would be the service areas be like for them to drive scale in those accounts? So is it going to be more from SDV side, connected side or electrification side? So if you can help us understand that arithmetic there.
If I understand your question right, you're asking, how will we scale...
So maybe I'll take that, and maybe Manoj, you can add on top. If you look at the portfolio of customers that we have in auto, I think we have enough customers, who represent the scale and size of JLR, because you have to think about JLR is, here is a customer, here is an OEM. This is the kind of work that they do. This is the kind of technology that they deploy to the market.
And in terms of market share and size, this is where we are. So do we have customers, who are bigger than them, who represent much more scale, definitely, yes. Do you have an intent to grow some of them and hopefully all of them to sizes equal to JLR and more, yes. And I think that's the path we are on. So I can be very frank about that. There is a whole set of customers, who are -- who have the same capability to scale as JLR can, right? But of course, it takes time. You need to build that strategic relationships and intent.
In terms of service areas, the way I see it, SDV is an overarching concept. But ultimately, if you break it down within, you will still have connected, you still have autonomous, you still have electric, because these are foundation pillars for what SDV will be built on. SDV will then further add an architectural layer, hardware aggregation layer and off car data layer. So in our view, everything that we do, I think, is absolutely aligned to where the industry is going.
Got that. And Nitin, Maybe if you can also add some flavor of time line. So maybe your customers -- what is the time horizon to complete all of the SDV programs, the autonomous program, the reimagining of architecture inside the car? What are the customers' average duration time lines for completion of such projects in their models?
Yes. So I think, Akshay, that's the interesting part, right? I think we are set for a fairly long-term transformation path for automotive, why? Because there is no one right answer, first of all. Everybody will experiment. And part 2, there is no one right answer in -- that will last forever. So there's no one architecture that will be valid, let's say, 5 years down. So that is why I think you will find generations of architectures that will come up. Each of them being fueled by what is the state of technology at that time, what is the state of compute and hardware at that time and what is the state of connectivity and what you can offload to the cloud, what we can do at the edge.
So in my belief, we are in for a cycle where there are going to be 3, 4 pivots of the architectures for cars as you talk of SDV. So there is no one single ideal architecture and the question only is about how fast do you get this? And that is what makes automotive so interesting.
Why I ask this is because auto industry is used to reusing and recycling the platforms they build, so that was the intention of that question, but I get your point.
Right and I think, I'll add one more item to that, just to clarify. The other big difference that's happening with SDV is the fact that the car is connected, means that you don't want to reuse to the extent that, okay, I've done this now. I don't need to do anymore. I think the whole point of SDV is now that you have software, everything is software controlled. How do you drive innovation week by week. So automotive customers are now going to have things like an Apple and Google, which is what features do I deliver this week, what features do I deliver next week.
That's very helpful. And the next question is for Gaurav. So Gaurav, other expenses declined sharply this quarter, and you explained it very well at the start of the call. But the question is more that this line item has been declining for 3 straight quarters and continues to be very volatile. So from a sustainable basis, how should one think about this particular item?
So this has been declining. I think it has been a conscious effort from the company perspective in terms of optimizing some of the costs. There was a sharp increase immediately after the COVID-related closures was open and all those things. But I think we have made all the effort in terms of variabilizing all the cost in tune to the scale of the business and wherever possible, optimize those costs. This also includes -- remember the third-party contractor cost, which was heightened during the time of the COVID and entire supply chain disruption was happening. So now with the bench strength that has been built by the company over the last few quarters with the trained people available, we are slowly gradually declining our dependence on the contractor and rotating with our own people, which helps in terms of our managing our people cost also and reducing some of the other costs, other expenses as well.
And also, I think this quarter, we have some collections and provision doubtful debt reversals, which is a small amount, but I think, we would be able to sustain as a percentage to the other expenses as a percentage of revenue for the coming quarter. I think especially with the growth and the scale that we see in the coming quarters. So I think we believe it is quite comfortable, and we are confident that we'll be able to deliver it at this level.
Got it. Can you please quantify that provision reversal, if possible?
It's a small amount, but yes, it adds up, but it's a very small amount. It's maybe 0.2%, 0.3%.
[Operator Instructions] We have the next question from the line of Apurva Prasad from HDFC Securities.
I have a question for Nitin. Nitin, you referred to the 2 tracks earlier in the Media and Communication vertical. So just want a sense on between the efficiency-driven track that you referred to versus the second track of customer experience and monetization. Do you see any change in either of those segments, say, from how the pipe was looking at the beginning of the quarter versus, I mean, now?
I think it will be a little too early to say, Apurva. In the sense that if you look at it, on one hand, there is a big play of digital and AI in both tracks, because you can drive efficiencies through use of AI and digital. You can also and necessarily all the new revenue sales that you're talking of are also predominantly technology and AI driven. I think the point that Manoj made, I think, I'll use the same words. I think we are seeing green shoots of a lot more conversations and a lot more relevant conversations that promise to be deals. Now I think it will be still too early to say whether this will have an impact in Q3 or we had to wait a little longer.
All right. Got that. And just finally, the headcount addition, Manoj, how should we expect that for the next 2 quarters and run rate as this quarter?
I would assume so. I mean we're not stopping our hiring engine. So that continues to check along. So that will be, of course, plus or minus, but we will continue to add people.
The next question is from the line of Tushar Bohra from MK Ventures.
Congratulations to the management for an excellent set of numbers. Sir, in terms of the diversity, in terms of domains, can you highlight work being done in, say, space side in offshore and aerospace and things like that, which are still not yet categorized separately, but management is highlighting that at some point, we will do so?
Yes. Maybe I can take that, Tushar. I think if you look at it, our hands are full at this time with automotive. So if you look at 4 years back, even before COVID hit us, we were starting to see certain signs of stress in the automotive sector, because everybody was pouring money into areas and things that they should not logically be doing, including shared mobility and so on. So we believe that there was going to be stress and we needed to derisk. And the derisking at that time was taken very clearly with the view of rail and off-road vehicles being the more stable, mature, if not as large industries to go into. I think we have done very well in ramping up there. But the problem that we have now is that the demand in automotive is so much that it is consuming everything that we can add more. So to that extent, we are actually starting some of the areas we already are in, just to be able to fuel the growth that we need in automotive.
Aerospace, I think we bring all the right capabilities because if you look at ingredients of what is needed in terms of software, in terms of machine critical capabilities, in terms of failsafe systems, we bring everything that is right. If you look at the kind of work that we've done for ISRO or HAL and so on, you will actually find a demonstrator. But is it worth getting our feet and jumping in deep into the aerospace pool, we are not so sure as yet.
So right now, I think it will be a little bit of a dipstick model in aero, because you need to be very clear that we'll not only be able to get in, we'll be able to scale and differentiate. I think we are always very careful about qualifying those 2 parts. So I think it will be a little bit of a skunkworks for a while.
Second, sir, in terms of the disruptive components or I will say that technologies, which have the ability to accelerate like using meta, for example, virtual and augmented reality or the generative AI piece of it. If you can highlight anything meaningful qualitatively or quantitatively in terms of number of conversations or nature of conversations? Or how you are being able to come up with some differentiated assignments, something that gives a view as to the next 2, 3 years, how things could be for the company?
Yes, I just don't want to generate auto text on the subject. I think I'll simply put it this way. As Tata Elxsi, I think we're very, very focused on identifying trends that we believe will pick up. If not 1 year, maybe 2 years, 3 years, 4 years. So we look at it in horizons. And in that sense, AR and VR is something that we've been doing from 2016. And you'll find press release as old as that in terms of a tie-up with Unity to transform what will happen with verticals they are and we are outside of gaming? Because we said, look, we don't want to go into the mainstream piece. We want to look at what we do for everything else.
If you take AI, you will find that we announced our own autonomous car technologies right from 2014. We won large programs in 2017. So the point I'm trying to make is that you can take any technology line, AR, VR, metaverse, you can take cybersecurity, you can take AI. AI is now taking the form of GenAI. You'll find that our investments actually date back to at least -- at the least 3 years, most likely, more like 5, 6, 7 years. GenAI, I think it's just the latest piece on the bandwagon. I think the interesting part about GenAI, it's all pervasive, because it seems to have an impact on almost everything that is being done, especially if it's related to text image and voice, primary impact on customer experience and marketing, but then further into operations and product development. So we have POCs going on. We have pilots going on. We have conversations going on.
We have projects also...
Projects also going on. But to start projecting that as the future, I think I would hesitate.
We will now take the last question from the line of [ Santosh Kesari ] from Kesari Finance.
Sir, I just had one question, and that was about the -- just about Tata group companies, Tata Technologies [indiscernible]
Sorry. My question was that there's some of Tata Group companies, Tata Technologies, which is coming up with an IPO. So what's the difference -- basically I wanted to understand what's the difference between the line of business you're in and the Tata technologies?
Santosh, the line for you is not audible at the moment.
Your question is about how Tata Technologies is different from Tata Elxsi.
Yes. I mean that.
Tata Technologies has always been there for many years, right? It's just that they are throwing their IPO hopefully in this quarter. Yes. So I think Tata Elxsi is a very clearly a design-led embedded engineering organization, focusing on product designs. Tata Technologies does a lot of work, including mechanical PLM, ERP and so on and so forth. So yes, so there's a sort of good, I would say, complementary skills within both the companies. We have common customers and also occasion where we bid together on some projects. So to that extent, I think they are great company. So -- but however, we -- the areas of operations are very different from what Tata Elxsi does.
So I can say that you are in high-tech engineering and they are into something like excessive automotive customers, into ERP and production and factory-led engineering.
Yes, PLM and so on and so forth. Yes.
I would now like to hand the conference over to the management for closing comments. Over to you, sir.
Thank you, everybody. Q2 has been, I think, an incredible performance given all the macroeconomic uncertainties and the challenges that we've had. And definitely, I would like to thank all the Tata Elxsians, who have contributed to bring this growth. As a management team, we are focused and to see that we continue this performance and the growth trajectory. So our laser sharp focus will be on to see how we can grow H2 over H1. We are confident on the strategies that we have, and we're confident on the direction that the company is moving.
So with that, I would like to conclude here and would look forward to interacting with you again at the end of Q3 results.
And we'll, of course, wish everybody a very, very happy Navratri.
Yes, I wish everybody a happy Navratri, Dasara and enjoy all the holiday season. Thank you so much.
Thank you. On behalf of Tata Elxsi Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.