Tata Elxsi Ltd (TATAELXSI) Q1 FY24 Earnings Concall Transcript

Tata Elxsi Ltd (NSE: TATAELXSI) Q1 FY24 Earnings Concall dated Jul. 17, 2023

Corporate Participants:

Manoj Raghavan — Chief Executive Officer and Managing Director

Nitin Pai — Chief Marketing Officer and Chief Strategy Officer

Gaurav Bajaj — Chief Financial Officer

Analysts:

Shashank Ganesh — Ernst & Young — Analyst

Bhavik Mehta — J.P. Morgan — Analyst

Vimal Gohil — Alchemy Capital Management — Analyst

Anika Mittal — NVEST Analytics — Analyst

Rohan Nagpal — Helios Capital — Analyst

Arun Maroti — Subh Labh Research — Analyst

Akshay Ramnani — Axis Capital Ltd. — Analyst

Satadru Chakraborty — Chakraborty Family Office — Analyst

Chirag Kachhadiya — Ashika Institutional Equities — Analyst

Nitin Gupta — Individual Investor — Analyst

Rajat Kumar — Individual Investor — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Tata Elxsi Limited Q1 FY 2024 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

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

Shashank Ganesh — Ernst & Young — Analyst

Thank you very much. Good evening to all the participants on the call. Good morning if you are 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 to 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 in restricting yourself to two questions to allow participants an opportunity to interact. If you have any further questions, you may rejoin the queue and we will be happy to respond to them if time permits.

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

Manoj Raghavan — Chief Executive Officer & Managing Director

Thank you, Shashank. A very good evening to everyone. Thank you, all, for joining us this evening for the earnings call. We are happy to report a healthy operating revenue growth of 17.1% year-on-year in the current macroeconomic environment, while delivering an EBITDA margin of 29.6%. In constant-currency terms, our revenue grew by 1.2% quarter-on-quarter and 11.9% year-on-year.

During the quarter, our healthcare and life sciences business reported a healthy quarter-on-quarter growth of 3.2% in constant-currency terms, which is a significant improvement over the performance during the earlier two quarters. This vertical also reported new product development deal wins for medical diagnostics and smart hospital equipment.

In the transportation business, we continued to see good traction and a strong deal pipeline especially in software-defined vehicles and electric vehicles. The transportation business grew by 1.8% quarter-on-quarter and 17% year-on-year in constant-currency terms. While some deal closures were delayed in this quarter, we won new deals including a strategic multi-year, multimillion dollar SDV deal with a leading Asian OEM for the SDV platform and software development. We also won a multi-currency licensing and deployment of a connected vehicle platform deal with a global top-five OEM.

Media and communication business perform creditably to retain and grow market share, even though absolute revenue growth was muted. The quarter-on-quarter revenue growth was at 0.2% in constant-currency terms. We won our first multi-year deal for our 5G network orchestration and automation suite with a leading telecom operator. This is an important milestone for the renewed portfolio we are building for this industry vertical. However, the media, telecom and technology sector is still soft globally, and we remain cautious on the short-term growth in the sector, while staying close to our key customers and focused — focusing on Intelligent AI-powered solutions and technologies that will drive the next wave of transformation in this industry.

I’m delighted with the all-round customer excellence demonstrated by Elxsians since that has allowed us to grow strongly with our key customers and positioned us well for competitive differentiation and new project considerations around our customer base. Our successes in growing our business with the large accounts resulted in the share of revenue from our top five accounts increasing from 39.8% in the previous quarter to 42% in the first quarter of FY ’24. Similarly, our revenue share from top 10 accounts grew from 49.4% in Q4 of the previous financial year to 51.9% in Q1 of this financial year.

On the people front, we continue to invest in our talent base with a net add of 422 Elxsians in this quarter. The Elxsi family is now 12,000-plus strong, with attrition dropping further to 15.6%.

We have grown strong operational excellence across the organization and protected our EBITDA margins despite the wage hikes and strong employee additions in the quarter. Our effective tax rate in this quarter has increased on account of lower tax exemption due to the completion of five years for a couple of SEZ units, impacting our PAT margins. Our PAT margin for the quarter stood at 21.6%. It’s a matter of great pride for all of us that Tata Elxsi to partner with ISRO and play a role in the Gaganyaan project. This collaboration will help push the boundaries of technology and provide us a unique opportunity to advance our capabilities and strengthening India’s space mission. We wish ISRO the very best as it progresses further in ambitious human space flight missions.

As we have stepped into the second quarter of this financial year, the confidence of our customers in our differentiated Design Digital propulsion and delivery excellence and a strong deal pipeline, especially in automotive, healthcare and design businesses, provide us the confidence and foundation for accelerating our growth throughout the year.

With this, I will hand over the floor to Shashank for the Q&A session.

Nitin Pai — Chief Marketing Officer & Chief Strategy Officer

Shashank, before we go — this is Nitin Pai here. I have a brief update for the entire audience who is joining us today. We move to a new fact sheet format, and my apologies because, I think, we missed the — reporting the constant-currency growth for the overall company. So, the intent, of course, was to move to a new format to make it more readable, more user-friendly. But I believe that we had a lapse on that front. That will be corrected. So, you will continue to see the constant-currency report at the company level too. So, my bad on that.

Thanks.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Bhavik Mehta from J.P. Morgan. Please, go ahead.

Bhavik Mehta — J.P. Morgan — Analyst

Thank you. A couple of questions. Firstly, Manoj, on the transportation vertical, which you mentioned that deal closures are delayed, but are you also seeing deal conversions getting pushed out because of the macro and clients being a bit cautious? So — because the growth has been a bit soft over the last two quarters in a row now, so what’s the outlook over there going forward?

And secondly, to Gaurav, if you can give us the margin walk for this quarter, and are the wage hikes completely done in 1Q or are there some part of the wage hikes come in 2Q [Indecipherable]? Thank you.

Manoj Raghavan — Chief Executive Officer & Managing Director

Sure. Regarding the transportation business, yes, you’re right. I think some of the deals closure is taking time. And — but however, I think the deal pipeline is still pretty strong. There are large opportunities that we are chasing. And we are really hopeful that in — we will have those closures in Q2 and the subsequent quarters. Yeah, to that extent, I think that lack of conversion is really reflecting in the sort of softer revenue growth. But I think we’re pretty confident that come Q2 and Q3, we will see accelerated pipeline closures.

Bhavik Mehta — J.P. Morgan — Analyst

Yeah. Gaurav?

Gaurav Bajaj — Chief Financial Officer

Yeah. Hi, Bhavik. On the margin, our EBITDA is 20 basis points lower compared to the last quarter in spite of the wage hike that has been rolled out during the quarter for the significant amount of Tata Elxsian employees. In terms of the brief margin walk, we have an impact of 140 basis points from the salary hikes plus the piece of cost that we have taken for a month in this quarter, because as we mentioned in the last quarter that we went ahead and we got an approval for the employee stock option plan. So, that has been rolled out and communicated to the employees in this quarter. The cost for one month has come in. So, including both wage hike and that ESOP, that the impact is about 140 basis points. We continue to reduce our contractors since we have better bench strength and the train to campus is available to us. So, that provides us a leverage of about 40 basis points to 50 basis points to do that reduction and rollover from the TPC contractors to our own employees. We have exchange movement gain of about 20 basis points odd on to the margin walk and another 50 basis points coming from the raw operating leverage in terms of the parameter rationalizations and improvement in the utilization with a volume growth and the scale. So, that makes up total of 20 basis point impact on a quarter-to-quarter sequential basis on our operating margins.

Bhavik Mehta — J.P. Morgan — Analyst

Thank you. That’s very helpful.

Operator

Thank you. [Operator Instructions] Next question is from the line from Vimal Gohil from Alchemy Capital. Please, go ahead.

Vimal Gohil — Alchemy Capital Management — Analyst

Yes, sir. Thank you for the opportunity. My question is, again, on automotive. Sir, how should we see that performance in the last two quarters versus what we are experiencing and reading about in the overall automotive industry, given the fact that most of the OEMs are — and of course, Tier 1 and Tier 2 suppliers are also talking of areas where we are heavily invested in, these are high-growth areas, and there is an urgency of investments over there being spoken about by our customers — potential and existing customers. So, how should we reconcile our relatively softer performance there? And what gives us the confidence that Q2 should be much better? Is it all related to macro, because macro clearly tells us that things are moving probably faster than what we expected in the automotive space especially? Thanks.

Manoj Raghavan — Chief Executive Officer & Managing Director

Yeah. I think I’ve answered that question. I mean, just to repeat, right? So, the deal pipeline is pretty strong. We still have pretty large opportunities that we have placed bids on and what was supposed to be closed in early part of Q1 is still open. So, customers are definitely taking their time to — especially, on large bids and so on. So, I think it is natural given the current macroeconomic situation. Customers are being careful before they roll out, especially, the large deals and so on. So, I think the fact that we have have a good pipeline and we see closures happening and — in Q2, we rest the discussion we’ve had with a number of our customers. We really hope that additional revenues will kick in, in Q2. So, that’s the confidence that we have.

Vimal Gohil — Alchemy Capital Management — Analyst

Understood. And sir, in — within broadcast and comms, have we essentially bottomed out or still thinngs are — things will continue to remain soft for the entire year? And lastly, just one point on transportation as well. Given the last two quarters of performance, do we expect FY ’24 growth rates in transportation to be lower than what we had in, let’s say, ’23? Would that be a fair assessment? Yeah. Thanks. That’s all from my side.

Manoj Raghavan — Chief Executive Officer & Managing Director

No, we wouldn’t want to call out anything at this point in time given that we are only in the Q1 of the financial year. I think we would definitely want to wait and see at least a quarter or more, right, to make that sort of a conclusion. But we still remain pretty confident that we are on a good wicket as far as our transportation or automotive businesses.

Regarding the media and communication business, it’s not just us, it’s the entire industry that — I mean, you see multiple of our competition has also shown either de-growth or significant de-growth in that business. Thankfully, for us, we have held our ground, even though we have not grown significantly, but I think we have done a very good creditable effort to maintain our business at where it is. And especially, if you look at our top five, top 10 customers, I think, we’ve actually even won deals and improved our market share as compared to our competition. So, I think — but having said that, the industry is still — media and communication industry is still pretty soft. I wouldn’t want to call it a washout for the full financial year. I think we would want wait and watch and see how Q2 — how the deal closures happen in Q2 and then take a call on all the industries.

Vimal Gohil — Alchemy Capital Management — Analyst

Thank you, sir, and wishing you all the very best.

Manoj Raghavan — Chief Executive Officer & Managing Director

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Anika Mittal from NVEST Analytics. Please, go ahead.

Anika Mittal — NVEST Analytics — Analyst

Hello. Good evening, sir. Am I audible? Hello?

Manoj Raghavan — Chief Executive Officer & Managing Director

Yeah, you are.

Anika Mittal — NVEST Analytics — Analyst

Okay. Sir, my question is from the healthcare segment side. So, what is your our near-term outlook on this particular segment for FY ’24, sir?

Manoj Raghavan — Chief Executive Officer & Managing Director

I think over the last two quarters, we’ve had some — I think the healthcare and life sciences business did not show the growth that we were expecting. But I’m happy to — and I think that is also because of the transition in the Euro MDR activities. And that has taken us a couple of quarters to get over that. But, I think this quarter, we’ve demonstrated good, new deals and good product wins there. So, that has really helped us to show a good growth. We are pretty optimistic that we will be able to show this continued growth in the subsequent quarters also. Yeah, but I’ll not be able to give you a number for the financial year. I don’t — we don’t give that projections. But I think we are on the recovery path and we hope to grow back to a full-year growth rate in this business pretty soon.

Anika Mittal — NVEST Analytics — Analyst

That’s it from my side. Thank you.

Operator

Thank you. Next question is from the line of Bhavik Mehta from J.P. Morgan. Please, go ahead.

Bhavik Mehta — J.P. Morgan — Analyst

Thank you, once again. Gaurav, just on the margins, like any wage hikes done for a large part of the employees or should we expect the wage hikes to come in 2Q as well? And secondly, your net employee addition has seen an uptick this quarter. So, how should we read that? I mean, is this a sign of improving demand that you see going forward or is this a way to optimize the costs by reducing the dependency on the subcontractors as you want your own employees to be utilized more on the projects?

Manoj Raghavan — Chief Executive Officer & Managing Director

Yeah. So, I’ll answer that. I think we have grown wage hikes in Q1 for all our junior staff. I think almost 70% of the headcount we have grown for wage hikes. For the senior staff, the wage hikes would come in this quarter, from July 1 onwards, right? So, the new hires that we have been doing. I think it’s something that we continue to do looking at the — I mean, we’re not looking at a quarter-on-quarter basis to really squeeze the hiring. These are offers that we have made and we continue to honor all offers that we have made. We strongly believe that we need to build our resource pipeline for the future quarters. And I think this is an ongoing — I mean, we’re not really diluting that focus of stopping hiring and so on. We continue to hire at our normal rate. That’s also because of the confidence that we strongly believe that the industry will recover and the bench that we build today will be useful for us moving forward. So, we not taking a very short-term-ish approach here. And I think we have — since we have maintained our EBITDA margins and we’re doing reasonably well, the — that also gives us a question to really go ahead and not take those knee jerk reactions.

Bhavik Mehta — J.P. Morgan — Analyst

Okay. And just lastly, on generative AI, how should we look at the impact of generative AI on the engineering services business? Any color over there will be very helpful.

Nitin Pai — Chief Marketing Officer & Chief Strategy Officer

Yeah. So, this is Nitin here. Bhavik, maybe I’ll take that. The way we see it is twofold, right? On one hand, in product per se, especially, because of the fact that we deal with physical product, whether it’s a car, whether it’s network equipment, boxes and services, or medical equipment, the direct impact of generative AI on such products is very limited. Why? Because they all deal with — if I may use the word, specific AI. So, therefore, the kind of training that you do, the kind of models that you build, the kind of algorithms that power an autonomous car or medical diagnosis or recommendation engine are quite different from what we would classically use ChatGPT or generative AI for. So, to that extent, AI becomes more and more relevant, AI becomes more and more predominant within the portfolio of customers. But it’s not coming from generative AI per se. In our view, generative AI has some impact on product development, to the extent that we are working on, how can you aid coding, especially, as a starting point rather than starting from scratch, how can you improve testing using generative AI, especially where you had to spend time on creating test cases, describing use case scenarios. There are certain benefits to using generative AI, which are already in the works for us in each of our segments. But the overarching comment would be that in the product engineering business, it has lesser impact. It has a far greater impact when you talk of areas like marketing, customer experience, customer care, and so on. And these are typical BPO-KPO activities. You can certainly imagine that impact there is far, far higher, and we have no play in those.

Bhavik Mehta — J.P. Morgan — Analyst

Okay. That’s very helpful. Thank you.

Operator

Thank you. Next question is from the line of Rohan Nagpal from Helios Capital. Please, go ahead.

Rohan Nagpal — Helios Capital — Analyst

Hi. Thank you. Could you talk a little bit about the demand trends that you’re seeing across North America and Europe? I see a declining — decline in the revenue mix coming from the U.S. and an increase in Europe. So, can you give some color on the potential demand that you’re seeing?

Manoj Raghavan — Chief Executive Officer & Managing Director

Yeah. I think just based on one quarter’s data, it’s very difficult to to make that — to make any — very clear reasons as to why

Demand is lower in one region other if you look at it maybe a couple of quarters ago, I think demand from North America was badly strong and so on. So, that keeps happening. But in general, let me tell you, a lot of our Europe revenues is transportation-led, whereas a lot of North America is media and communication-led. So, to that extent, the relative slowing down in media and communication vertical can be badly correlated to the North America market. Having said that, the medical business is also pretty strong in North America. So, we’re really hopeful that, that piece will pick up. So, we look at it both North America and Europe as very, very key strategic geographies for us and we continue to invest in those geographies. You would have seen the press releases as well as our — we talked about opening a new office in Troy. So, we continue to invest in these geographies. And we are hopeful that growth will return eventually.

Rohan Nagpal — Helios Capital — Analyst

Got it. That’s helpful. Thank you.

Operator

Thank you. Next question is from the line of Arun from Subh Labh Research. Please, go ahead.

Arun Maroti — Subh Labh Research — Analyst

Yeah. Hi. Thanks for the opportunity, sir. First of all, congratulations to the management team who are continuing with the steady, good set of opportunity performance in a tough economic environment.

Operator

Arun, your voice is not coming clearly.

Arun Maroti — Subh Labh Research — Analyst

Yeah. Am I audible now?

Operator

Yes.

Manoj Raghavan — Chief Executive Officer & Managing Director

Yeah, better.

Arun Maroti — Subh Labh Research — Analyst

Yeah. First of all, congratulations to the management team for continuing with the steady good set of opportunity performance in tough macroeconomics. My question is to Mr. Gaurav here. In the current quarter’s financials, we can see, in both the segments, especially in the software development segment, our absolute profit has increased much more than the revenue. But some unallocated expenses have impacted our profitability. So, if you can share some more detail on the increase in unallocated expenses, that will be quite helpful, sir.

And the second question is, this quarter, our effective tax rate has increased due to tax holiday period completed in two of the SEZ. So, can you guide for this financial year as a whole, whether this will be the benchmark rate or do you see any further changes in the effective tax rate? Thank you, sir. That’s it from my side.

Gaurav Bajaj — Chief Financial Officer

Okay. Hey, Arun. On your first question on the segment results, I think you are bringing it from the segment result. Under segments, since we embark on the digital transformation, so we did a little bit of reclassification, internal changes in the methodology of the allocation and the unallocated expenses. To that excent, you see that there is a difference from the quarter-to-quarter. But what we have published in the Quarter 1 would be the basis to go forward in the future. So, you should do the benchmarking and comparative on the Quarter 1 basis going forward.

On your second question on the effective tax rate, I think we have been highlighting in the last couple of quarters that we have been coming — we will be coming out of a couple of undertaking — under in the SEZ where our tax bracket will move, exemption will move from 100% to 50%. And you see the impact of the same coming in this financial year. So, whatever is the ETR of the current quarter here would be the threshold and the range for the tax rate going forward in this financial year.

Akshay Ramnani — Axis Capital Ltd. — Analyst

Okay. Thank you, sir.

Operator

Thank you. The next question is from the line of Satadru Chakraborty [Phonetic] from Chakraborty Family Office. Please, go ahead.

Satadru Chakraborty — Chakraborty Family Office — Analyst

Yeah. Hello. Good evening. Congratulations on a fair and decent set of numbers. I basically have a bit — not really a lot of finance-related questions, but a bit more on the macro side. So, the first question maybe is on the transportation vertical per se. The question is really around software-defined vehicles, because I see a lot of Tier 1, Tier 2 OEMs going from a product to a solution side. A lot of them are now trying to sell SaaS solutions. So, my question really was, how do you guys see all of this integration into the global master, let’s say, bus going ahead, because it seems to me that the market is just not having a lot of standardization? And then if you have a brake supplier, if you have a battery supplier, if you have an engine component producer doing their own solutions, how easy or difficult it is to integrate all of these in the digital stack and then give this out as a package, if you will, to an OEM client?

Nitin Pai — Chief Marketing Officer & Chief Strategy Officer

Hi, Satadru. This is Nitin Pai here. Maybe I’ll take that. On one hand, if you look at the software-defined vehicles, I think it’s fundamentally driven by OEMs, and it has been driven precisely with that point in mind, which is that ultimately, the car is an amalgamation of software, hardware, and mechanical elements coming from houses of suppliers. And a lot of these are black boxes, and therefore, if you’re trying to drive performance out of all of those, if you’re trying to — speeding up or create agility out of how you update functionality and features in the car, you not only have to work with, again, the same thousands of suppliers, but each of those changes cost you money and each of the changes require you to go through a full validation cycle. So, to that extent, I think the — premise SDV sells exactly that, but there are two opportunities. One, the opportunity to create agility in the features and functionality of the vehicle, both what is going to be delivered and produced newly, but also what is available already in the fleet through software updates. So, that’s part one. And I think, part two, which is more interesting, is equally the monetization opportunity. Now that you have a connection to the consumer directly, which were otherwise not available to OEMs, they were only connected through dealers, it’s only dealers who had a relationship, so does that relationship now create opportunities to monetize. And at monetization, it can take completely different path, right, from subscription waste, features, to over-the-top services that you can deliver and so on and so forth. So, I think the point remains that software-defined vehicles are here to stay. The level of software-defined is always a question. I’ll just call it software-centric, because different OEMs will require and can afford different levels of ownership. In some cases, it may not even be necessary to try and own everything. You may just choose to take a selective view on what software you own and what software you run. But I think the premises is very clear: agility and monetization. So, that’s, I think, a one-way street. You will see that change.

I hope I have kind of helped you understand.

Satadru Chakraborty — Chakraborty Family Office — Analyst

Yes, absolutely. That’s very helpful. A similar sort of question on the healthcare and life sciences space. I was sort of trying to read the balance sheets of a few, let’s say, global medical device companies. For some reason, the last two, three quarters have been very choppy for them. I mean, the pharma companies are struggling, but the med devices are struggling even more. I just had a very generic question on how do you guys see this — the lucrativeness of this space going ahead, because I know that gross profit margins are high, and I know that there a lot of software definitions happening in the med devices space, a lot of connected devices, IoT and then running analytics on top? So, just give me a sense of how do you see the overall market getting better or worse? And how are you guys planning to play in this market basically, setting up yourself for the future?

Nitin Pai — Chief Marketing Officer & Chief Strategy Officer

Sure, Satadru. This is Nitin, again. So, I’ll take that. If you look at the premise on which we are — and which we, in fact, even build to focus around the medical devices and healthcare industry, it was based on the fundamental assumption that in general, the healthcare industry has been fairly conservative. Product life cycles are very, very long. In fact, there are devices that are designed 15 years, 20 years, 25 years back that continue to run. And the advent of cloud, AI, connected devices essentially means that you can actually afford to deliver a far more superior customer experience, far more data-led insights that directly affect patient outcomes and help. And therefore, it is essential that all products actually pivot to in terms of the equivalent of a car, you need to be connected, you need to be automated, I’ll not call it autonomous, and you definitely need to look at electronification, because a lot of the previous generation medical devices were electromechanical rather than electronics.

So, that’s the premise on which we’ve built the business and you’ll see that over the last five years from the time we started, moved from zero revenue to about 15%, right? And that’s been a business that’s grown almost 10% quarter-on-quarter for few years to go. So, to that extent, I think there is confidence that as industry is actually behind the automotive industry in terms of the transition that it needs to make even though there are no regulations that are driving it unlike in the automotive industry where you have sustainability, you have ESG concerns that are — put stakes in the ground as far as countries are concerned. This is really an opportunity to change because that is what would sell in the future, that is what will create monetization in the future. So, to that extent, I think there is great confidence that, that pivot has to continue. Software, cloud, IoT, connected devices, intelligence. That is an inexorable path for medical devices. All of them have to get there.

The pharma industry has to adopt it to some extent too in the sense that as pharma industry moves from prescription-based billing to outcome-based billing, you will need to then monitor a patient vitals, you will need to provide for patient tracking and so on. All these are devices that will do it for them, because the tax will be then decided based on the markers. And that will be personalized based on the actual patient profile. So, in our view I think the fundamentals of electronics and dominant part of what medical devices company need to do is given. The rate that we’ll do it at is not driven at the same rate as automotive — with automotive, as priority is coming from regulatory and regional or country-based decisions that have been made on when they will stop or turn off ice and so on. The medical device industry does not have that trigger, but has a trigger of how they make money in the future. So, that is what creates absolute confidence. And I think we’re just at the start of that. We know it’s a the conservative industry. It’s difficult to get in. There are barriers of entry. But we have a marquee set of logos that we work with. We are quite confident of our ability to stay incredibly relevant to these companies.

Satadru Chakraborty — Chakraborty Family Office — Analyst

That’s very helpful.

Nitin Pai — Chief Marketing Officer & Chief Strategy Officer

Yes.

Satadru Chakraborty — Chakraborty Family Office — Analyst

Maybe just one last question from my side. This is, let’s say, a mix of talent management plus the factors that you guys playing. It always fascinates me how a company can play in these three diverse EPD verticals and still be successful. I know the broad-based argument that if one sector doesn’t grow good, then you can diversify and so on and so forth. But if I look at a company — if I look at the big, big software players, the Accentures, the Capgeminis or even a big brother like TCSs, for them, that makes sense. But I’m always curious how you guys think of talent, because these three are so diverse verticals that, let’s say, the domain knowledge is very different, the software standards are so different. So, apart from the fact that, of course, you can have some basic level of integration, how do you guys just manage talent and just see these three very diverse verticals sustaining, because I’ll be very frank, I haven’t seen another company like Tata Elxsi doing so diverse verticals and still having so great returns over so many years. So, how do you guys look at talent management and then these three diverse verticals in general?

Nitin Pai — Chief Marketing Officer & Chief Strategy Officer

Sure, Satadru. So, Nitin, again. Again, just like Coke or KFC, I’m not going to reveal all our secrets, but having said that, maybe I’ll start with the fundamental point, right, that when you’re doing this for 25 years and more, and this is the only business that you do, believe me, there’s a whole lot of ingrained company knowledge that reflects in the processes and its quality systems and way we both hire and manage talent. So, that’s the first fundamental building block that we build on. Equally, we also acknowledge the fact that these three industries are so different that the domain knowledge, especially, as we move quickly up the seniority and experience levels, demands that you have training programs, you have training methodologies, you have quality systems, you have — everything that is different for each of these verticals. And to our advantage, I think that’s also our core competency, that’s also what makes it very difficult for a generic IT player who depend on fungibility, who depend on training that is industrialized, I mean, you’d have trainings that people take just for 15 days, one month, and then are ready for billing. For us, it’s nowhere close to that. For us, it’s multiples of that timeline to get people ready. But I think those are — that’s the way we do business, and hopefully, that’s the secret sauce that we bring.

Satadru Chakraborty — Chakraborty Family Office — Analyst

Very helpful. Thank you, gentlemen, and all the very best.

Nitin Pai — Chief Marketing Officer & Chief Strategy Officer

Thank you, Satadru. Take care.

Operator

Thank you. Next question is from the line of Chirag from Ashika Institutional Equities. Please, go ahead.

Chirag Kachhadiya — Ashika Institutional Equities — Analyst

Hi, sir. Sir, I want to understand like whatever the development is happening in India across the sector like say, EMS, defense, automotive, and rail and etc., and the order bidding is going through the global players, which are — some of them are our clients. So, I want to understand our relation with them that how are we going to benefit by taking orders from the global wins which are fuelling growth of the Indian economy for the diverse sectors, yeah?

Nitin Pai — Chief Marketing Officer & Chief Strategy Officer

Yeah. Maybe I’ll take that. Very quick view is, we definitely have businesses for multiple sectors, whether it’s automotive or whether it is rail or [Technical Issues] where there are programs that are won by suppliers or suppliers to supply to using in or to [Technical Issues] in India, including rail, we find that we’re supporting those programs. And our relevance becomes even higher, especially, if you’re competing with regional or overseas-based competition. So, to that extent, the fact that we are in India, within proximity, understanding of those customers, ease of communication, ease of coordination, I think, only adds to our attractiveness. But please note, having said that, any program in India obviously comes at cost-equation that are quite different from, let’s say, doing the same project for a deal in Spain or a deal in the U.S. and so on. So, you also have to live with that challenge, which is that you will have that much more of a pressure on the pricing and the deal value. So, it’s a conscious balance that we have to strike in terms of what is right for us, what is relevant, and despite the fact that we can win almost anything that we bid for.

Chirag Kachhadiya — Ashika Institutional Equities — Analyst

Okay. And how is your supply side scenario situation in Europe and the U.S.A. for manpower and other related, sir?

Manoj Raghavan — Chief Executive Officer & Managing Director

Yeah. I think as you know, we are — 90% of our resources are based in India. It’s only 10% that are based overseas. So, to that extent, I think we are less dependent on resources in the overseas market. Having said that, I think the resource situation definitely has become a lot more easier. We are able to hire resources on need basis. But in general, as Gaurav said, we are removing the — or we are reducing the dependency on third party contractors and filling positions using our own internal resources for better margins and so on, right? So, that — we will continue that approach.

Chirag Kachhadiya — Ashika Institutional Equities — Analyst

Okay. Thank you so much, sir, and all the very best.

Manoj Raghavan — Chief Executive Officer & Managing Director

Thank you.

Operator

Thank you. [Operator Instructions] Next question is from Akshay Ramnani from Axis Capital. Please, go ahead.

Akshay Ramnani — Axis Capital Ltd. — Analyst

Hi. Thanks for taking my questions. So, first question for Manoj, so you said that the build pipeline gives you the confidence of the growth acceleration going through FY ’24. Now, this is despite another comment of soft media and communications at least in the near term. So, I just wanted to understand that is the strength of transportation and medical enough to power that growth acceleration going forward? And while you’re talking about demand, if you can also talk about how do you see the IDV business going forward?

Manoj Raghavan — Chief Executive Officer & Managing Director

Sure. So, I think, yes, as I said, growth has come back in our medical business and we definitely hope that we will see some acceleration in the transportation business moving forward. Media and communication, we are still hopeful, though it is very difficult to give a comment in terms of how much of recovery will happen. But definitely as compared to a lot of our peers and other global players, we still continue to deliver value to our customers and at least not de-grow in that media and communication business. So, that’s something that we will constantly keep a watch on. Regarding the industrial design business, as I said, it’s a smaller business, it’s a very, very critical business for us. With that business also has grown. As compared to last financial year, it has grown significantly. But however, on a quarter-to-quarter basis, we see some amount of either flatness or some amount of ups and downs. We are still — it’s still in the early stages to see how we can have a steady quarter-on-quarter growth there. But that’s something that we’re working on. We are — we definitely are hopeful that the industrial design business will also continue to grow significantly over the next three quarters for the financial year. So, I think all of that gives us a confidence that in spite of the media and communication business being a little soft, the other businesses that we have should definitely be able to continue the growth path, and then — and essentially, help us to show a decent growth in the financial year.

Akshay Ramnani — Axis Capital Ltd. — Analyst

Right. So, on IDV business, over the past two quarters, we have seen a flattish performance. So, is this more to do with stand-alone IDV customers or is it some EPD vertical-specific customers where we have seen some softness on the IDV side?

Manoj Raghavan — Chief Executive Officer & Managing Director

It is a combination of both, right? IDV also does a lot of work for the media and communication business. So, that part of the business is a little slow as similar to what our EPD business is. And — but however, IDV also have their own independent customers. And then we are really focusing on that to see how we can grow that business.

Akshay Ramnani — Axis Capital Ltd. — Analyst

Got it. Next question is for Gaurav. So, Gaurav, you talked about one month of the ESOP cost impacting this quarter. When I look at the release, the release shows that about INR40 lakhs of ESOP cost was recognized in Q1. So, even for one month, that number appears quite low. So, if you can please help me understand this quarter’s ESOP expenses and how do you see the sustainable cost which you should think about going forward?

Gaurav Bajaj — Chief Financial Officer

The first month the cost is low, it depends upon the number of the grants unit that has been communicated to the employees, there is still some communication which is left to be done, which will be done in the Quarter 2. Hence, what we talked about in the previous quarter or previous quarter earning call also, that going forward, the impact for the PSOP grants once done completely to all the employees would be about 0.4% to 0.5%.

Akshay Ramnani — Axis Capital Ltd. — Analyst

Got it. And since you have rolled out the wage hikes for the rest 30% employees, so what kind of margin impact would that have in Q2?

Gaurav Bajaj — Chief Financial Officer

So, we have not yet — we are in the still in that progress — process of working out wage hikes and the impact for the remaining employees, which will happen effective Quarter 2. But I think with the scale and the growth that we expect to have in the quarters, in the next quarter also, we don’t see any significant impact. But yes, there will be some wage hike impact. But at the same time, we feel that can be compensated with the other operating leverage and the growth in the volumes, total volumes.

Akshay Ramnani — Axis Capital Ltd. — Analyst

Got it. And then coming to the utilization part. So, if you can just touch upon what level of utilization are we operating at and what is the sustainable level which you think is good for the company? Thanks.

Manoj Raghavan — Chief Executive Officer & Managing Director

I think currently, we are operating in a 72%, 72.5% as a utilization. Yes, I think that is also because of the fact that we — a number of fresh engineers that we have hired have come out of their training period and now they are on the bench, right? So, the good part for us is we have pretty good bench strength now. So, as the business picks up, all the training investments and all the hiring investments that we have put in, we’ll be able to use them and grow our revenues. So, for us, we would be really comfortable to see how we can push this utilization from 72%, 72.5%, over a period of time, to somewhere closer to 80% or so, right? So, that will be something we are aiming for. And so, as you see, we have enough headroom and leeway to utilize these trained resources. And that’s something that we will focus on, on the — in the next few quarters.

Akshay Ramnani — Axis Capital Ltd. — Analyst

Thanks for answering my questions, sir.

Operator

Thank you. [Operator Instructions] The next question is from the line of Nitin Gupta [Phonetic], individual investor. Please, go ahead. Nitin Gupta, will you please unmute your line? Yeah, go ahead.

Nitin Gupta — Individual Investor — Analyst

Hello? Am I audible?

Operator

Yes, you are.

Nitin Gupta — Individual Investor — Analyst

Yeah. My question is [Technical Issues]

Operator

Nitin, sorry, but we are losing your audio in between.

Nitin Gupta — Individual Investor — Analyst

Hello? Is it better now?

Operator

Yes.

Nitin Gupta — Individual Investor — Analyst

Yeah. My question is with respect to the hiring of — like what are the plans for the complete financial year?

Manoj Raghavan — Chief Executive Officer & Managing Director

Yeah. So, for the complete financial year, if you look at hiring of freshers, we would be hiring around anyway between 1,800 to 2000 engineers, of course, depending on the joining ratios and so on. Lateral hiring will be always need-based based on specific projects or engagements. But going the fact that we have enough bench strength, I think we will first focus on utilizing the bench strength before going out and hiring laterals.

Nitin Gupta — Individual Investor — Analyst

Okay. Thank you for that. And the last question would be like, can we expect these kind of margins going ahead for the full financial year?

Manoj Raghavan — Chief Executive Officer & Managing Director

We don’t give margin guidelines and you must look at our track record over the last eight to 12 quarters, right? You will get the answers to your question.

Nitin Gupta — Individual Investor — Analyst

Okay. That would be it from my side, sir. Thank you.

Operator

Thank you. Next question is on the line of Rajat Kumar [Phonetic] individual investor. Please, go ahead.

Rajat Kumar — Individual Investor — Analyst

Yeah. Good evening [Technical Issues] Just two, three macro questions I have. The first one is on the ADAS technology. So, I just want to know, given that we are part of the Tata Group, so how do we make the insights with the other vendors given our exposure to China, and just want to like competition like Samsung they are better placed compared to Tata Elxsi. So, how do we work on this?

Nitin Pai — Chief Marketing Officer & Chief Strategy Officer

Yeah. So, maybe I’ll take that. Technically, we don’t compete with Samsung. We are a potential supplier to Samsung, right? And when you say Samsung, I presume you mean it in the context of HARMAN one, which is the company that’s [Speech Overlap] acquired and grew. So, to that extent, HARMAN would be a potential customer.

Manoj Raghavan — Chief Executive Officer & Managing Director

It is a customer.

Nitin Pai — Chief Marketing Officer & Chief Strategy Officer

It is a customer rather than a competitor. So, in that sense, there is no conflict of interests, sir, and it’s not to do with whether we work with Tata Motors or [Indecipherable] or not. The question is, do we have capabilities on the software side that add to what they’re trying to do in terms of product — engineering and product development? And to that extent, we’re incredibly relevant.

Rajat Kumar — Individual Investor — Analyst

Okay. Got it. Yeah. And second thing, obviously, developing the robots linked to the da Vinci — this is more on the medical side, because our seniors, that’s why they talk about the industrial robotics. So, just want to know what work we are doing on the medical side.

Nitin Pai — Chief Marketing Officer & Chief Strategy Officer

Yeah. So, there is automation, I’ll not call it fully robotized surgery or fully automatic surgery, but there is a fair amount of work that you’re doing both with AI as well as robotics, that are to do with automating and bringing into — bringing in precision surgery. But at this time, that is all that I can tell you.

Rajat Kumar — Individual Investor — Analyst

Okay. Currently, that is the only US FDA approved robotic system, right, so…

Nitin Pai — Chief Marketing Officer & Chief Strategy Officer

That’s right. So, to that extent, that’s why I’m hesitant to say that we are working with fully robotized systems. But there is some level of automation and precision surgery that happens in multiple other spaces. I mean, think about eye care for example, you will see that there are laser-guided surgeries that work on cataracts and so on. So, it’s not that there is no robotic surgery in other areas. If you look at cancer, there is equally guided robotic treatments that happen for chemo, radiation, and so on. So, all I would encourage you to look at is the fact that robotics and automation applies in many levels, just like in cars, we have from Level 1 to Level 5.

Rajat Kumar — Individual Investor — Analyst

Okay. My question is more from a strategic standpoint. So, like in a three-year to five-year standpoint, will we be the challenging the da Vinci Systems and that’s what…

Nitin Pai — Chief Marketing Officer & Chief Strategy Officer

No. So, please note, again, like we made the comment on Samsung and so on, we would hope that we work with da Vincis and create many more da Vincis by supporting them.

Rajat Kumar — Individual Investor — Analyst

Okay. Got it. Sir, and lastly, how would the opportunity from the in-flight entertainment given that Air India is now part of the Tata Group and there’s a lot of what is happening on the aviation here. So, are we going to leverage any of this and get more work on this piece?

Manoj Raghavan — Chief Executive Officer & Managing Director

Yeah. In-flight entertainment is a very niche area and I think there is just a couple of companies that work on it. And the opportunity is not very big in that sense. But however, as you rightly said, Air India, definitely, I know is a group company and there are a lot of other opportunities that we are working with Air India and supporting them, not necessarily on the in-flight entertainment. But yes, if there is an opportunity, definitely we will definitely get involved because we’re bringing enough competencies on audio, video, the play-out, the entire video capabilities that we have in the media and communication businesses fully relevant to to this use case. But then there are definitely a lot of regulations, safety and number of standards that you need to understand. So, to that extent, yes, the opportunity is not as big to really focus and go after that. And the number of players are also very, very limited. But we are in discussions with Air India for a lot of other opportunities. And yeah, we will leverage that Air India to see what we can do in the avionics or airline industry.

Rajat Kumar — Individual Investor — Analyst

Yeah. Thanks a lot, sir. Thanks for answering the questions.

Operator

Thank you. The next question is from the line of Rohan Nagpal from Helios Capital. Please, go ahead.

Rohan Nagpal — Helios Capital — Analyst

Thanks for the follow-up. You break out your vertical exposure for the embedded product design segment and you briefly touched on the vertical exposure for the IDV segment. Could you flesh out the vertical exposure in the IDV and SI segments as well?

Manoj Raghavan — Chief Executive Officer & Managing Director

IDV, definitely, when — I mean, I think about three years to four years ago, IDV had its own set of customers and needed to go around. But we consciously took a decision to focus IDV capabilities around the same three verticals that we have, which is transportation, media and communication, and healthcare. So, today, if you ask me, a majority of our revenues in IDV space come from these three verticals. Of course, there are a number of other verticals that we go after that EPD doesn’t service, right? So, yes, so there is a lot of effort and focus that we have brought in, including from a sales perspective to really cross-sell IDV into all our EPD customers, right? So, that’s something that we continue.

SI is a totally different business. SI is primarily a business based out of India. We provide system integration services to a different set of customers, not necessarily the three verticals. And that’s something, I think, we would be a little more opportunistic. And then, of course, even in SI, what we’re trying to do is to see how we can leverage like capabilities to address the three verticals in EPD. It’s at the early stage. IDV has progressed a lot, but SI is still a very early stage. And however — and especially, on the — as we look at building our own products and so on, SI plays a very, very key role on the run management part, right? And that’s something, especially, on the cloud and data center and so on, that is where we intend to use their capabilities. But again, as I said, it is still pretty early-stage there.

Rohan Nagpal — Helios Capital — Analyst

Got it. Thank you.

Nitin Pai — Chief Marketing Officer & Chief Strategy Officer

I’ll just add one comment. At this time, the fact that IDV is a little volatile, it’s not exactly a constant number quarter-on-quarter, does not allow us to publish a mix because you will not read very much from it. I think if you give us a few quarters — and that’s something that would be consolidated, we’ll be able to draw a clear signature to say, okay, this much percentage you can trust to come from automotive, this much you can trust to come from media. And we have a certain amount of sustainability, rather, a lack of volatility that makes it meaningful to publish the breakdown.

Rohan Nagpal — Helios Capital — Analyst

So, I just noted it. That’s helpful.

Nitin Pai — Chief Marketing Officer & Chief Strategy Officer

Yeah.

Rohan Nagpal — Helios Capital — Analyst

That’s helpful. Thank you.

Operator

Thank you very much. Ladies and gentlemen, we’ll take the last question from the line of Satadru Chakraborty from Chakraborty Family Office. Please, go ahead.

Satadru Chakraborty — Chakraborty Family Office — Analyst

Yes. Thank you. Just one final follow-up question and maybe feel free to answer it as you see fit or not. This is really around the IP of Tata Technologies. Obviously, it’s coming out. So, maybe my preliminary observation is very bad, but I do see there are lot of similarities, right? I mean, from the very quantitative stuff I have seen that are related-party transactions happened in ’21 and ’22. Just help me understand why should we treat it as two different companies and what is really the strategic differentiation within the Tata organization that we have to really differentiate between the two? And I know that the history and the corporate structure and Tata Motors wants to spin this up. But just probably your true sense on this, what external industrial looks at?

Manoj Raghavan — Chief Executive Officer & Managing Director

Yeah. So, as you rightly pointed out, Tata Technologies is a subsidiary of Tata Motors, right? And they also have a significant portion of the revenue coming in from group companies, which is Tata Motors and JLR and so on. And they primarily play in the — if you ask me, I would say the mechanical engineering space, they have some — they do work on ERP, which is SAP and so on. And recently, they’ve built capabilities in the avionics industry with Airbus and so on, right? So, that is what Tata Technologies stands for.

Tata Elxsi on the other hand is a full-fledged product engineering, what do you say, majority of our business comes in electronics and embedded software domain. And we work across three different verticals, right? Automotive, healthcare, and media and communications. So, to that extent, if you look at it — if you look at the automotive industry, it might seem as if there is clash or a conflict situation. But actually we are pretty orthogonal, the service offerings are pretty orthogonal. So — and there are quite some more places where we work together and provide services and solutions to the customer. So, to that extent, I would say, we definitely can continue to coexist as two different companies.

Satadru Chakraborty — Chakraborty Family Office — Analyst

All right. Thank you.

Manoj Raghavan — Chief Executive Officer & Managing Director

Thank you.

Operator

Thank you very much. And I’ll hand the conference over to the management for closing comments.

Manoj Raghavan — Chief Executive Officer & Managing Director

Yeah. Thank you, all, for taking the time out for this Q1 conference call. We definitely hope to see you again in the Q2 conference. And definitely, there is a lot of commitment from our side, from our employees, to ensure that we deliver good results in the coming quarters, right? So, that’s something that we are very much aware of and we continue to pursue these large strategic deals that will really help to show a consistent quarter-on-quarter growth. And that’s something that definitely we will stay focused on.

Thank you so muc, once again, and look forward to seeing you again next quarter.

Operator

[Operator Closing Remarks]