Tata Elxsi Ltd (TATAELXSI) Q3 FY23 Earnings Concall Transcript

Tata Elxsi Ltd (NSE: TATAELXSI) Q3 FY23 Earnings Concall dated Jan. 25, 2023

Corporate Participants:

Manoj Raghavan — Chief Executive Officer and Managing Director

Gaurav Bajaj — Chief Financial Officer

Pai Nitin — Chief Marketing Officer and Chief Strategy Officer

Analysts:

Shashank Ganesh — Analyst

Bhavik Mehta — JP Morgan — Analyst

Apurva Prasad — HDFC Securities — Analyst

Vimal Gohil — Alchemy Capital Management — Analyst

Urmil Shah — Aegis Federal Life Insurance — Analyst

Naveen Bothra — — Analyst

Ravin Naredi — Naredi Investments — Analyst

Mayur Matani — Mahesh Kumar and Company — Analyst

Hiren Ved — Alchemy Capital Management — Analyst

Akshay Ramnani — Axis Capital — Analyst

Karan Uppal — PhillipCapital — Analyst

Anik Mittal — US Research — Analyst

Tushar Bohra — MK Ventures — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Tata Elxsi Limited Q3 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 — Analyst

Thank you very much, Faizan. Good afternoon — good evening to all the participants on the call. Good morning if you’re joining us from the western side. Before we proceed with 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 risks that could cause further [Phonetic] 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’s 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 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 — Chief Executive Officer and Managing Director

Yes, thank you. Thank you, Shashank. Good evening, everyone. Thank you for joining the Q3 earnings call this evening. Wishing you all a very successful and prosperous 2023. I’m glad to report that in a challenging macroeconomic and business environment across regions and markets, we are reporting a steady quarter with a healthy growth in revenues and net profit, and improvement in our margins as compared to last quarter. Revenues from operation during the third quarter stood at 817.7 crores. Quarter-on-quarter growth of 7.2% and Y-o-Y growth of 28.7%. Our EBITDA for the quarter was at 246.9 crores, growing by 9% quarter-on-quarter. Our PAT for the quarter stood at 194.7 crores growing 9.7% Q-on-Q. In constant-currency terms, the company grew 3.5%.

We continue to lead with user design with our industrial design business reporting a 19% quarter-on-quarter growth in constant currency. The business — this business continues to help us differentiate our offerings, feed entries into new projects and customers and set the foundation for a larger downstream development projects. As our business continues on its path of transformation and registered a healthy growth of 9.3% quarter-on-quarter in constant-currency terms, it’s building the foundation for what we call as the run services including tools, infrastructure and operational support to help engineering teams develop and deploy products into the market. This includes support for some of the platforms that they built and licensed.

EPD division grew by 1.6% quarter-on-quarter in constant-currency terms. Within EPD if you look at it, we are witnessing sustained growth momentum in our Transportation segment that reported a strong growth of 7.3% quarter-on-quarter in constant-currency terms. During the quarter, we not only continue to scale our — with our existing customers but also won some strategic multi year deals including and HD TV program with the global OEM software organization and an offshore center of excellence for our EV systems leader from the US market.

Our media and telecom and healthcare business units saw some impact of furloughs and delayed decision-making. Also, this being a seasonally weak and shorter quarter, there was some impact on our Q-on-Q business growth. In constant-currency terms, the media communication business witnessed a decline of 2.6% Q-o-Q basis and our healthcare and medical devices business unit revenues declined by 1.9% Q-o-Q. But overall in both of these businesses, we have done well to protect our business and position ourselves strongly for upcoming deals. We also won key deal from [Indecipherable] ad-tech and Healthcare platform development that underscores the differentiation we bring to the customers.

On people front, we continue to do well with employee engagement and retention, attrition declining for the third consecutive quarters to 18.4%. Our investments in hiring and training large number of fresh engineers who joined us in the last quarter and before is actually starting to pay dividends as more and more of them are getting onboarded into customer projects. We will continue to add fresh engineers over the next four quarters and laterals in key lead positions across delivery, technology and sales.

As we move to the last quarter of this financial year, at an overall company-level, we have a strong order book and pretty healthy pipeline across key markets. So, strongly believe that we have a good story here. I’ll now hand over to — the floor to Shashank for the Q&A session. Thank you.

Questions and Answers:

Shashank Ganesh — Analyst

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 JP Morgan. Please go ahead.

Bhavik Mehta — JP Morgan — Analyst

Thank you and good [Indecipherable] the management. Two questions. Firstly, the weaknesses we saw in media and healthcare verticals, is it over do you expect some follow-through continue into 4Q [Indecipherable] these two verticals going forward. And second question was on the wage cycle. If I remember correctly, last year we had [Indecipherable] March and June quarter. So how are you looking at the wage cycle business? Thank you.

Manoj Raghavan — Chief Executive Officer and Managing Director

Yeah, so regarding both the media and communication and health-care vertical, we believe it will continue to be soft in for the quarter or two, especially the media and communication vertical. On the health-care vertical, we’re a lot more bullish, we should be able to recover much faster. And we are seeing deals coming back. I think we will wait-and-watch. Regarding the wage cycle, yeah, our next hike will be in Q1, and then we will — based on how the deals flow in Q4 we will take addition, but the wage hikes is currently planned for Q1 next year.

Bhavik Mehta — JP Morgan — Analyst

Okay. And just lastly, the ESOP plan values. Any early comments on how much impact will be there because of this on the margins?

Manoj Raghavan — Chief Executive Officer and Managing Director

No, I think there won’t be very significant impact. We’ll cover it up with our operational excellence. So more details we will — once we talk to the regulators and so on, we will disclose a lot more in the coming days.

Bhavik Mehta — JP Morgan — Analyst

Okay, thanks. That’s it from me.

Operator

Thank you. The next question is from the line of Apurva Prasad from HDFC Securities, please go-ahead.

Apurva Prasad — HDFC Securities — Analyst

Hi, thanks for taking my question. Manoj, I had a question on the IDV business. Now it seems nearly half the growth has come from IDV sequentially. It seems counterintuitive looking at its historical cyclicality and the current macro. So it’ll be good to know what’s driving growth here? Are there more synergy deals here with EPD? Or are these stand-alone deals outside the traditional transportation media verticals? A good question, Apurva, and for folks who have been listening into our commentary, we have been restructuring our design business over the last four quarters, right? And a lot of things that we have done to really scale that business. If you look at it on — on a quarterly run rate basis as compared to maybe a couple of years ago, we have almost — it’s almost like 2.5 times the numbers right now that we — so over the two years, we have really done a number of things to really grow that business. And whatever we are seeing now is a result of all those initiatives that we have taken. Design business continues to win design digital deals for the company across our key verticals and also helping us seeing larger development opportunities across the various verticals. So I think it’s not just — definitely, there is a lot of cross synergies with our current verticals. We are pushing a lot more design digital deals in the three major EPD verticals. Of course, we also have — IDV also have their own customers outside of these three verticals. So that’s something that definitely is positive. A lot of focus and emphasis on also design when you say AR/VR-related, training-related and worker productivity and there are a number of things that we are doing; and that’s also really combining the design capability along with the engineering capabilities that we have, right? So yes, while we look at — we have grown the breakup of our verticals, primarily for the EPD division. IDV also contributes to the automotive, media and to the health care vertical. So at some point in time, we will take that decision of actually merging or actually, from a Tata Elxsi perspective, showing the real picture of the total revenues, including EPD and IDV in each of these three verticals, right? That’s something that we have not been doing, but we are really looking at now that IDV is scaling, I think it makes sense at some point in time to really show the overall revenues, both EPD and IDV, we put together for the three major verticals that we have. Got that. And my second question is on the top five, which was flat sequentially. So is the performance uniform across top five? Or is it more top client specific? And if you could talk about what’s the outlook and the funnel in this.

Manoj Raghavan — Chief Executive Officer and Managing Director

No, if you look at the top five, it’s not been flat. I mean, relatively, yes, if you look at it, we have definitely grown but the growth has been slower than the next five and the next 20. So the growth that we have shown in this quarter has primarily been driven by outside the top five customers, right? But top five has also grown. And you should also note that our top five accounts are significant large — bringing large revenues to the organization.

And in a few cases, we have had furloughs and impact of furloughs is also factored into this — the revenues that we have shown, right? So to that extent, yes, you must have seen some slowdowns and so on. But top five has growth. It’s not flat.

Apurva Prasad — HDFC Securities — Analyst

Okay, thanks and I’ll get back in the queue.

Operator

Thank you. The next question is from the line of Vimal Gohil from Alchemy Capital Management. Please go ahead.

Vimal Gohil — Alchemy Capital Management — Analyst

Congratulations on a strong quarter in considerably challenging matters Sir, my question — first question was on margins. So last quarter, we had a fairly strong hiring. And the expectation was that there will be some cost into this particular quarter. However, that probably may — that has probably not happened. If you look at the overall employee cost as a percentage of sales.

And plus also there is a reduction in employee costs given the fact that we were facing supply pressure, especially in the automotive piece. So if you could just help us reconcile this piece. And also, I just wanted to check again on margins, would it be fair to say that our IDV business or our design pieces, the margins over there are slightly above company average? Or if it’s different, if you can just highlight that.

Manoj Raghavan — Chief Executive Officer and Managing Director

Yes. So the first question, right, I think there was some — I couldn’t really hear keyword that you said, and I’m not able to get the context of the question. Maybe you can repeat it. From an IDV, the second question, IDV margins and so on. I think we wouldn’t want to disclose the margins at this point in time.

And margins, it is deal to deal and it’s a smaller business. So sometimes we take a — we are very aggressive really to get that business and then build on it because not just the design business, but that is downstream engineering. And so we know that overall, as an overall entity, we can make better margins. So — so it will be misleading if we really look at only IDV and say whether the margin is good or not, right? So — and there are cases stand-alone IDV deals where margins are extremely good. So it’s a mixed bag, and it will be misleading if I give you a commentary that margins are great and so on and so forth. But we don’t look at it in that way. We look at it and as a combined entity, how IDV really helps EPD and EPD customers and — and each account, if you look at it, we look account margins, not so much about whether IDV margin is better or EPD margin is better. But the first question coming back, I really couldn’t get the context, if you could repeat that.

Vimal Gohil — Alchemy Capital Management — Analyst

I’ll just repeat that. The question was on the second quarter had very strong hiring, right? So the expect — and you can correct me on this, the expectation was that there will be some costs that will pass through in this quarter; and there could be some pressure on margins before the margins improve going forward. But improvement has just come slightly better. So what helped, that’s all.

Gaurav Bajaj — Chief Financial Officer

So there are a few things there. I think you rightly mentioned that there is some tailwind from the past quarter hiring because we will have that full quarter impact in this in quarter 3 compared to quarter 2 for the both campus and the that has been intake in the quarter 2. But to offset that, I think we have a superior top line growth and also that the campus and other people that we intake in the previous quarter, they started to improve our utilization and those people are been put to the billable projects this quarter. So both…

Manoj Raghavan — Chief Executive Officer and Managing Director

Yes. And apart from what Gaurav said, we’ve also had a reduction in more expensive consultants, right? We — I mean, because of the situation in the market, we had contractors that we had hired. So we’ve actually reduced the contractor head count, and we’ve moved the format replaced them with our permanent employees at a lower cost. So I think these factors helped us to show better margins.

Operator

Understood, sir. Thank you so much. All the very best. Thank you. Thank you. The next question is from the line of Urmil Shah from Aegis Federal Life Insurance. Please go-ahead.

Urmil Shah — Aegis Federal Life Insurance — Analyst

Yeah, thanks and congrats on a good quarter. Sir, my first question is if we look at from a medium-term point of view and the transformation that you are undergoing on our SI business — should we look at from the perspective how IT services companies are looked at wherein your SI business should enable you drive cost savings for your clients? And that budget could be channelized towards the EPD business. And if that is the case, which of the areas you were already seeing at least a discussion starting to happen.

Pai Nitin — Chief Marketing Officer and Chief Strategy Officer

Yes. So maybe I’ll take that. Urmil, this is Nitin here. If you think about what transformation we are driving with SI, we don’t want it to be orthogonal in the sense that we do not want to try and grow it in a conventional IT services and professional services area. We are aligning it to the engine of EPD itself, which is we are in product engineering and more and more products are now getting connected and therefore, the cycle of development is going to become a continuous integration and continuous deployment.

In some sense, like your connected car platforms, the digital health platforms or OT — OTT, where you have constant updates of the software on the product. We want to be able to not just deliver the product that is on the assembly line. We also want to be able to manage the assembly line that is delivering it. So to that extent, the DevOps engineers that are required below the plumbing and the infrastructure that is required to deliver this companies integration is what we are focusing on. So in that sense, we are aligning it very strongly to complete the story for product engineering and to say that, look, we are future ready for products that are going to be deployed and updated and managed continuously.

Urmil Shah — Aegis Federal Life Insurance — Analyst

Sure and thanks for clarification. That was helpful. My second question was, you sound quite positive on the IDV business, should we understand it in a manner where in the visibility, which was there, let’s say, two years before as compared to that the visibility and the IDV business is much more. And that’s why the growth over there should be relatively much more consistent as compared to what it was two years before.

Manoj Raghavan — Chief Executive Officer and Managing Director

The visibility is definitely better. The synergies are playing out better now between IDV and EPD. But at the same time, I should warn you that it’s still a small business, right? So you should really not see it from a quarter-to-quarter basis, you should look at it from a financial year perspective, right? How have we performed versus last financial year versus this financial year; you have to look at it from a four-quarter basis. It will be misleading if you really look at it from a quarter-to-quarter because — they still do a lot of project-based engagements. So there are deals that come in and we — once the deals are closed, and then we deliver and then before the next deal kicks in, sometimes there is delays and so on. So to that extent, that could still be a little bit of volatility and so on. But definitely, we are much better as compared to two years ago.

Gaurav Bajaj — Chief Financial Officer

Yes. I think just to add to what Manoj said, I think I can just drive three directions, right? One is the synergy part. We are saying, look, try to minimize standalone deals, which do not lead to larger downstream. So aligned to the verticals that you are in, let’s scale in health care projects in HMI and UX and car automotive projects, let’s focus on delivering engagement and UI and experience for OTT and for media. So the point being that there, it is — there is really a downstream play, and there is a continuous play as we continue to work with its customers even in deployment and downstream engineering.

Or — so that’s the synergy piece. Two is, I think we are selectively scaling around a set of customers. While earlier, we deal to the whole number of customers; we are starting to call the number of customers we work with and start to build a base of fairly dependable customers, even if not dependable set of projects. So there are two, three things that we’re doing that help us mute to volatility while providing for scale. But I think on the other hand, like Manoj said there may be volatile times.

Operator

The next question is from the line of Naveen Bothra, an individual investor. Please go ahead.

Naveen Bothra — — Analyst

Congratulations on good set of operating performance once again. And also congratulations to the management team for getting the board approval from the share-based incentive plans, congratulations. Sir, my first question is regarding the — our recent announcement that on our digital platform, Tata Motors, 500,000 vehicles has been achieved. So to Mr. Nitin, my question is, if you can throw some more light on it from 500,000 to we say 10 lakh, 15 lakh or 20 lakh vehicles on this data platform growth, how will this help us, Tata Elxsi in the revenue and the performance? If you can throw some more light on it, it will be quite helpful for us.

Manoj Raghavan — Chief Executive Officer and Managing Director

Yes. So rather than Nitin, I’ll take it. So yes, I think it’s — what we have published is only the TML deal, right? There are other deals also that we have won on the platforms. And each deal is different, right, from a — some deals are more NRE focused. And then there is a change requests and there are — to scale up the platform to meet larger numbers, we go back and we do additional revenue streams come in and so on.

Some of the deals are less of NRE and more of royalties per car and so on, right? So in those deals, as the volumes grow, definitely, it is a nonlinear sort of a revenue stream that we get. So we have a mix of that, right? So it is — so definitely, as the installations as the number of cars increase, there will be a lot more revenue either because the platform itself needs to be scaled up and there are changes that we need to undertake to address the larger numbers that we are onboarding. Or, in some cases, plainly, it is a royalty per car sort of a deal. So as the volumes increase, the revenues also increased.

Pai Nitin — Chief Marketing Officer and Chief Strategy Officer

Yes. Maybe I’ll just add to that. I think look at the press release as an indication and the declaration of the market that one, we have reached a scale of 0.5 million cars, which is very difficult, achieve in all markets, right? It demonstrates the power and the scalability of the platform. But what is even more interesting is that we have now onboarded commercial vehicles, gasoline-powered IC engines as well as pure EV vehicles onto the platform. So what we’re telling the market clearly is that across product types and product ranges, we are now able to handle any kind of connected vehicles, not in connected car, but a connected vehicle need. So for us, the real benefits of the press release are going to be the deals that we signed further rather than what you get Tata Motors itself.

Naveen Bothra — — Analyst

Yes, yes, yes. That’s quite clear, sir. And the next question is to Mr. Gaurav regarding our overall human resource cost, the direct employee cost is direct line item. And as in the earlier questions, Mr. Manoj said, that we have replaced the contract outside contractors cost and with our own staff. So if you can — Mr. Gaurav can throw some more light on the consultant cost in other expenses to get the better understanding about overall the cost of employees and consultants in our sales and revenue mix. It will be quite helpful, sir.

Gaurav Bajaj — Chief Financial Officer

Sure, sure. as I mentioned earlier and what Manoj also said that the people that we took in the previous quarter, now are trained and those people are put to the billable projects. And with that, we were able to bring the contractor replaced this contractor with our own billable people. If you see that the employee cost is an equation of both some of the tailwinds from the previous quarter. Some cost increase because of the on-site resources because of the exchange increase in the currencies. And also, it’s a mix of the utilization improvement compared to the previous quarter. So in a way, if you see the employee cost plus the contractor cost, that tailwind is kind of getting offset with the utilization and the contract reduction.

Naveen Bothra — — Analyst

Okay. Because in the latex cost, we are seeing in the TTM basis, more than 1% improvement is there in the employee cost. But since the cost o

Gaurav Bajaj — Chief Financial Officer

It will be about 50 basis points to 60 basis points.

Naveen Bothra — — Analyst

50 basis points to 60 basis points. Thank you again for the — congratulations for the share-based incentive plan.

Manoj Raghavan — Chief Executive Officer and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Ravin Naredi from Naredi Investments. Please go ahead.

Ravin Naredi — Naredi Investments — Analyst

Hi, Manoj, again, congratulations for a nice result. Sir, what is the utilization of cash plan with the fund aligned with the company?

Gaurav Bajaj — Chief Financial Officer

Sorry, if you can come back on the question, it was not clear.

Ravin Naredi — Naredi Investments — Analyst

Utilization of fund lying with the company, how we utilize them for organic inorganic growth or distribute the gain.

Gaurav Bajaj — Chief Financial Officer

Okay. So basically, utilization is basically we do at the time of the quarter 4. That is when we come up with our policy. And typically, what we have done in the previous quarter is that we have paid out the dividend. This time also, we will do internal discussion with the Board. And in the due course, during the end of the last quarter of the year, we will get back as what would be the stand for this year?

Ravin Naredi — Naredi Investments — Analyst

Any inorganic growth acquisition in plan?

Manoj Raghavan — Chief Executive Officer and Managing Director

Right, yes. So that option is always there. And again, just want to make it clear that, look, we will really go that route only if we are fully convinced that really helps us. And any of those inorganic activity should not decelerate our current performance. So there are many considerations. There are many deals that come our way, but we will look at those that really help us achieve our objectives, right? So yes, so we keep on the lookout. There’s nothing to report at this point in time.

Ravin Naredi — Naredi Investments — Analyst

Okay, thank you very much and all the best. Thank you.

Operator

Thank you. The next question is from the line of Mayur Matani from Mahesh Kumar and Company. Please go ahead.

Mayur Matani — Mahesh Kumar and Company — Analyst

Yeah, good evening, sir. Congratulations for the good set of numbers. I have two questions. One is regarding our employee addition. So during the end of the first quarter, we had mentioned that we plan to hire about 4,000 to 5,000 employees in the current year, so. And this quarter, we had seen that the net employee addition is negative. So I would like to know what are the plans for the employee additions in the next three months and the year going forward?

Because generally, it is taken as a lead indicator as to what demand we foresee going ahead? And second is with regards to the geographic mix as contrary to the expectations, the European region did better than the U.S. market. So can you give some comments on that also Thank you.

Manoj Raghavan — Chief Executive Officer and Managing Director

Sure. I think we have to be very pragmatic about employee additions. Yes, in Q1. We were in a good question. We really believe that we will be able to add 4,000 plus engineers and so on. And as a result, if you look at it in Q1 and Q2, we did add a significant number of employees, head count and so on. But in Q3, we had to be a little careful because of the way the macro economic situation, the market and also the fact that when you bring in so many employees, it’s not a question of bringing employees. It’s also a question of how do you train them? And how do you enable them to get — to move in billable roles and so on, right?

So we had our hands full. We realize the numbers that are pretty significant. And we really decided that we need to take a pause there in Q3. But having said that, from Q4 and the subsequent quarters, we will continue hiring and whatever we talked about even from a fresher hiring perspective, we’ll definitely add anywhere between 400 engineers to 500 engineers per quarter for the — over the next four quarters. And laterals will we continue to add depending on the business. So yes, employee hiring will definitely continue. From a geo mix, geo mix perspective, yes, Europe definitely did well. And as you would have guessed, Europe is a lot more automotive for us and U.S. is a lot more media and health care.

So to that extent, if you look at it, the macro economic situation that is really working — I mean, affecting us in the MCV and the health care business is more U.S.-centric, right? And as a result, the U.S. growth is slightly lower as compared to EU growth. Right?

Mayur Matani — Mahesh Kumar and Company — Analyst

And when do you see the recovery in media vertical? Because right now, also the situation is not that great. So when do you see the pickup in the media vertical?

Manoj Raghavan — Chief Executive Officer and Managing Director

I think we are closely watching the media vertical. We believe there are no easy answers there. It will take some more time, but we are a lot more confident that the medical vertical will — or the health care vertical will pick up faster. So maybe a couple of quarters more for the media vertical. We are on a wait and watch that.

Mayur Matani — Mahesh Kumar and Company — Analyst

Okay sir, thank you. Thanks a lot.

Operator

Thank you. The next question is from the line of Vimal Gohil from Alchemy Capital Management. Please go ahead.

Hiren Ved — Alchemy Capital Management — Analyst

This is Hiren here from Alchemy at the outset. Congratulations on a good set of numbers. My question is that we’ve had a very smart growth in the automotive vertical this quarter, which has kind of done the heavy lifting for the other two verticals. Do you expect to see the continued momentum in automotive like we’ve seen in Q3, while the other verticals take time to take off?

Manoj Raghavan — Chief Executive Officer and Managing Director

See, that’s the strength of Tata Elxsi, right, in a way. If you — maybe a year ago or 12 months ago, the situation is totally reversed, right? Because MCV and medical that is pulling up and the transportation business is going down, right? So — so we strongly believe that having this good portfolio of service offerings, which are relevant for the market, right? That could be temporary issues for a quarter or two in some of these verticals. But overall, we strongly believe that these three verticals, along with the strong design digital push that we have gives us a lot of confidence that as an organization, we are well poised to really address the requirements of our customers. And that is what we would really focus on. We are really not worried about these slowdown in — due to other reasons, right, due to not reasons because of Tata Elxsi because of either the funding situation, the macroeconomic situation, the war and some of the things that can happen, right?

But Overall, we still strongly believe in the relevance of our service offers and in our design digital positioning that we have, right? And we strongly believe that, look, it’s a matter of time before we recover in both the medical and the Media and Communication business. So I think, yes, over all, I still believe you talked about the transportation business. We do definitely see a good order book and good sort of our pipeline there. But at the same time, we also know that there are risks; you talked about Europe. You talk about the fact that if anybody’s guess about how this war would go. Automotive business is heavily Europe-centric. So that is also true. But at the same time, there are customers that are really spending, right? So we don’t see an immediate de-growth or anything happening there at this point in time. And I think, yes, we are confident that we will continue our growth.

Hiren Ved — Alchemy Capital Management — Analyst

And my second question is that the benefits that we accrued from better utilization and moving some of our own employees versus contractors? Do you think we still have some scope to squeeze efficiencies and margins for that in Q4 as well or more or less, whatever we had to had is already done in Q3?

Manoj Raghavan — Chief Executive Officer and Managing Director

No. Of course. Of course, our utilization is still not where we want it to be. So there are still operational parameters that we need to focus on. There is still more juice that we can extract. So definitely, no, it’s not as that everything is done.

Hiren Ved — Alchemy Capital Management — Analyst

Okay, great, thanks. Thanks so much and all the best.

Operator

Thank you. The next question is from the line of Akshay Ramnani from Axis Capital. Please go ahead.

Akshay Ramnani — Axis Capital — Analyst

All right. Congrats on a good quarter. So my first question was on this the software-defined vehicle deal, which you have announced pointed to get some sense there. Is this engagement substantially larger than what we have been seeing historically like a typical in deal sizes? And do we have similar deals which are floating in our pipeline. Also, if you can just highlight about competitive intensity for such deals and how Tata Elxsi position could drive multiple deals of such type.

Pai Nitin — Chief Marketing Officer and Chief Strategy Officer

Yes. So Akshay, this is Nitin here. So let me take that question. For us, this is a strategic entry rather than size aspect. So to that extent, we have onboarded into the next-generation software development platform that this particular OEM is developing. We have just been onboard into a few modules. We already are looking at deals that are sitting in the pipeline for the same customer, covering a lot more modules. So to that extent, for us, what is happening is we made a start. We’re already in some. It is just for us to continue to grow, right? The highlight is actually about the entry into that particular customer because we’re not them in the software organization before. And we see a long runway ahead. As far as your question on other deals concerned, the pipeline for auto is very strong.

Akshay Ramnani — Axis Capital — Analyst

Got that. And another question was on margins. Last quarter, we saw rent loading of cost, which was led by some investments which we made in our talent and which also impacted margins sharply now this quarter looks like they have stabilized on that investment and improved it quite a bit. So I wanted to understand on an investment pipeline per se, do you have any investment pipeline over the next in two quarters to four quarters, which can impact margins or on an organic basis, excluding that, we should expect these operational efficiencies of increasing utilization to aid margins from here also. How should I think about the margin trajectory going forward?

Manoj Raghavan — Chief Executive Officer and Managing Director

I think if you look at it when we hire — I mean when we hire pressures from the colleges, right, typically, they would come in in large numbers either in Q2 or Q3 depending on the business needs and so on, right? And that is when the impact of the large headcount will happen in our business, right? So we have already done that for this financial year. So yes, if it all, it will happen only again in the next financial year. And that’s a call that’s a hit we need to take because that’s how our business is and that’s how we plan for resources. And in one quarter, we need to take that hit, and we’ll get the benefits of that over the subsequent few quarters, right? So apart from that, I don’t think there is any — Gaurav, if you have any views on that?

Gaurav Bajaj — Chief Financial Officer

No, I think that would be the we typically do every year in terms of the intake of the campus and then train them and that is how the forward-looking investment is done from our side. Apart from that, I think we will continue to work on the operating lever to utilize the impact of those costs like that happens typically in the first two quarters of the financial year, along with the growth that we will be able to achieve with those billable people.

Akshay Ramnani — Axis Capital — Analyst

Got it. And if I can squeeze one in for Gaurav. So ATR has been worrying about this 19%, 20% range for the past three quarters. So is that a sustainable range going forward? Or do you expect any of these SEC benefits to reverse over the next year or 2? How should one think about that?

Gaurav Bajaj — Chief Financial Officer

Net cash — so we have not done the assessment for the two years. For this year, it would be — the effective tax rate will continue to be in this range. But yes, in the coming year, there will be a couple of units that will be coming out of the first block of 100% exemption. But at the same time, we are looking at the business, how to continue some of the expansion and the growth of the volume in some of the ACS, which will have — still have a higher exemption limit of 100%. We have to do that margin for the coming year, but that will happen along with our business units. That’s — I think that’s what we can tell at this point of time. But with well — in the coming quarters, we will let you know more on it.

Akshay Ramnani — Axis Capital — Analyst

Thank you.

Operator

Thank you. The next question is from the line of Karan Uppal from PhillipCapital. Please go ahead.

Karan Uppal — PhillipCapital — Analyst

Yeah, thanks for the opportunity. Just one question for Manoj. So in comms and media vertical, is the weakness concentrated to a few large accounts? Or is it broad-based across the customers? – and also, I believe that our top line is from this vertical. So what’s happening in our top line? Is it also showing some weakness?

Manoj Raghavan — Chief Executive Officer and Managing Director

Yes. So we did have some furlough impact in the quarter from the top customer. So yes — and again, this impact is not only from the top customer perspective, it is at least the top ten accounts, we see obviously, a little bit of a — deals are there. It’s not as if the deals are not there, but we are not seeing the large opportunities moving forward rather most of those deals are broken up into smaller deals, right? So there is caution in the market definitely. We used to have a lot more good order book visibility and so on in this business. But right now, we see that funnel– large funnel really breaking into smaller funnels, right? So that’s how it is. But I think it’s a question of a few quarters. The relationships are still intact. The intent from customers is also there. But I think the customers are just — especially with the sort of, they are watching, right? They don’t want to take any large investment additions at this point in time, I guess, in a couple of quarters, we’ll get better clarity.

Karan Uppal — PhillipCapital — Analyst

Okay, thanks. Thanks for that clarity, and all the best. Thank you.

Operator

Thank you. Next question is from the line of Anik Mittal from US Research, please go ahead.

Anik Mittal — US Research — Analyst

Hello, good evening, sir. Am I audible?

Manoj Raghavan — Chief Executive Officer and Managing Director

Yes, yes, you are.

Anik Mittal — US Research — Analyst

Just a simple question on basically the demand outlook in the medium term across all the segments that we are currently operating in.

Manoj Raghavan — Chief Executive Officer and Managing Director

See, again, demand outlook is pretty strong. If you look at the automotive business, if you look at our entire design business and so on, we continue to see very strong order book and so on. Media and Communication, it’s a little muted. The medical business, if I really look at it, if you look at medical — or the health care business is a long lead cycle business and additions are pretty slow. You need to — it takes anywhere between three quarters to four quarters to six quarters before large deals are signed, right? So we’re going through that process.

What has happened is if you look at the — a part of our services come from the regulatory services, and there is something called for the European market that is the regulated service called EU-MDR. EU-MDR was mandated — all products has to be EU-MDR certified by 2024. So there was a deadline and there was a rush by all companies to really get the product certified by 2024.

What has happened is recently, maybe just about a quarter ago, the commission there relaxed the deadline from 2024 to 2027 or ’28, right? So ’27, they relax the time line. So what has happened is a lot of these companies because the time lines are relaxed, they — what are supposed to be done in about 1.5 years is — can now be done over four years plus, right? So a lot of the companies since decided to sort of make use of that — take benefit of that.

And — so the TCVs are intact, but unfortunately, revenues are now going to be spread out. Not all customers, a few customers have got into that, right? And that has affected us a little, and that is why you look at it, our revenues have dipped a little bit. But the good part is, now the budgets that are available with the customers, they can then use them for other activities, including new product development and other activities that are there.

So that is something that we are hoping that in the subsequent quarters, we will be able to leverage this budget availability to really push for new product development sort of deals. And as you know, we have been investing in the digital health platform for quite some time now. And that is another thing revenue stream that we are building up.

We are engaging and having those discussions with customers. It does take some time to really sign deals there. But that is — and all of that will happen over the next couple of quarters. And that is where I’m a lot more confident that we’ll be able to recover the situation in the health care business.

Anik Mittal — US Research — Analyst

Okay, okay, that’s all from my side. Think.

Operator

Thank you. The next question is from the line of Tushar Bohra from MK Ventures. Please go ahead.

Tushar Bohra — MK Ventures — Analyst

Yeah, thanks for the opportunity and congratulations to the management for a good set of numbers. Sir, just a couple of questions. First, we continue to report our business along 3 verticals as on date today, the transportation, media, communications and health care. But over what period do you think that some of your initiatives in other sectors and subsegments would start to become fruitful so that you would maybe move on to reporting those segments separately. And does that happen in the near term?

Manoj Raghavan — Chief Executive Officer and Managing Director

So that’s a call that we will take. And actually, if you look at it, the adjacencies that we called out are already pretty significant if you look at the individual verticals, right? So there are upwards of — in some cases, they are close to 10%. In some cases, they’re close to 15%, 16%. So that’s something that is not out of focus. Adjacencies definitely are doing pretty well, and we are really monitoring them. So we will take attrition as to — at the appropriate time to disclose those numbers. New verticals, I think we will continue to be cautious. We are incubating a few verticals and at again, at the appropriate time, we will bring that in, right?

Tushar Bohra — MK Ventures — Analyst

Just to clarify on this, is defense or related area also an opportunity for us in some way?

Manoj Raghavan — Chief Executive Officer and Managing Director

It’s not an active opportunity for us. Though — we are looking at the defense avionics side, and we do work with ISO and — we do work with a few companies in India. But again, it’s not a large business. And I don’t think it will be a large business because you really need to cater to the U.S. defense industry or the European defense industry, if you really want to make a big splash. But unfortunately, those are — there are a lot of restrictions on — you need to have U.S. citizens and so on work. And there are a number of restrictions that doesn’t make it easy for us to enter that sector.

Tushar Bohra — MK Ventures — Analyst

Sure. So sir, second, just want to get some qualitative inputs on maybe how are IP performing in terms of helping us win business or also in terms of actual revenue contribution and also some of the new work that we are doing. So in the previous call, we’ve highlighted about metro. This call — this presentation, this time, you mentioned about the AR/VR project and the software-defined vehicles. There’s some inputs that help us understand the opportunity would say, next three years or so in these areas?

Manoj Raghavan — Chief Executive Officer and Managing Director

Sure. So if you look at it, our products, we have done a lot of investments in the media and communication vertical from a product perspective, whether it is products like FalconEye, Cochin, V-Play. There’s a number of ad-related advertisement-related platforms, there a number of things that we have done. And if at this point in time, I would say that is one area which is — which are doing pretty well for us from a media and communication vertical perspective. Automotive, of course, we have done a lot of investments, including on the ADAS side, the autonomous car, autos and so on. Of course, we are working a lot on the electric vehicles, a lot of IPs and products that we are building from a validation perspective and so on. But all of that is currently in the investment phase. We hope that we’ll be able to really push that into the market and get revenues.

From a medical health care business, yes, the investments that we have done on the digital health platform, right, that is — that is a pretty significant investment. And we hope in the next two quarters to four quarters, that will start generating returns for us. So I think as compared to a couple of years ago, we are, number one, we have a lot of products that are there in the market; number two, a lot of products that are generating revenues for us. That is also a positive for us. And I think this investment will continue because even though it is — the numbers are not very significant. But from a year-on-year perspective, we are almost projecting internally, we’re looking at a 100% sort of revenue growth from the products and product-led business, right? So that’s something that we will continue to focus on and continue to make those investments I think at some point in time, it will be significant, and we will hopefully hit a gold mine somewhere. But yes, we will continue to invest.

Tushar Bohra — MK Ventures — Analyst

Yes, sir if I may just squeeze a couple very quickly. Sir, one is on in the TCS con call, management interestingly made a comment about ChatGPT. And obviously, it’s a raise right now for a lot of reasons. Just to understand some of these technologies could end up being disruptive on either side, positive or negative for us and for our peers. If you can maybe throw some comments on some such technologies, which you to either avoid being disrupted or leverage better to actually gain better business win. And on a related area, in general, we’ve seen a lot of spending cuts or other — on the technology side, we’ve seen a lot of correction. Valuations have come down for a lot of companies globally. Is there anything on the M&A side that you are starting to at least sense that things are coming close to your comfort in terms of valuations or — so that you may look at an inorganic — not immediately, but definitely in the way near term?

Manoj Raghavan — Chief Executive Officer and Managing Director

Sure. We have our targets, and we’re looking at it from an M&A provide. So again, as I said, right, there’s nothing to report at this point in time. And again, we are operating at 28.7% PBT and 30% plus even — so we have to be careful in terms of when we acquire what is the impact of that, right? So — and there are only very few businesses out that operate at that level. So we don’t want anything M&A to be disruptive to our own financials. So we’ll be careful, we’ll look at it and we’ll evaluate the synergies a lot more as compared to other companies, right? Because we are already operating at a very, very nice level. So that’s something we’ll be very cautious.

Pai Nitin — Chief Marketing Officer and Chief Strategy Officer

On the first part, maybe I can respond. In terms of ChatGPT, we think that more as an anchor rather than as a specific point. I think the fundamental difference on the fundamental differentiation we bring and the application of digital technologies and I think we have said this more than once is that we are not out to build a generalized AI platform like many of the large IT companies talk of. We are very clear that we will do very specific AI. So if you’re doing AI, we will do it in cars, it will enable autonomous driving. If we use it in media, we’ll use it for personalization of content and for nothing else. If you’re doing medical, it will be to improve the predictability and outcomes of the diagnostics that we’re doing. So in that sense, if you look at it, these are not generalized — is per AI problem. These are specific AI problems. So to that extent, we are in a space which still continues to need what we do and the intelligence that we bring, right, as the intersection of domain and engineering.

But equally, I think there are opportunities for us to use generalized AI technologies like ChatGPT, especially as you move out of the product and then we get into the cloud, I think there is a lot more potential in those areas. So for us, I think we see it as an upside because it allows us to go into areas that we don’t otherwise address in general.

The same is true for others, by the way. If you look at digitized technologies, really think of the deal that we called out, which is the use of AR/VR in worker and productivity training. It’s actually the meters, except that we are applying the matters for industry, the industry 4.0. So again, there, we are seeing clear of general application of metaverse in gaming and in entertainment. We are looking at the application of the metaverse AR/VR in the context of either improving engagement or experiences within cars, we’re looking at within factories and so on, right? So in general, I’ll just put it this way. For us, what is important about digital is the intersection of that with a particular domain, and not digital for itself.

Tushar Bohra — MK Ventures — Analyst

Sure sir, thank you sir. Thank you so much. I’ll join back in queue. Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Akshay Ramnani from Axis Capital. Please go-ahead.

Akshay Ramnani — Axis Capital — Analyst

Thanks for the follow-up. So Manoj, last quarter you spoke about high on-site wage inflation. Wanted to get an update on that trend. Has that moderated? Also the new center in Germany, is this a large one for us, and the parallel thought that should one expect any reversal in the offshoring trend which is holding up quite well for us?

Manoj Raghavan — Chief Executive Officer and Managing Director

Okay. Your voice was echoing. So I heard the second question. I didn’t hear the first question. Let me answer the second question, and then we can come back. So yes, I think we’ve recently opened a center in Frankfurt, we believe it’s a good location for us. Even though we’ve — of course, we get access to local talent there. And there are a few customer engagements that we are going to execute partly out of that facility, right? So I think we’ve always had a smaller center. This time we really scaled it up to a significant larger center. So yes, I think that’s something — and I don’t think that our on-site offshore ratio is going to change drastically because of it. We still continue to be an office-centric organization, and if you look at the ratios also, I think we are more or less at the same level where we operate. So I think that doesn’t change. Coming back to your first question, can you repeat that question?

Akshay Ramnani — Axis Capital — Analyst

Sir, that was around on-site wage inflation. You had called out a high on-site wage inflation last quarter. I wanted to get an update on that trend? Has that moderated? Or how are you seeing that?

Manoj Raghavan — Chief Executive Officer and Managing Director

Wage inflation is still high. It is very — it’s early to talk about all these layoffs and impact of that on the on-site wage inflation. I think we will really wait and watch. But I think until last quarter, it continued to — the inflation continues to grow, right? So yes, so — but our — but there is some softening in the market right now with all the layoffs and so on. But it’s too early to comment on that. We’ll wait and watch for the end of the quarter.

Operator

Thanks, management. Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Nitin Pai for closing comments.

Pai Nitin — Chief Marketing Officer and Chief Strategy Officer

Thank you. And first of all, let me wish all the participants today, very happy new year again. Thank you for joining us on this call. We look forward to meeting you again in the following quarter. Of course, this time, our results were delayed a little bit, not because we’re not ready, but we have to enable the availability of the entire Board, which was otherwise occupied. So hopefully, we’ll have our numbers coming up early as usual in the following quarters. Thank you, and have a good day.

Operator

[Operator Closing Remarks]