Cyient Limited (CYIENT) Q4 FY23 Earnings Concall Transcript

Cyient Limited (NSE:CYIENT) Q4 FY23 Earnings Concall dated Apr. 20, 2023.

Corporate Participants:

Krishna Bodanapu — Managing Director and Chief Executive Officer

Ajay Aggarwal — Executive Director and Chief Financial Officer

Karthikeyan Natarajan — Executive Director and Chief Operating Officer

Analysts:

Philip Goela — Morgan Stanley — Analyst

Sandeep Shah — Equirus Securities — Analyst

Mohit Jain — Anand Rathi — Analyst

Shradha Agarwal — Amsec — Analyst

Mihir Manohar — Carnelian Asset Management — Analyst

Nitin Sharma — MCPro Research — Analyst

Pratap Maliwal — Mount Intra Finance — Analyst

Abhishek Chindarkar — InCred Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Cyient Limited 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.

Krishna Bodanapu — Managing Director and Chief Executive Officer

Thank you very much, and good evening ladies and gentlemen. Welcome to Cyient Limited earning 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. Karthikeyan Natarajan, the Chief Executive Officer and Executive Director; Mr. Ajay Aggarwal, who is the just retired 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 emailed to you, and is also posted on our corporate website. This call will be accompanied with 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 to repeat. We will regroup a few things and want to make sure that we give a clear understanding of what these are. When we say core services, that is the organic services business of Cyient. So, this would not include any of our acquisitions or the Design Led Manufacturing business. Consolidated services is the core services plus the acquisitions that were made in financial year ’23. Group [Indecipherable] is consolidated services and DLM, the manufacturing business of Cyient. Transportation is a segment that includes Aerospace and Rail Transportation. Connectivity is the segment that includes communications.

Sustainability is a segment that includes mining, energy and utilities, and new growth areas includes medical, semiconductor, high tech and automotive, which are essentially the areas that we are investing aggressively for accelerated growth.

The market regulator Securities and Exchange Board of India SEBI has provided an observation that IN DLM limited to go ahead with the proposed public offering. As you all know, we are in the SEBI mandated quiet period. Therefore, the management cannot respond any queries in connection with the proposed IPO of Cyient DLM Limited or the 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 $213 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, but what is especially impressive is that there were no further acquisitions in Q3, so Q3 versus Q4 is a like-for-like comparison without any inorganic bumps that we got.

In rupee terms, we posted a quarterly revenue of INR1,751 crores, which signifies a growth of 48.3% year-on-year at 6.2% [Phonetic] quarter-on-quarter. Consolidated service revenues 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-over-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-over-year. Normalized group EBIT was 14.2%, which was up 136 basis-points quarter-over-quarter, but down 21 bps YoY, 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 acquisition, 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 YoY and again for the same reasons I mentioned because much of these were services acquisitions.

Normalized free-cash flow generation for the quarter stood at INR261 crores or INR2,614 million, a conversion of 81.8% on a normalized EBITDA basis, and this represents one of the highest cash conversion that we’ve ever had.

Normalized PAT stood at INR1,760 million or INR176 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, and I’ll also give you a quick overview of the highlights for the full-year.

Revenue for the first time crossed INR6,000 crores and stood at INR6,016 crores, a growth of 32.7% year-on year. In U.S. dollar terms, this was up $746.3 million, a growth of 26.9% YoY in constant-currency or 22.7 in U.S. dollars.

Consolidated service revenues stood at INR632.4 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. 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 again for 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 INR547 crores, a conversion of 15.8% on EBITDA, and almost 100% conversion on normalized PAT. Normalized PAT for the year was at INR565 crores, which was up 8.2% year-on-year.

I am also delighted to inform you that we declared the highest-ever dividend for the year at INR26 per share, which included an interim dividend of INR10 which was declared in October.

I would just like 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 iBASEt to inaugurate a center of excellence and drive digital innovation, especially in Aerospace and Heavy Engineering industry.

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

Ajay Aggarwal — Executive Director and Chief Financial Officer

Thank you, Krishna. I will also present two segments; one is the quarter four and one is the full year. If you look at the Group revenue, Krishna already talked about the numbers of $413 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% of growth year-over-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 the growth has come from services, and we have got about 8% of growth that has come from [Indecipherable] 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 is shown in the [Indecipherable] when you look at these bottom of the chart.

For the full year, as Krishna said, we crossed INR6,000 crores, $746 million for the full year, as against $608 million. We all were very concerned that we, if you look at the ’19, ’20, ’21, and ’22, we were stuck at the 550-560 kind of the range, it is a quite nice 27% jump year-over-year and that takes us to the league, 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 exit quarter of getting to that run rate of $1 billion, I think we are in-line with that.

In terms of the consolidated services growth at constant-currency at the 0.2%, yeas, there is an impact of acquisitions. And if you 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 power contracts as of now are about $154 million. And at the current odd position of the 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 output.

If you look at the income statement, I think, really we take pride in the fact that we have reached 16.1% margins and there has been tremendous effort in the last few quarters. We’ve talked about various initiatives even in the Investor Day and the earlier call, and that’s showing up the impact, and we’re really looking at good trajectory of 16.1% for the core, which is an improvement of 103 bps quarter-on-quarter, and I think a number of levers is at play, we have got some price hikes. We are seeing the environment, we are able to take for some customer price increases, volume impact of SG&A, and of course, we continue to spend on some investment related to technology or other things that are required. Our Group EBIT was 13.2%, and one more thing you will see is that at EBITDA level, we are at 18.4%.

And acquisitions, again I think what we said out here that accretive at EBITDA level, so when you look at the number of the services, you will find that the EBITDA is positive for acquisitions compared to the core EBIT level due to the amortization of the investments that we have made. There is a gap at EBIT level. So that’s why we started presenting both EBITDA and EBIT you so that you can see the operating performance, and as you proceed on those acquisitions, we will see that in year two and year three when we start getting the benefit of the 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 to work in terms of the benefits of our special economic zone and other things around the global acquisition, and while you look at the backdrop 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 is a slight change in the taxation in U.K. Apart from that, I think the trends will be similar, and the tax for India overall begins to look at 25.1% to the ordinance rate 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 four, but as I said, the trend is really increasing, and whatever we are looking at the various initiatives, we feel that there is other route. Krishna will talk about guidance for the year. There are multiple levers which are active in quarter three and quarter four, be it the cost program, be the pricing, be the automation. I think we will continue, and you will see the numbers to be very nice.

In terms of PAT, as Krishna said, is INR565 crores is the profit that we have delivered about full-year at a normalized level. And just as a disclosure, there are statements that are there, we have given the EBIT bridge. We also provided the reconciliation between the reported matrix and the normalized matrix. Some of you who are regular on these calls are already familiar with what are these new items, and there are no new additions during this particular quarter to that category of [Indecipherable].

I will take them, you can read them, and If you have any questions, one of us can take them in, in terms of the change quarter-on-quarter and full year in terms of profit, in terms of the margin. In terms of price generation, we have seen that both the last quarter and this quarter it has been very healthy. We have generated cash of INR206 crores during the quarter. And our conversion is almost close to the net profit 100% conversion. We have a cash position of INR1,077 crores. And in terms of the total debt that we have is about INR900 crores. So, on net basis, we are cash-positive. The net-debt for the company is zero. Actually, we are in excess in terms of cash and you will see other [Indecipherable] issues are coming down, and you will see that today we are very safe on the balance sheet in terms of the EBIT. 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 will hand over to Karthik, to provide the business update.

Karthikeyan Natarajan — Executive Director and Chief Operating Officer

Thank you, Ajay, good evening, everyone. I wanted to start off by saying that it’s been an all-around performance across the sales delivery and operational performance, and happy to report that our core services have shown eight 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 up. And connectivity, there is a bit of buying stake on 3% quarter-on-quarter in constant-currency, while year-over-year, it reported 27.7% constant currency. Sustainability business, which is comprising of Mining, Energy and Utility have shown a 3.1% constant currency quarter-on-quarter growth, and 125.1% year-on-year, with apex being included as part of this group.

And new growth areas, which includes automotive, hi-tech, medical devices and semiconductors have supported a mild degrowth of 0.8% in constant-currency, and which has shown 34% year-over-year growth. Interestingly, even the organic core services have shown year-on-year growth across all the core business segments that we operate in, resulting in consolidated services at INR176.2 million and 3.2% constant-currency growth, and core services growing at 2.6% and including acquisition grown by 3.2%, and in terms of year-on-year, at 38.4% in constant-currency.

If you look at order intake, we have done about INR212.7 million and this showed about 13.3% from Q4 of fiscal ’22. In constant currency, this is about 19% growth. And we also announced about five large deals, and this is covering all the four business segments. I think the large deals is the concept that is panning out across our business units. I’m happy to report that to a total contract potential of $187 million in Q4.

So if you can look at the full year, and similar to what I’ve 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, it was 8.7% 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 INR720.5 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.

I will move forward to give a larger business outlook. While the challenges continue dominated by geopolitical issues and wage inflation, interest rate, and also potential signs of the economic slowdown, and we do feel that our customers intend to invest on technology and innovation continues to be high, and we do believe with the technology disruption that are happening around us, including the generative AI part, which has picked-up momentum in the last three to six months.

We are really getting ourselves aligned to address the market needs through what we call the mass technology-led growth, which is going to be supported by indigent products and platforms, digital enterprise, which is about digital engineering and technology, and sustainable infrastructure and decarbonization. We believe these key technology groups would accelerate our growth moving forward, and we believe this particular concept of three technology groups would drive growth through this decade and not just for a specific period of time.

To get down to specific business units, transportation and recovery of aerospace continues to be there through this year, and also the increase in defense spending and also some of advanced air mobility solution we will continue to drive growth, and some of the growth areas we are seeing from our customers include improving their operational efficiency, include 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 trade, and which will bring us additional opportunities of growth.

Connectivity, and we continue to see a demand even through fiscal ’24 and as we remember, this has become our largest vertical for core services years ago, they continued to run and we still hope this will continue to be a growth engine for us even in terms of [Indecipherable]. Some of the offerings that we have been able to strengthen in this area includes the network management and network operations and optimization, and digitalization are likely to drive growth in this 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 and across to 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 [Indecipherable] states and autonomous mining operation, definitely helping our customers to improve their operational efficiency, and also with energy transition which is likely to put significant pressure on the utility company to move away from being distribution network operators to the solution operators, and this is being funded by various government agencies, and we are confident that some of our offering put into these areas, apart from what we call them as autonomous plant construction AI enabled plant design, some of these other things would really be something the customers would be excited to partner with time.

On some of the other growth areas, which includes automotive and led by autonomous and electrification as we continue to see momentum in that segment, and we have grown even in that core. We continue to be hopeful of this being the growth engine for us in fiscal ’24, and medical, which is medical and healthcare, which has taken some cost in the last six months, we expect this to come back to growth path during this year, 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 was led by miniaturization and also creating AI-enabled chips, and that’s going to really try and 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, predictive maintenance solutions for leading aircraft operators, and we’re working with hydrogen plant project built on simulation of electrolyzer stack, and carbon captive systems and power plant projects, which includes the digitalization of plant and helping them to enable [Indecipherable] forward, and this is one of the asset management platform built to take up that position, and NextGen currently which that includes building, design and development of security module for [Indecipherable] to manage the authentication and asset management, and this is going to be useful for IT scaler cost for one of our customer.

Autonomous systems and process that talks about our ability to build, image analytics and integrated web perception systems has been some of the offerings that we have been able to build and demonstrate to our customers, and this is likely to create a [Indecipherable] 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, our regulatory compliance, specifically around the medical device and healthcare, 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 sharing the outlook.

Krishna Bodanapu — Managing Director and Chief Executive Officer

Thank you very much, Karthik. [Technical Issues]

Operator

I am sorry to interrupt, sir. We are unable to hear you.

Krishna Bodanapu — Managing Director and Chief Executive Officer

Sorry, thank you very much, Karthik. The outlook for the year is as follows. In FY ’24, we expect consolidated services revenue growth to 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 be 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 industry, and we have a very balanced portfolio with the four pillars that will 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 a bit of a range, but we believe that with the uncertainty it will probably be prudent and work towards making the range narrower, and hopefully changing some of the guidelines from 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 this call 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, we wouldn’t 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 in Cyient including FP&A, M&A, but in the context of this call, Investor Relations. As many of you perhaps know already, Shrini moves on to PLM, Cyient manufacturing subsidiary as the CFO of Cyient PLM, and obviously has a very exciting role with the impending IPO, then hopefully the very exciting growth trajectory that that business is on.

But having said that, of course, I would like to thank Mr. Ajay Aggarwal. Ajay has been a friend, a philosopher at Cyient and somebody who has 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 also the credibility that Cyient as a company holds with all of you. Thank you very much, Ajay. Ajay will continue consulting with the company on a few things. So, he will see here, but perhaps let [Indecipherable]. 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 Director and Chief Financial Officer

Thank you very much, Krishna. I just would take two seconds for every quarter, so that that makes it about [Indecipherable] I had a statement to say, and honored to have the opportunity to serve as the CFO. I would say your CFO, to people on the call. I want to take a moment to reflect the progress that we’ve made together. During my tenure, we have focused on building 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, ensuring that you have the information you need to make informed investment decisions. In the last 12 years, we have generated excellent returns for investors. Our market cap has gone up by six times, our patent free-cash flow has increased by four times and 13 times. We are leading our mid-cap year in terms of dividend payout over the last three, four years. As a company, we’ve always focused on optimizing our tax rate and augmenting other income through treasury allocation and export incentive. Let me assure you that Prabhakar will focus on these initiatives with the same vigor.

I’m proud to say that we have made significant process in each of the areas. We have built the financial function that is capable of supporting the strategic objective of the company while also adhering to the highest standards for continuity and ethics. [Indecipherable] and Mayur here are the examples of two professionals here. We have different capability to your feedback. Many of you on the call have been my [Indecipherable] still making internally, and we have established robust governance practices that are designed for the best interest of all stakeholders. Perhaps most importantly we have prioritized transparency and disclosure. We believe that providing timely and accurate information to our investors is essential to building trust and confidence. We have been transparent about the performance of the risks and opportunities, and we are providing this information we need to make informed investment decisions.

As I hand over the baton to Prabhakar, I want to express my sincere gratitude to each and every one of you. Your support and feedback have been invaluable to me, and I am 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 sign and agreement to make it successful. Thank you for your time, your trust and your partnership and staying in touch. Thank you very much.

Krishna Bodanapu — Managing Director and Chief Executive Officer

Thank you, Ajay, and have we’ll open it up for Q&A.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Ladies and gentlemen, we will wait for a moment while the question queue assembles. We have a first question from the line of Philip Goela from Morgan Stanley. Please go ahead.

Philip Goela — Morgan Stanley — Analyst

Yeah, hi, thanks for the opportunity. First of all, I wanted to thank Ajay for all his help also 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 on 15% to 20% on services business. Just wanted to understand very qualitatively, what are the areas where you would be more cautious through the year, which you all bake 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, or 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.

Krishna Bodanapu — Managing Director and Chief Executive Officer

So, I think, after the first part of the first question and then I request Karthik for his views on that. But I’d say I think generally, there is a 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 are just being cautious and that’s why we kept the higher-end of that 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, that’s why we are being cautious. So, I think I’d say couple of industries possibly, one is the 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 the [Indecipherable] but again, that’s how we’re also managing the business because we don’t want to let any of the growth go, so we cannot just take a very conservative view at the same time after flexibility that if it 15 not 20, then we can take some actions to make sure that at least cost is under control. Karthik, if you want to add something to that, and also, the second part of your question on margin.

Karthikeyan Natarajan — Executive Director and Chief Operating Officer

Yeah, no. I think we’ve 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-digits for the next year. I think that is where our optimism comes from, and we’re also cautious of the fact that there could be potential issues on some specific projects and programs that we don’t have visibility yet, which may get impacted or which may get pushed to the right, which may get delayed to begin. And we do expect some of them to show up during the year. So, if 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 have shaped up 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 side, also any kind of wage hike that we have planned for this year.

Philip Goela — Morgan Stanley — Analyst

Understood. Thanks a lot.

Operator

Thank you. Ladies and gentlemen, in order to ensure that management is able to answer queries from all participants, kindly restrict your questions to two at a time. You may join back the queue for follow-up questions. We have our next question from the line of Sandeep Shah from Equirus Securities. Please go-ahead.

Sandeep Shah — Equirus Securities — Analyst

Yeah, thanks for the opportunity and congrats on once again a good execution. All the best Ajay for your retirement life, as well as congratulations for Shrini and Prabhakar for the new role. The first question in terms of FY ’24 guidance. There we also had 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 as of it.

Krishna Bodanapu — Managing Director and Chief Executive Officer

Yeah, 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 would be very difficult for us to separate it beyond Q4. So, our view is keeping all of them in play and, we have arrived at this 15% to 20% range. I know we could broad range, and as we learn more about how things happened during the year, we’ll try to narrow this range.

Sandeep Shah — Equirus Securities — Analyst

And just a follow-up, what could be the outlook for the railways? Will it be 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 rate hikes in FY ’24?

Krishna Bodanapu — Managing Director and Chief Executive Officer

Did you ask the first question to be on energy?

Sandeep Shah — Equirus Securities — Analyst

On railways. Growth outlook on railways.

Krishna Bodanapu — Managing Director and Chief Executive Officer

I think we expect 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 will close during the latter part of the year, and we expect medical and healthcare and licenses should start getting into the growth trajectory, but it will be muted, and hi-tech would probably be again soft. 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 would be in similar lines, like what we have done for the last year.

Sandeep Shah — Equirus Securities — Analyst

Yeah, yeah. I was asking about railways actually.

Krishna Bodanapu — Managing Director and Chief Executive Officer

Yeah, 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. The transport segment like we have talked about, we expect it to be in double-digit growth for the year.

Sandeep Shah — Equirus Securities — Analyst

Okay, thank you. I will come in the follow-up. Thanks.

Operator

Thank you. We have our next question from the line of Mohit Jain from Anand Rathi. Please go ahead.

Mohit Jain — Anand Rathi — Analyst

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

Krishna Bodanapu — Managing Director and Chief Executive Officer

Yes, it is like-to-like price side, and when we talked about that. We have been able to be a strong indent 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 at a major concern, and they are supporting us with appropriate price hikes in the geographies that we operate.

Mohit Jain — Anand Rathi — Analyst

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

Krishna Bodanapu — Managing Director and Chief Executive Officer

That is right, yeah.

Mohit Jain — Anand Rathi — Analyst

Okay and sir, last question, if you could help me understand the breakup because I think there is some reclassification, you mentioned about in the opening remark also. But if you could provide 4Q breakup in the old format like aero, rail, ARC, etc. And if you can just explain which segment goes there in the new classification.

Krishna Bodanapu — Managing Director and Chief Executive Officer

Yeah. I think it is nothing but aero and rail gets classified under transportation and communications is getting reclassified as connectivity along with [Indecipherable] 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 — Anand Rathi — Analyst

Okay, to that extent, they are comparable with the past number.

Krishna Bodanapu — Managing Director and Chief Executive Officer

Yeah.

Mohit Jain — Anand Rathi — Analyst

Thank you very much sir and all the best.

Operator

Thank you. We have our next question from Shradha Agarwal from Amsec. Please go ahead.

Shradha Agarwal — Amsec — Analyst

Yeah, hi, congratulations on another good quarter. I have a question on aerospace and defense, which has seen many consecutive quarters of good performance out there. Is it more a widespread performance across client buckets, or is it some one or two clients that is driving growth in this vertical for us. And how do you look at our aerospace into FY ’24 given a very good exit in 4Q, that we have delivered.

Krishna Bodanapu — Managing Director and Chief Executive Officer

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 the 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 the ability to address the customer segment. We do expect it to continue to grow in double-digits for this year, but we do expect the segment also in due for a platform upgrade, which is expected to be announced anytime in the next three years and it’s going to be announced. But that is going to be their super site beginning of a super-cycle, in terms of how this will drive new products and that’s meant significant capital infusion which is due anytime in the next three, four years, and we hope something happens in the next two to three years.

Shradha Agarwal — Amsec — Analyst

Right. And sir, just 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 two quarters, so I think you had alluded to some right shifting of orders last quarter, if I’m not mistaken. But what drove the decline in communication in this quarter also, and how do we look at the segment in ’24?

Krishna Bodanapu — Managing Director and Chief Executive Officer

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 of connectivity vertical, and we expect it to having built 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 Agarwal — Amsec — Analyst

Thanks. And just one bookkeeping question, I’ll just say, I think you had guided to EPR being 27% for ’24 earlier, and are we now guiding to 24%, is this understanding, right?

Krishna Bodanapu — Managing Director and Chief Executive Officer

As I said, I think in U.K., [Indecipherable] and also we are planning to look at simplifying the fraction of outgoing where the ordinance stays 25.1. I would say, it could be more between 25 and 26.

Shradha Agarwal — Amsec — Analyst

Okay sure. Thank you and all the best.

Operator

Thank you. We have our next question from the line of Mihir Manohar from Carnelian Asset Management. Please go ahead.

Mihir Manohar — Carnelian Asset Management — Analyst

Yeah, hi, thanks for giving the opportunity and congratulations on a good set of numbers. I mean, first if all, thanks to Ajay for all the support that he has given to us. So thanks for that, good luck guys. I wanted to understand you not aware of business and NBFC growth over the last two quarters specifically. So wanted to understand fundamentally how long [Indecipherable] and as you mentioned about some upgrades coming in the next two to three years, if you could throw some more light around that, you know, what kind of…

Krishna Bodanapu — Managing Director and Chief Executive Officer

I am sorry, your voice is not coming very clearly, very guarded.

Operator

Mr. Manohar, can you speak slowly as well. Use your handset.

Mihir Manohar — Carnelian Asset Management — Analyst

Yeah, sure. Hello. Is it audible?

Krishna Bodanapu — Managing Director and Chief Executive Officer

This is better, this is better.

Mihir Manohar — Carnelian Asset Management — Analyst

So, I mean likely I wanted to understand the aero side of the business. You mentioned as to which areas are driving the growth. Wanted to understand, know how are long container cycles on the [Indecipherable]. I mean, should we see good spend there to existing for the banks two to three years at least. And you mentioned about some big upgrades coming. The new product side which could happen in the next two to three years. So, if you can throw some light around what kind of uplift are you talking about, that was one question on aero.

Second question was on the EBIT side of the piece. I mean we are looking at 100 to 200 basis-points kind of an expansion on the consul 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. We are having this legal lawsuit in the U.S. and we have incurred roughly INR45 crores, which is like $5 million to $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 big over there. So those were the questions.

Krishna Bodanapu — Managing Director and Chief Executive Officer

So, let’s me answer the legal question and then I will hand it over to Karthik on the aerospace, but we are still continuing to vigorously defend ourselves in the legal case. The legal case has gone for trial right now, we are defending ourselves to 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 any continuing costs that we might occur with the case. So, I would say, spare with us for another quarter or perhaps two quarters, and we’ll have a much clearer view on the legal cost going-forward. Karthik, on the aerospace business.

Karthikeyan Natarajan — Executive Director and Chief Operating Officer

Yes, I think what I can answer the question, Manohar, based on what we have seen in the last three years. If I look at in fiscal 2021, there was a significant dip in terms of the [Indecipherable] passenger mile. I think that is coming back to 99% for most of the domestic passenger miles, but if you look at the international passenger mile, it has significantly opened up after China’s zero COVID policy has 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 then 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 their 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 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 and district today. And then the platform upgrades. So, we don’t know when it is likely to happen, and this is anybody’s guess at this point of time. And the two large players, I think one announces they have enforced, the other one also to announce.

If you just take 737 or 320, and both are probably 30-year-old platform, and both need some kind of an upgrade, it’s only a matter of time during this decade.

And from your second question on EBITDA expansion that we talked about for 100 to 200 basis-points, I think this is coming from the confidence that we have on our execution capabilities in terms of really running at very tight ship in the form of utilization levels and also the ability to really talk price hikes and the hyper-automation, which is one of the way to really trend more fixed-price projects more productively and efficiently. And how do you think we can really manage the cost under control which is the wage inflation that’s going to happen during this year. So, we are confident about the rate cuts we are providing here, and we’ll kind of keep you updated as we make progress on this front.

Mihir Manohar — Carnelian Asset Management — Analyst

That’s it from my side. Thank you very much.

Operator

Thank you. We have our next question from the line of Nitin Sharma from MCPro Research. Please go ahead.

Nitin Sharma — MCPro Research — Analyst

Yeah, thank you for taking my question. First of all, congratulation on this type of numbers. What I want to understand is what kind of headcount addition you are looking in FY ’24 and then I have a bookkeeping question.

Krishna Bodanapu — Managing Director and Chief Executive Officer

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

Pratap Maliwal — Mount Intra Finance — Analyst

What kind of headcount addition you’re looking at this financial year?

Karthikeyan Natarajan — Executive Director and Chief Operating Officer

Yeah. I think I’ll try to answer that, Nitin. You would have seen that we have added about 509 heads as far as Q4. And we do have our current supply to fill in what is needed for the next six months. We are continuing to play both on contingency as well as permanent hiring based on what makes sense. How do you think we really see demand panning out, and we are definitely looking at headcount addition similar to what we have done last year, which is again cautiously credit-based on how demand is shaping up. And if you would have seen, we’ve have dropped about 3.5% on utilization. We also added about 500 people anticipating growth, and we do have both utilization as well as incumbency added as the levers for us to drive the growth in the H1 of 2024.

Nitin Sharma — MCPro Research — Analyst

The current level of utilization is what you are keeping it around and comfortable with.

Karthikeyan Natarajan — Executive Director and Chief Operating Officer

Yeah, 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 right levels of utilization by having the resources being fungible and flexible to be rotated around, and we have done upskilling and re-skilling program over the last few years. I think all of them are helping this, we have the resources which can be moved around the projects.

Nitin Sharma — MCPro Research — Analyst

Okay, and a bookkeeping question. Can you please share the breakup between aerospace and rail transportation for 4Q.

Karthikeyan Natarajan — Executive Director and Chief Operating Officer

Sure, Nitin, I will ask Maria to be in touch with you to provide more detail.

Nitin Sharma — MCPro Research — Analyst

Perfect. thanks a lot.

Operator

Thank you. We have our next question from the line of Abhishek Chindarkar from InCred Capital. Please go ahead.

Abhishek Chindarkar — InCred Capital — Analyst

[Technical Issues]

Operator

I’m sorry sir, you’re not audible. Please use your handset.

Abhishek Chindarkar — InCred Capital — Analyst

Hi, can you hear me?

Operator

Yes.

Abhishek Chindarkar — InCred Capital — Analyst

Yeah, thank you for the opportunity. Just one question on the order detail. [Technical Issues] Moving ahead over the next four quarters, do we have all the investment in place to better sustain the order book? And the second question is for the quarter reported of the order book, if the acquisition order book — I mean, how do you plan to collaborate or is it part of [Technical Issues] I missed it in the presentation, so you can help with that, thank you.

Krishna Bodanapu — Managing Director and Chief Executive Officer

Abhishek, for the question you asked as the 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. Will cover better view during H1 of fiscal ’24 as we integrate the processes so that we can get an apples-to-apples comparison. Thankfully, these are all core services as Krishna has defined in the initial part of the presentation. And sorry, what was your other question?

Abhishek Chindarkar — InCred Capital — Analyst

The second question is, how do we have these investments in place to sustain the order book, [Technical Issues]

Operator

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

Abhishek Chindarkar — InCred Capital — Analyst

Can you hear me now?

Operator

Yes.

Abhishek Chindarkar — InCred Capital — Analyst

Yeah, my apologies. The question was about the investments [Technical Issues] to sustain the current order book momentum. Do we have everything in place or booked as it comes back [Technical Issues]

Karthikeyan Natarajan — Executive Director and Chief Operating Officer

Yeah, I think, I hope I understand your question, Abhishek. 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 keep drilling them as and when needed. And like we spoke about in the last few 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 order intake that we had, and we hope our capabilities that we have already built and the team that we have invested on re-skilling, will start helping us during the period. And if there are any gaps that we find as we start executing, we will keep filling them as needed.

Abhishek Chindarkar — InCred Capital — Analyst

That’s helpful. Thank you for taking my questions. My apologies for the line decline. Thank you.

Operator

Thank you. We have our next question from the line of Pratap Maliwal from Mount Intra Finance, please go ahead.

Pratap Maliwal — Mount Intra Finance — Analyst

Hello, am I audible?

Operator

Yes.

Pratap Maliwal — Mount Intra Finance — Analyst

Thank you and thanks for taking my question and congrats on a good set of numbers. So just wanted to confirm that last quarter we had said that aerospace will expect 10% growth quarter-on-quarter. So, has that been achieved because the product structure has been changed. So just wanted to confirm that.

Krishna Bodanapu — Managing Director and Chief Executive Officer

Yes, Pratap.

Pratap Maliwal — Mount Intra Finance — Analyst

Okay, we achieved that. Now, I just wanted to look at in the past year in FY ’22, we have said that digital and embedded software had shared a lot of our growth to come, and perhaps that’s one area where maybe we’re slightly late to the party, so I think the management had called out that we are 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 wins in these areas and relevant deal sizes, just to understand, if you’ve actually made up on the lost ground there.

Krishna Bodanapu — Managing Director and Chief Executive Officer

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

Pratap Maliwal — Mount Intra Finance — Analyst

I guess 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, and you were late to getting to that vertical. So, I just wanted to ask that are we 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 vents in these areas and have we made up on that lost ground.

Krishna Bodanapu — Managing Director and Chief Executive Officer

Sorry, Pratap, maybe we can take your question offline, and the question was not clear. And if I understand your point, are we growing on embedded digital at semicon areas that we talked about in 2023, the answer is yes. I think these are the ones that is driving the growth for us in the last 12 months, and we also realize the margin improvement based on our price hikes and operating metrics like utilization and our ability to expand on the automation area. I think these are the ones that helped us to improve on the market, and we are continually working on the 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 offshoring. So, wherever we see that there are opportunities for us to improve, we keep looking at our ability to improve on the operating metrics.

Pratap Maliwal — Mount Intra Finance — Analyst

Okay, sure sir. Thank you for your time and thanks for taking my questions.

Operator

Thank you. 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.

Krishna Bodanapu — Managing Director and Chief Executive Officer

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 I 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 will thank my good friend Ajay for the journey that we’ve been on, and wish him the very best for the journey he is going to embark on in the second innings of his life. Thank you, Ajay, and thank you everybody for your participation.

Operator

[Operator Closing Remarks]