Tata Elxsi Ltd (TATAELXSI) Q1 FY23 Earnings Concall Transcript

Tata Elxsi Ltd  (NSE:TATAELXSI) Q1 FY23 Earnings Concall dated Jul. 15, 2022

Corporate Participants:

Shashank Ganesh — Investor Relations

Manoj Raghavan — Managing Director and Chief Executive Officer

Nitin Pai — Chief Marketing and Chief Strategy Officer

Gaurav Bajaj — Chief Financial Officer

Analysts:

Bhavik Mehta — JPMorgan — Analyst

Vimal Gohil — Union Mutual Fund — Analyst

Bharat Sheth — Quest Investment Advisors — Analyst

Ravi Naredi — Naredi Investments — Analyst

Unidentified Participant — — Analyst

Tushar Bohra — MK Ventures — Analyst

Hiren Ved — Alchemy Capital — Analyst

Apurva Prasad — HDFC Securities — Analyst

Rohit Ingle — First Global Securities — Analyst

Dipesh Mehta — Emkay Global — Analyst

Devendra — Invest Yadnya — Analyst

Karan Danthi — Jetha Global — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Tata Elxsi Limited Q1 FY ’23 Earnings Conference Call. [Operator Instructions].

I now hand the conference over to Mr. Shashank Ganesh from EY. Thank you, and over to you, sir.

Shashank Ganesh — Investor Relations

Thank you very much, Steven. Good afternoon 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 forward-looking 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 and restricting yourself to 2 questions to allow participants an opportunity to interact. If you have any further questions, you may join the queue, and we will be happy to respond to them if time permits.

Having said that, I would like to hand over the call to Mr. Manoj Raghavan. Over to you, Manoj.

Manoj Raghavan — Managing Director and Chief Executive Officer

Thank you, Shashank. Good afternoon to everybody, and thank you for joining us today and hope you and everyone in your family safe and healthy. I’m happy to report that we had a robust first quarter performance. Our growth momentum from last financial year continues and our top line and bottom line growth stayed strong. Our revenue for operations for the first quarter was INR725.9 crores, growing 6.5% quarter-on-quarter and 30% over the same quarter of the previous year. This growth was predominantly volume led. Our EBITDA margin for the period was INR238.2 crores, growing 7.6% quarter-on-quarter and 58.8% year-on-year.

There’s a 36 basis point expansion of EBITDA margin over the previous quarter. Our profit after tax for the quarter was INR184.7 crores, showing a robust growth of 15.4% quarter-on-quarter and 62.9% year-on-year. Both of our key divisions, EPD and IDV performed very well. The EPD, our largest division, grew by 6.2% quarter-on-quarter, and our industrial design and digitalization business too witnessed a strong growth of 6.6% quarter-on-quarter, fueled by design-led deals and AR VR deals. The robust performance of our EPD division was contributed by all the industry verticals.

Our Media & Communications business reported a steady performance of 4.7% quarter-on-quarter and 29% year-on-year growth. Our Transportation business unit reported another strong quarter with 6.3% quarter-on-quarter and 41.8% year-on-year growth. Our Healthcare business continues with its stellar performance and has grown by 10% quarter-on-quarter and 53.6% year-on-year. This business is now almost INR100 crores per quarter business, contrasting with just over INR36 crores 8 quarters before, almost a 3x growth in 2 years. So we’re very happy with the growth of the health care business.

In terms of our performance by region, our U.S. geography contributed 42.8% of our revenue during the quarter, recorded a strong quarter-on-quarter growth of 10.6% and a year-on-year growth of 27.4%. Europe grew by 3% quarter-on-quarter and 28.1% year-on-year. India reported a robust performance of 15.5% quarter — growth quarter-on-quarter and 58.8% year-on-year. We are focusing on deeper customer engagements and mining, both for our top 10 accounts and capital liquidated portfolio of strategic accounts beyond the top 10. This is actually helping us with both wallet and market share growth.

On the employee front, I’m happy to share that the Tata Elxsi family is now over 10,000 people strong. Our net addition during the quarter was 771, which is more than double the net addition of Q4 FY ’22. This has been supported by our concerted efforts on employee engagement, reinforcing our employer brand proposition to attract the right talent from outside. Our attrition rate has dipped marginally to 19% as compared to the previous quarter. To expand further our engagement with future design thinkers and to encourage young innovators to think out of the box to bring sustainable solutions to the market, we have launched iGNITE, a global design and innovation contest for sustainable design, coinciding with the World Industrial Design Day on 29th June.

So overall, it has been a pretty good quarter with consistent growth across our key divisions, key geographies and industry verticals. We continue to focus on growing our talent pool with both hiring and retention while maintaining and building on healthy margins. We are entering the second quarter with a strong order book and an health deal pipeline across our key markets and industries.

With that, I hand it over for the Q&A session. Thank you.

Questions and Answers:

Operator

[Operator Instructions]. The first question is from the line of Bhavik Mehta from JP Morgan.

Bhavik Mehta — JPMorgan — Analyst

Congratulations on the great set of results once again. So I had a couple of questions. Firstly, to Manoj and Nitin, if you can just talk about what are you hearing from clients on their R&D budget for this year as well as next year, given the macro concerns everybody was talking about? And if you can also give a flavor across the 3 verticals on this topic. Secondly, how are you looking at the sub situation given that attrition still remains at elevated levels? And is there a plan to do another wage hike in FY ’23? Or should we assume that the wage hike position is done and the next cycle will be in FY ’24? And one question for Gaurav is if you can just provide the puts and takes on the margins for this quarter.

Manoj Raghavan — Managing Director and Chief Executive Officer

Yes. So I think regarding your first question regarding what we are hearing from the market and some customers. I think, yes, we all are aware of the macro economic situation, the war and so on and so forth, right, inflation in the U.S. and so on. But I think so far, we have — I mean, we are a very engineering service provider working on the ER&D business. From all our major customers, we really have not heard any intent to reduce budgets. And also if you look at our deal inflow and deal pipeline as well as the sort of order book that we have and so on, I think quarter-on-quarter, it has only improved.

Yes, there is the macro economic institution. We are aware of it. We are watching it very carefully, but we have nothing to report from either our key customers or what we hear from the market, right? But that could change maybe a couple of quarters from now. But as of now, I think it is business as usual, and we — our order book, our — the deal info, et cetera, continues to be pretty strong.

Your second question was about wage hikes, wage hikes and supply situation and so on. I think we’ll take it as it comes, right. We’re not — I mean, we have done our wage hike, a substantial wage hike in January for most of the junior level, and we have done one in April for all the senior folks. We will wait and watch. The attrition is still high, but I think we have come off the peak of the attrition. It is coming down. Supply is still a challenge. I mean challenge in the sense that we really need to put in a lot of effort to bring in the resources.

And my HR and recruitment team has done an excellent job in the last quarter and the results are there to see. So I think the situation is improving. We’ll wait and watch. Whether we do our wage hike again, at this point in time, it’s difficult to tell. So maybe a couple of quarters from now, we will relook at the situation and then take a call.

Gaurav Bajaj — Chief Financial Officer

Yes. I think your third question was on the margin performance for the quarter. I think we are really satisfied with the margin that we’d be able to deliver in this quarter. And as I mentioned in our last earning call also that I think we feel very confident and not as much worried about the margin situation. Of course, there are inflationary pressures and we did the wage hikes. But at the same time, we have other levers which help us to mitigate a set of some of those which like impact on our margins, be it operating lever, price hike we’re able to secure from the customer. And also the SG&A optimization of SG&A with the scale also helps us in terms of sustaining our margin as we did in the last quarter. But this quarter, we also moved some of our operations into the SEZ, which boosted our profit after tax.

Operator

[Operator Instructions] The next question is from the line of Vimal Gohil from Alchemy Capital (sic) [ Union Mutual Fund].

Vimal Gohil — Union Mutual Fund — Analyst

Yes. Thank you for the opportunity and many congratulations on the robust performance. Sir, my question was on the hiring target that you have for FY ’23. If you could highlight what kind of numbers are we looking at for the full year of FY ’23? And how much — what is the fresher intake possible in this year?

Manoj Raghavan — Managing Director and Chief Executive Officer

Yes. In FY ’23, we are looking at hiring about 3,000 to 3,500 fresh intake. And laterals will be, of course, as per business needs and so on, we could add about 1,000 or 1,500 of laterals.

Vimal Gohil — Union Mutual Fund — Analyst

Just to clarify, the 1,000 to 1,500 will be included in this 3,000 to 3,500 or this is separate?

Manoj Raghavan — Managing Director and Chief Executive Officer

No, no, no, it is on top of that. The fresher is that we hire from universities is about 3,000 to 3,500.

Vimal Gohil — Union Mutual Fund — Analyst

Got it. Got it, sir. Got it. Sir, just wanted to get a sense on, again, on margins. If you could just maybe highlight what the 32 bps of expansion that you’ve seen in your EBIT this time. If you could just break up between what was the impact of the wage hike. And how much did your cross currency impact because if you have a pretty significant exposure to euro and GBP. Can you just highlight what was the headwind between these two issues and how do you offset that?

Gaurav Bajaj — Chief Financial Officer

This is Gaurav. So I will take your second question first on the currency headwinds and all. If you see our results, our both action in the content currency has delivered the same 6 points right. Of course, there were headwinds and tailwinds when we compare USD, euro and GBP. I mean, one appreciating, other depreciating. But the way our mix of the portfolio is, it — we’re able to meet the constant both actual and the content deliver at the same growth rate. So as such, there is nothing from those getting into the bottom line.

On your margin, I think as I already alluded on my — on the previous question, but basically, the expansion of the margin is because of the interstate, which optimize SG&A expenses that we have. And then other operating lever in terms of utilization we’re able to get a better utilization this quarter compared to the last quarter, you also be able to secure certain price hike. While we won’t be able to break down the impact, but the 30 basis points can be concluded towards the operating lever and utilization pyramid and some of the hikes that we’re able to secure from the customers.

Vimal Gohil — Union Mutual Fund — Analyst

Fair enough. Sir, lastly, what — your forecast or your outlook on the comms vertical, autos, we all know that it’s in a structure obtained. If you can just maybe highlight what is your outlook on the communications vertical? And plus your — you have also highlighted that health care will probably be towards that 20% number, which is — and the progress there has been quite good, I must say. So if you can just highlight your outlook over there given the macro situation we are in, any headwinds that you’re seeing in communications because now at this point in time, it’s the largest vertical, even larger than auto. So your outlook over there will be helpful.

Manoj Raghavan — Managing Director and Chief Executive Officer

Yes. So I think all the 3 verticals have been growing pretty satisfactory over the last 7 to 8 quarters, right, or 8 to 9 quarters. Health care, as I said, is the fastest-growing vertical. And it’s been growing pretty well. This quarter, we grew 10%. But having said that, and we have also talked about how over a period of a couple of — over a period of 3 years, how the industry vertical mix would be, right, 40%, 40% and 20%. 40% Media & Communication, 40% auto and 20%, the health care and medical business.

And if you see over the last many quarters, we have been trending towards this particular ratio. I mean, it’s still — the medical is about 15% or so. But I guess in under 2 years’ time frame, we would hopefully reach that 20% guidance that we’ve been giving, right? So the media and communication vertical definitely is — over the last 6 quarters have shown pretty very good growth rate, a consistent growth rate rather than I would say. This quarter also, we’ve had a pretty good growth rate. All our key customers, we continue to be very significant and very relevant to those customers.

There is, of course, there’s new opportunity with 5G coming and with a lot of investments that we’re doing on the ad tech space and OTT space and so on, right? So I continue to remain bullish — growth rates would, of course, on quarter-to-quarter, that would be plus or minus 2%, 3%. I don’t think we need to make too much about it. But if you look at the long-term growth path and see how it is consistent. So I think all our businesses, we have a pretty steady business. And I continue to be pretty bullish on the growth prospects of these 3 verticals.

Operator

The next question is from the line of Bharat Sheth from Quest Investment.

Bharat Sheth — Quest Investment Advisors — Analyst

Congratulation Mr. Raghavan and Nitin on excellent performance and continuous, I mean, performance over the last 16 quarters. So, Raghavan, if I have to look into other players like who are also in engineering R&D, their growth is pretty much lower than what we are doing and their margin is also. So what exactly we are doing differently from them? So that is, I mean, giving this kind of a confidence that we are talking?

Manoj Raghavan — Managing Director and Chief Executive Officer

Thank you, Mr. Bharat Sheth. You’re asking me to disclose something very confidential. And how do I do that?

Bharat Sheth — Quest Investment Advisors — Analyst

No. Sir, I mean, if you can give some color or I mean, broader out — I mean the point —

Manoj Raghavan — Managing Director and Chief Executive Officer

Whatever color I give, I’ll not be able to answer that question, right? It doesn’t make sense to answer that question on the public forum like this, right? Yes, we have our strength. We have our capabilities. We are focused. We have a very strong execution in our methodology, we plan for the long term, and we execute our strategies very, very carefully. And we stay consistent, right? That’s the key for our execution.

Nitin Pai — Chief Marketing and Chief Strategy Officer

Yes, Mr. Sheth, maybe I can just add on this.

Bharat Sheth — Quest Investment Advisors — Analyst

Yes. I’ll be grateful.

Nitin Pai — Chief Marketing and Chief Strategy Officer

Yes. Now I’d only suggest that one should look at it as a combination of factors and levers, right? Because it is never one single thing that contributes to success. It’s really the combination at least. So, therefore, if you look at how we have driven the focus on 3 key verticals rather than saying, do only one because then it subject to huge market risk versus many where you’re then subject to a lack of attention and focus. So we have picked a set of verticals. We believe that there is enough growth and space in these verticals to grow, and we’re investing in them deeply.

Two, we are also looking at the maturity of a delivery process, right, which is, again, very differentiated. And that maturity results in the ability to drive offshore because it is not offshore just because you wanted offshore. It’s sometimes also offshore because your customers trust you to be able to deliver. So if you look at the offshore on-site ratio, if you look at how we are driving fixed rate concentration, again, not too much. The idea is not to become 100% fixed rate or 100% time material. I think it’s the combination of these 4 or 5 elements that you’ll find reflecting in, one, growth and, two, margins.

Bharat Sheth — Quest Investment Advisors — Analyst

Okay. And I mean, Nitin, taking for what is, say, how much, I mean, this designing will add as a capability to be more — I mean, right from the inception stage, I mean, concept level stage with the customer to deliver?

Nitin Pai — Chief Marketing and Chief Strategy Officer

Yes. So Mr. Sheth, I would encourage that it should also be treated as one more element of what drives that overall growth in margins because design by itself will not drive all the growth. We look at it as one more lever where you’re able to say why is Tata Elxsi different from the others because we’re able to look at the customer experience part of the objective of the customer. We’re also able to look at what products need from a perspective of human-centric design that will make it more desirable or more successful.

So in that sense, it gives us on a differentiation when we stand there in front of the customer, along with the same set of other ER&D companies that you’re referring to. The second is, it also allows us to add a little more value to the success of the customer. Success of the customer is not just in schedule, quality, time and the project that fitted well, it’s really in the success of the product when it goes to market. So I think there’s just those little things that as, if I may say, that the masala that makes it more tasty. We’re lack of a better comparison.

Bharat Sheth — Quest Investment Advisors — Analyst

And last question on this quarter, particularly, our India business has grown substantially. So how do we look at India business quarter-on-quarter, which has gone. So do we see the sustainability of India business, I mean, they’re also becoming a larger pie?

Manoj Raghavan — Managing Director and Chief Executive Officer

India business is a combination of factors, right? Of course, if you look at it, our SI business has grown. And that will come entirely from India. So that has also contributed to the overall India business growth. Of course, we have — we work with a lot of the captive M&C customers here, and that business has also been growing pretty well for us.

Bharat Sheth — Quest Investment Advisors — Analyst

All the best, both of you.

Operator

[Operator Instructions]. The next question is from the line of Ravi Naredi from Naredi Investments.

Ravi Naredi — Naredi Investments — Analyst

First congratulations on our market cap now INR50,000 crores, which show Manoj and your team, how you are dedicated for working of the company. Sir, my next point, the tax rate is in this quarter is 19% versus 27% in March. So what is the reason behind that?

Gaurav Bajaj — Chief Financial Officer

Ravi, this is Gaurav. I think I answered part of it in my — to your first question. We said that we expanded our capacity in Trivandrum where we have moved into the SEZ office space which has helped to bring our tax rate down. And also last quarter, there was onetime tax impact that we had took. So to that extent also, there is when you’re comparing from the last quarter to rest of quarter, there you will see a bigger contrast. But having said that, I think with the SEZ expansion and that’s helping us into our overall effective tax rate to bring it down, I think we believe that this year, we will be lower on our effective tax rate.

Ravi Naredi — Naredi Investments — Analyst

I mean so this year, we may have tax rate around 19% to 20%, right?

Gaurav Bajaj — Chief Financial Officer

We won’t be able to project that, but yes, it will be lower compared to the last year.

Operator

The next question is from the line of Arun Maruti [Phonetic], an Individual Investor.

Unidentified Participant — — Analyst

[Technical Issues]. Congratulations to the management for the stellar performance. Sir, only I have a single question that despite revenue growth, our other expenses are seen as of last quarter. So I would like to understand the delta behind that and whether there was something one-off in last quarter or something else?

Gaurav Bajaj — Chief Financial Officer

Yes. So other expenses, it’s not directly proportionate to our revenue scale. Those are some of the other discretionary expenses that we have at the company level. So there, we don’t see any major variation in any of the cost line items. Hence, if you see, those are not very different from the last quarter. So the capacity and capability ahead of our operations, knowing that growth rate that we are achieving and delivering quarter-on-quarter. So to that extent, there is no incremental there.

Operator

The next question is from the line of Tushar Bohra from MK Ventures.

Tushar Bohra — MK Ventures — Analyst

Congratulations to the management for an excellent set of numbers. Sir, I would like to understand the management’s focus and efforts being taken to increase beyond our top 3 domains today. In the past, you’ve referred briefly to maybe aerospace, maybe offload, railways and other verticals. If you can just help us understand what is the work that we’re doing in these areas?

Manoj Raghavan — Managing Director and Chief Executive Officer

So I think we’ve — what we have told earlier is that apart from the 3 main verticals, we have adjacencies to these 3 verticals, right? So from an automotive or transportation industry perspective, which is off road, which is rail is the commercial vehicle side and so on. I think that that’s going pretty well. And we have — even in the last quarter, we have won deals in the adjacency, especially on off-road vehicles and the commercial space. So that’s something that we continue to invest in.

From media and communication verticals, the adjacency if we look at the new media and the entire digital space as an adjacency. And there, we have been doing pretty well. A lot of projects that we have been doing on the OTT side and so on, a part of this as we can see. From a medical and health care side, yes, again, on the digital side as well as on the pharma side, we have been investing in. And that also we have — I mean, we have launched TEngage, that’s our digital health platform. And that’s part of this overall strategy for the adjacency.

I think we’ve shown that in multiple trade shows around the world, good traction building. And I think we are pretty satisfied with the adjacency framework that we have built. And we believe over the next 3 to 5 years, we will see decent growth from these adjacencies, which essentially if you derisk the main industry verticals that we are in, just in case those industry verticals go through any macroeconomic situation and so on. So I think from that perspective, we are pretty well covered. And I think we’re pretty satisfied with the growth that we see on all these 3 adjacencies.

And note that we are also looking at a few other areas that we are investing in, whether from the industry for auto side, the manufacturing side and the entire augmented reality and virtual reality side and so on. So there are a lot of other things that we are investing in building capabilities, building POCs, doing rallied projects with customers and so on. So we will — as of now, it is still a pretty small revenue numbers from those new areas. But as and when and be significant, we will get back to you.

Tushar Bohra — MK Ventures — Analyst

Sir, just related to this, I also wanted to understand, we had this engagement with Panasonic a few years back and consumer electronics. So if we build up on that further globally, if you’re working with other players or any thoughts around that. And if I may quickly slip in a second question. How is that innovation thought process working out, meaning IP-based revenues or any clarity around that or any outlook for the future?

Manoj Raghavan — Managing Director and Chief Executive Officer

Yes. So Panasonic continues to be a key customer for us. We have set up a offer a dedicated center for them in our Bangalore facility. And it’s now more than 5 years. We have completed 5 years of engagement with Panasonic. And I think we’ve seen good business growth as well as good projects that we have done. We have built a lot of capabilities in the consumer appliance space. We — apart from Panasonic, there are a few other customers that we work in the consumer appliances space.

From an innovation perspective, IP perspective, yes, we have built our own products, our own framework, which we license to customers and get royalties and so on. So that is also — that continues to be a focus. We continue to invest in new products, building new products and so on. But again, from a revenue perspective, it is still not very significant to report, it’s pipe works. But we believe once we have good traction in this, that’s a good — another good opportunity for us to build up a good revenue base without really hiring a lot more resources and so on, right? So nonlinear space is what we are driving at, but it’s too early at this stage.

Operator

The next question is from the line of Hiren Ved from Alchemy Capital.

Hiren Ved — Alchemy Capital — Analyst

I don’t have any questions, but just wanted to congratulate on fantastic set of numbers and great execution as usual, all the best.

Operator

The next question is from the line of Apurva Prasad from HDFC Securities.

Apurva Prasad — HDFC Securities — Analyst

Congratulations on the numbers. Manoj, can you share some progress on the adjacencies across the different verticals? You touched upon some of that, but if you could just expand further. That is the first question. And the other one, Gaurav, is on margins. How should we look at it, you think the current margins are sustainable? And what are the different puts and takes in the more near term that you see on this?

Nitin Pai — Chief Marketing and Chief Strategy Officer

Apurva, this is Nitin, here. Maybe I’ll take the first one. When we called out adjacencies and we called it out both as an opportunity to grow the addressable market as well as to derisk the cyclicity, if any, in the industries that we currently operate in. And to that extent, what we have also looked at as a long-term goal is 80-20 ratio, right? And again, we like to set some numbers. And the idea is that they create lighthouse directions for us. And it’s not a matter of whether we get there precisely. It’s a matter of trending there.

I think that is what we’re doing very well on. And for example, if you look at media and communications, our progress on new media far exceeds the milestones that we had set, right? So which means that we are growing far, far better than what we have set out as milestones on the journey of 80-20. If you look at the transportation business, we had added off-road as well as rail. And we looked at 2 markers there, right? So one marker is about, whether you’re adding marquee customers. You just need to get those logos in first irrespective to the revenue or dollar numbers against them.

The second is absolute revenues. I think we’re doing well there, just about on target. While you look at health care, of course, you have to give them credit because they’ve been so busy growing the primary business that sometimes there’s no breathing space or anything called adjacency, but I would give them great credit that they have done a lot of efforts in terms of building out the service portfolio for pharma and digital health, right? And I think the launch of TEngage, which was done in March of this year, I think there’s a very, very big milestone for us in that journey.

Why? Because for that view, part of the journey will be product and platform driven, part of it will be services. So again, I think we are making sure that they have the right milestones and markers for knowing that will make progress. So to that extent, I think there’s still far from starting to declare what the adjacency numbers are and so on. It’s not required, because you’ll see that it is an integral part of our growth, but we can assure you that we are on track.

Gaurav Bajaj — Chief Financial Officer

Apurva, this is Gaurav. So, Apurva, on your second question on the margin outlook and all, I think we try to answer on some of the other questions. Okay. Yes, we don’t give an outlook or the projections. But I think what you can say that at least in the short term to the extent that we have a visibility and given all the macroeconomic environment and situation, I think we continue to believe and being confident with our tight execution and discipline focus objectives. We should not be something which is not something worry us too much. We will continue to be in that range about.

Of course, we have to see certain inflationary pressure. Though wage hikes are already behind us, but we have to see whether we have to do something more or not. I think that is something very difficult to say at this point of time. But I think the other good factor is that given our target operating model, which is more offshore centers and end to end government, I think that gives us little bit more flexibility and lever in terms of tightening some of those things and setting — set off some this inflationary pressure. I think sometimes like we can have those levers available to us wherever we can have the expansion, do more offshoring.

And also I think other things other than the operating levers, we’re also able to expand into the SEZ, which also helps us to build at least on our profit after tax, given the superior profitability, and that will continue because that expansion, our effective tax rate is going to come down this year. So that will also add to the bottom line when it comes to the EPS and the profit after tax.

Apurva Prasad — HDFC Securities — Analyst

Got that. Just to — on the last point, Gaurav, what is the onetime in the ETR for the quarter? And what should be a normalized ETR on a go forward basis? And on the margin —

Gaurav Bajaj — Chief Financial Officer

I think we were like we have onetime — I would not be able to put up a number, but we feel that at least 2% to 3% we can top our effective tax rate.

Apurva Prasad — HDFC Securities — Analyst

Versus FY ’22 ETR. Okay. And just on that margin point. So based on our medium-term outlook of the delivery mix, do you think this 32% plus is a more sustainable normalized level or do you envisage additional increments and scope to bring this — the margin structure down?

Nitin Pai — Chief Marketing and Chief Strategy Officer

No, I mean, as I said that I think it is going to be the range about. We don’t feel that there will be a significant change of the variation from the current level. Of course, there could be certain expansions, certain discretionary expense that may come back. But there are a lot of — currently, there are a lot of macroeconomic things that has to be taken into account. So from short to medium terms, I think it should be okay. I think we were comfortable there.

Apurva Prasad — HDFC Securities — Analyst

Got it. Thanks, Nitin, for the detailed answer. All the best.

Operator

The next question is from the line of Rohit Ingle from First Global Securities.

Rohit Ingle — First Global Securities — Analyst

So first of all, congratulation, all the team of Tata Elxsi. Sir, I have only one question about the EBITDA margin. So what were the reason of highest EBITDA margin we are reported?

Gaurav Bajaj — Chief Financial Officer

I think we have already answered a few times. We mentioned that the scale to optimize G&A with the economics of scale and the top line growth and other operating levers along with some of the rate hikes that we’re able to secure from the customer able to expand our EBITDA margin by 30 basis points.

Operator

The next question is from the line of Chirag Kacharia [Phonetic] from Ashika Institutional Equities.

Unidentified Participant — — Analyst

Congratulation on good set of numbers, sir. I would like to know your broader outlook on American market and European continent specifically?

Manoj Raghavan — Managing Director and Chief Executive Officer

Yes. So I think — yes, so as I talked earlier, right, broadly both U.S. and — I mean, the issues are different in both the markets, right? The U.S. right now is a high inflation scenario. People talk that there is going to be a recession. But then if you look at it, everybody has a job. I mean, the job market is very, very hard. And at the same time, people will say recession is happening. So there’s a little bit of a contradiction there.

Similarly, in Europe, Europe the issue is more about the war and other — the macroeconomic situation out there, right? But having said that, again, we are still a small to medium-sized organization. From our perspective and the revenues that we deliver, right, I believe these factors really don’t play too much of a role for us. Our customers do not heard anything from our customers that they’re going to reduce the spend, they are stopping some projects or any of that. So to that extent, both U.S. and customers in Europe, we continue — we hope that we’ll continue to do well in these markets.

Of course, in U.S., we have the dollar becoming stronger and stronger. And on the other hand, in Europe, you have both pound and euro becoming weaker, right? So that — of course, that will affect the net realization in INR in both these regions. But other than that, I think we continue to keep close to our customers. We continue to deliver value to our customers. And I believe unless something drastic happens, definitely not in the short term. We don’t see any short-term issues, but bit on the long term, again, there are a lot of factors, including how this war will continue and effect of that on the overall global economy and so on.

But whatever happens, it won’t be that it’s something very specific only to Tata Elxsi. We will still, I believe, we will be better off than a lot of our competition or our other players in the IT industry, right. So whatever affects them, it affect us also.

Unidentified Participant — — Analyst

Okay, sir. I have one more question, if you allow me. Can I ask? Shall I come later?

Manoj Raghavan — Managing Director and Chief Executive Officer

Go ahead, please.

Unidentified Participant — — Analyst

Sir, I have a question in terms of the constant currency calculation because the normal growth and constant currency, both in similar range. So if you shed some highlight on the mechanics of this calculation?

Nitin Pai — Chief Marketing and Chief Strategy Officer

I think Manoj also touched based upon that USD appreciated and we can strengthen the ER&D. On the other hand, if you see pound and GBP in some of the other currencies still have been depreciating. Given how the mix of the portfolio and the revenue we recognized this year, I think both kind of played off with each other and the actual and the constant are coming in similar.

Operator

The next question is from the line of Dipesh Mehta from Emkay Global.

Dipesh Mehta — Emkay Global — Analyst

A couple of questions. So I just want to get clarity about salary hike. Salary hike we give from effect from April and it is fully given or a certain set of employee-only hike was given?

Manoj Raghavan — Managing Director and Chief Executive Officer

So I think we gave first salary hike for all the juniors, almost 60%, 70% of the staffs from January in the beginning of the year. And the remaining set of staffs was given a salary hike in April. So it is fully done.

Dipesh Mehta — Emkay Global — Analyst

Okay. And if I look at, say, this quarter, your employee expenses due less than your headcount growth. So in a way, it is not getting captured in terms of inflation. So can you help us understand what explains that part?

Gaurav Bajaj — Chief Financial Officer

No. I think if you see the personnel cost, it is inclusive of both the wage hike that has been done for the middle and the senior management this time and also includes incremental headcount that has been added during the quarter.

Dipesh Mehta — Emkay Global — Analyst

That is right. Your headcount growth, let’s say, quarter-on-quarter was 8 percentage. Your employee expenses or wage bill grew 6 percentage. Now when you say you gave salary hike to almost half of the employees, it is not getting reflected. That is why I try to get some clarity.

Manoj Raghavan — Managing Director and Chief Executive Officer

Yes. Maybe I can just clarify. It is because the added employees don’t necessarily come in the beginning of the quarter, so they don’t count for the full quarter. We had them throughout the quarter.

Dipesh Mehta — Emkay Global — Analyst

Even if you take average, let’s say 8 percentage end-to-end. If I take 4 percentage leverage, still it is hardly any gap between —

Gaurav Bajaj — Chief Financial Officer

And then it has to be within the pyramid, the mix of the people, the regional mix. There are a lot of factors which goes into there. And the personnel cost also includes other contribution because funds and the staff rate and all other expenses. So that state math will not work like that.

Dipesh Mehta — Emkay Global — Analyst

Understand. Understand. Second question I had is about outsource, which let’s say we are seeing very steady improvement over the last few quarters. Do you think considering things are opening up, that trend will now stabilize or may have some reversion? Or do you think this trend likely to continue?

Gaurav Bajaj — Chief Financial Officer

So our focus is that was your complete study. So do you see that continuing at that level? Or do you see that —

Manoj Raghavan — Managing Director and Chief Executive Officer

Yes. I think over the last few quarters, it has been pretty steady. Yes, I think there’s a slight uptick in on-site revenues this quarter, but not a significant uptick. So we — I think I would tend to continue that customers are reaping benefits from the offsite execution that we provide for these customers, right? So I don’t think there will be in a hurry to move on site.

Dipesh Mehta — Emkay Global — Analyst

Okay. So you expect this 75-25 broadly stable likely to happen even on medium term basis?

Manoj Raghavan — Managing Director and Chief Executive Officer

More or less, that would be a plus 1%, plus 2% here and there.

Dipesh Mehta — Emkay Global — Analyst

That’s fine, but broadly 75-25?

Manoj Raghavan — Managing Director and Chief Executive Officer

Yes.

Dipesh Mehta — Emkay Global — Analyst

Understand. And last question is about the adjacency which you — sorry.

Operator

Sir, sorry to interrupt, but for any follow-up question, may we request you to reach the queue please. The next question is from the line of Dev from Invest Yadnya.

Devendra — Invest Yadnya — Analyst

My first question was on pricing. So you said that you had some price increase. So can you elaborate on that? I mean which were the hot skills which were suitable so that you could get price hikes from your customer and across which verticals was this phenomena observed?

Manoj Raghavan — Managing Director and Chief Executive Officer

I won’t say it was based on skills and so on. Of course, there are certain skills that traditionally also command a premium and so on. But the price hikes that we are talking about is customer engagement, right, depending on how long they have been engaged and what value that we deliver to these customers over the Covid years and so on, right? So we have been able to go back and negotiate a price hikes with individual customers, I mean based on the value that we bring to the table.

Devendra — Invest Yadnya — Analyst

And I have one more question. So it was respect to automotive vertical. So your traditional versus OEM. So what is your contribution to the new age OEMs versus the traditional volumes in the automotive segment?

Manoj Raghavan — Managing Director and Chief Executive Officer

We continue to work with new age OEMs as well as the traditional OEMs. The new age OEMs are primarily around the electric vehicles, the connected car platform, the digital twins and all the new areas, right. Whereas the traditional OEMs, it’s a mix of the traditional businesses of infotainment, body chassis, powertrain, cockpit and so on, plus, of course, the electrification scope and so on. At this point in time, we’re not in a position to tell you how much percentage or what we don’t have the data.

Operator

The next question is from the line of Jairaman Krishnamurti [Phonetic] an Individual Investor.

Unidentified Participant — — Analyst

I have a question basically on the health care revenue. It’s expanding more than what we projected would be. Is this due to any tailwind or there is a concentrated effort to expand the revenue? Because what I know is we look at 20% of the revenue to be health care. The way we are growing, is there a possibility that we will exceed this 20%? The second question is with regards to the revenue, how much percentage of the new business that we are getting is from the existing clients? If you are not able to share the percentage, is it possible to at least share is there any increase to the last financial year?

Manoj Raghavan — Managing Director and Chief Executive Officer

Sure. So medical business, I mean, it’s not this quarter alone. I think over the last 8 quarters or so, we have been showing consistent high growth. So to that extent, it’s not something new. Whether we will exceed 20% or not, I think that we will — when we reach 20%, we’ll think about it. But at this point in time, as Nitin said, we put the target and we want to hit the target first, right?

And of course, if there are opportunities to grow, we’re not saying that we will not grow. We’re not saying, oh, no, no, we can’t grow beyond 20%, right? So to that extent, we will continue to accelerate our focus on medical. We made a lot of investments in that area. And I think we have built very, very strong capabilities that is relevant to our customer base. And I think we have a pretty good team executing there, right?

From your second question regarding new business, I think we — as I said in the beginning of the call, we have been focused on deeper account mining and staying relevant to our key customers, right? So to that extent, I think almost 98% of our revenues come from our existing customers, even in the quarter gone by, right? And new customers only account for a very small fraction of our revenue. Of course, over a period of time, the new customers also grow and then become significant. But in the quarter in which we get into a new customer, it’s typically — it’s about a 1%, 1.5% or so it would be new customers.

Nitin Pai — Chief Marketing and Chief Strategy Officer

Jairaman, just to add a little more color. The point is that given the nature of the business that we are in, which is R&D and product development, typically, customers don’t start off with a big bank because you’re not going out to renewal contracts and so on. So traditionally, it would be small projects that you learn and the customer also learns and gauges you buy, and we will build and expand on top of that. So that also kind of explains the ratio.

Operator

The next question is from the line of Amit Tawani [Phonetic] an Individual Investor.

Unidentified Participant — — Analyst

Just one simple basic question. The annual report mentioned about 3 more industries. One was the semiconductor, second one was the telecom and the consumer electronics. I was just — because in our presentation, we don’t include that. So I’m just wondering which — in which segment would these 3 come in?

Nitin Pai — Chief Marketing and Chief Strategy Officer

Yes. So Amit, this is Nitin here. Maybe I’ll take that. If you look at semiconductor, because they form the foundation for electronics and every sector that you will work in. So to that extent, we do have engagements even today with some another companies but addressing certain key markets. And what is in the public domain, for example, is Renesas, where we have been working with them on automotive electronics. And we also announced the next generation EV innovation center, which builds on top of silicon from Renesas and brings in software that we develop.

There are similar relationships when it comes to 5G and telecom, a seller relationships when it comes to health care. So that is the semiconductor piece. Telecom is an integral part of media and communications. So when you look at media and communications, that’s what we call the vertical, telecom is that communications piece, right? We do not say telecom only for the reason that nowadays, telecom players are also media players, they offer triple-play, quad-play and so on. So that’s what we call the vertical media and communications.

As far as consumer electronics is concerned, it partly reflects in media and communications because there is some amount of consumer electronics that involved in media, right? Because when you work on set-top boxes, when you work on gateways, fundamentally, we’re working on consumer products. All of it gets reflected in design.

Operator

The next question is from the line of Vimal Gohil from Alchemy Capital. As there is no response from the current participant, we move to the next question from the line of Bharat Sheth from Quest Investment.

Bharat Sheth — Quest Investment Advisors — Analyst

Sir, in our earlier answer, we said that we plan to add around 3,000 plus kind of a fresher and 1,000, 1,500 lateral. So that gives — which is almost forming around 40% to 50% of existing headcount. So just this kind of new hiring, what kind of say short to medium term looks — seems to be very bullish. Is that a fair understanding?

Manoj Raghavan — Managing Director and Chief Executive Officer

Sir, you have to also take into account attrition, right? So there will be attrition also that we need to plan for, right? And then, of course, this is a target that we have 3,000 or 3,500 freshers. And in reality, we could — we may end up anywhere between 2,500 to 3,000 or whatever it depends on how many of them really actually joined, right? So while we would target, it’s not that 100% of the people would join us also, right? So I think what about — I think we should be around 3,000 people is what we target from freshers. And laterals, as I said, right, depending on the demand and how attrition happens and so on, we will add anywhere between 1,000, 1,500 people.

Bharat Sheth — Quest Investment Advisors — Analyst

And this kind of addition, do we expect, I mean, offshore to go a little up in the next 4, 5 quarters?

Manoj Raghavan — Managing Director and Chief Executive Officer

A good percentage for offshore. It could marginally go up, but I think it won’t be significant.

Bharat Sheth — Quest Investment Advisors — Analyst

Okay. And last question on the margin side. Despite we are not adding much revenue from IP business, but does it really help us to improve our margin where we can deploy same into the client service business?

Manoj Raghavan — Managing Director and Chief Executive Officer

We have not yet reached that stage. Right now, our IP, the products that we have is primarily like getting us — helping us get a foot in the door and opening new accounts, new customers and so on. At a later point in time, hopefully, when some of these are mature products and we get repeat orders and so on, what you say would happen.

Bharat Sheth — Quest Investment Advisors — Analyst

Okay. And one more question.

Operator

Mr. Sheth, sorry to interrupt, but for any follow-up, may we request you to rejoin the queue, please. The next question is from the line of Kandel Wal [Phonetic] an Individual Investor.

Unidentified Participant — — Analyst

I just want to understand, right now, our employee cost is around 50.38%. So what is the projected going in future the trained? Is it likely to increase or decrease? What is your opinion?

Gaurav Bajaj — Chief Financial Officer

Yes. I think maybe that calculation may not be accurate, but I think that trained employee cost is directly proportionate to our revenue, but I think we have been working on other products and IP-related and non linear kind of the revenue. So likely, it will not exceed the current percentage. Of course, there would be intervention in terms of the wage hike and all those things as we go along and there could be other things. But it’s going to be in the similar range.

Operator

The next question is from the line of Mayur Matani [Phonetic] from Mahesh Kumar and Company.

Unidentified Participant — — Analyst

Thanks for the opportunity and congratulations to the management on excellent set of numbers. I have 2 questions. One is related to our revenues from Asia apart from India. So it has been declining as a percentage of revenues. So is it by choice that we are focusing on other regions and that is why our revenues are lower because Asia being a big market for automotive and communications. So what would be your take on that? And my second question would be on the initial response that we have got on our new health care platform.

Manoj Raghavan — Managing Director and Chief Executive Officer

Yes. So coming to revenues from Asia, yes, it has been declining. I think especially revenues from China has come down because China has been hit by Covid really badly. People are not being able to travel to China. There is no — even within China, there are a lot of restrictions and so on. And similarly, I think both revenues from Korea and Japan also has come down. I think all these countries are — the macroeconomic situation is not that good, and customer spend and customers that the confidence is also down there in that particular market.

So I think lastly, we see — we don’t see any large opportunities, big deals that are coming from that part of the geography — so yes, revenues are down. But at the same time, for us, from our perspective, the other major markets, Europe and U.S. and India has been growing very, very rapidly. So from our management focus also, we have been focused to really grow the other geographies. But at some point in time, definitely China and Japan and Korea would also come up. And then hopefully, in the near future, we will see growth there.

Nitin Pai — Chief Marketing and Chief Strategy Officer

And Mr. Matani, just taking up the second question on the health care platform. This is Nitin here. I just wanted to clarify that we’ve kind of announced and launched that just at the end of March, right? So it’s just been about 3 months since we have gone actively to market with it. You have to appreciate the fact that a digital platform like that is a fairly big and strategic position for customers. So in some sense, it does take time to make sure that customers see it, appreciate it, understand it and then are able to move down the path of assessment and selection.

But I think the big side effect for us is the fact that even as we go into greenfield opportunities where a particular target customer does not have a platform and wants to adopt ours. We’re also already starting to see the benefits of Brownfield where they have platforms. They are not necessarily going to switch with ours, but they are seeing that we’re bringing all the relevant design and digital capabilities are necessary for such platforms. The elements of customer engagement, patient engagement, views that you provide for doctors, health care providers, patients.

These are digital and design skills that are both compliant to industry standards, compliant to health care regulations and deliver the right experience. So we’re already winning projects in terms of services that address digital health care platforms for customers, but our own wins are yet to come. But we have no doubt, we will win some of those, but I think the benefit will be both in terms of services that are coming off the platform demonstration and services that are coming, and revenues that are coming from platform licensing and sales.

Operator

Ladies and gentlemen, we take the last question for the day from the line of Karan Danthi from Jetha Global.

Karan Danthi — Jetha Global — Analyst

Management team, many congrats on the great set of results. So I wanted to just dig in a bit little more, if you just first to the macro. Many software companies in the U.S. have started to see pressure, particularly from Europe. And if you follow the hardware supply chain within, I guess, the server complex, you’re starting to see some, I would say, some signs that server deployment is slowing. So it’s very clear.

And I think Morgan Stanley said this on their earnings call yesterday that there is a prioritization happening where companies are saying, there are certain projects that are prioritizing certain projects that are not. Now, I think we’ve done really well so we orient ourselves in that project. So I don’t think we’ve seen any, if at all, impact from this. And there’s a good argument as to why that should continue to be the case.

But let’s take a scenario where there is a recession in some parts of the world and the job market does get weaker in other parts of the world. What percentage of your project we would you decide is — would you say discretionary for the customer, i.e., they would do it if they could, but if they have to put it off too because the trade-off of being innovative versus saving money, just the math doesn’t work at some point. So it would be helpful if you could just frame that. And then I have one follow-up.

Shashank Ganesh — Investor Relations

Yes. Maybe I’ll take a first stab with that current because it’s a complex question, and obviously, we’re dealing with possibilities here rather than something that’s concrete. The way I see it is right, I think you’re right in the sense that over the period of years, consciously from our side and equally going through Covid, what has happened is a lot of the budget rationalization in favor of what the strategic, what is important has already been done. So in that sense, I think Covid was a bigger recession than anybody else, not anything else.

Because it clearly, truly squeezed decision on what is important, what is strategic, what should stay, what should go from many companies. So to that extent, I think, to a large, large extent, the budgets that we’re dealing with now and the kind of projects we’re working on now are, like you said, mission critical. If I were to then extrapolate to say now there is further pressure and customers still need to kind of think of what would they cut on, I would still say that we stand a pretty good chance. And I’ll just justify why that is so because if you think about what are the options, an option is to do it in-house.

The first option is not to do it at all, in which case there is no debate, nobody wins. But if there are option is to say we have to do something, but have to do it at the lowest cost possible, I think we become the most attractive auction on the table. Why? Because we are predominantly offshore, we are operating on very, very competitive rates. We deliver ownership and assurance of the objectives that the customer has or the outcome that the customer has. So in many ways, I think we are a better option for continued even if it’s a reduce continue than a stock.

So all I would say is that unless the decision is a stop and therefore, they hire their own employees or they’re going to cut out all the workers they’re giving out, we would most likely still be the second last or the last one option. I can only envisage our future battery. And the only other thing I would say is that, look, these events happen, right? And we have seen it happen in Covid in the first quarter of 2020. we did have a situation where customers did pull the plug then a lot of projects are cracked and so on.

But the good thing about Tata Elxsi is that we have seen this before, and we quickly reoriented ourselves and we were able to come out of that situation within the quarter, right, within a quarter by next quarter, we are up and running. So I think there is a lot of confidence in the team that in the case of a deep recession and deep budget cuts and so on, we will figure out ultimate ways to deliver to come back and continue our growth, right? So — and we’ve proven that during the Covid time also. So that is the confidence we feel.

Karan Danthi — Jetha Global — Analyst

And then my follow-up was the transport business, just as you look forward, it seems like there’s a growing course that the semiconductor shortages are essentially moving in the right direction as slack in increasing consumers has shift reallocated towards autos. Does that benefit you in anyway if production rebounds, I guess the budgets don’t change, people would have to innovate either way. But I’m just curious whether that has a kind of a secondary to impact?

Manoj Raghavan — Managing Director and Chief Executive Officer

So if the sale prices come down, then all our customers will be happy. And as you know, right now, if you go to any auto dealer, you don’t have too many options. There is a huge waiting list for most models, right? So what happens is when all this pressure automatically comes form, OEMs are able to sell more, which means automatically, they generate a lot more money in the bank and that really final a lot more new R&D projects. So definitely, we will benefit.

Operator

Ladies and gentlemen, due to paucity of time, and that was the last question. I now hand the conference over to the management for their closing comments. Over to you, sir.

Manoj Raghavan — Managing Director and Chief Executive Officer

Thank you all the investors who attended today’s call. It was a satisfying quarter for us. And we hope to continue this trajectory and look forward to talking to you again — after our Q2 results. Thank you so much.

Operator

[Operator Closing Remarks]

More TATAELXSI analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

{%sfr%}