TATAELXSI - Tata Elxsi Ltd Share Price

Management provided an optimistic outlook for fiscal year 2027, anticipating higher single-digit growth across all verticals following a challenging past year. They highlighted a revenue of INR 993.8 crores for Q4 FY26, reflecting a 0.9% quarter-on-quarter growth in constant currency terms. Despite a decline of 13.1% in the Healthcare and Life Sciences vertical, management expressed confidence that Q4 was the bottom, with expected deal closures likely to boost growth in Q1 FY27.

Notable points from management include strategic wins in the automotive sector, which now sees 77% of its revenue from OEM customers, and strong growth of 5.6% in the Media and Communication sector driven by significant deals. They emphasized the effective implementation of AI technologies, with a push toward becoming an AI-native engineering organization, which is hoped to strengthen operational leverage and drive sustainable growth.

Margins improved, with EBITDA standing at 24.6%, reflecting a 130 bps increase from previous quarters. Management noted that utilizing fixed-price contracts and enhancing operational efficiencies contributed to this margin uplift. Looking forward, they aim for an exit margin of approximately 27% in Q4 FY27, bolstered by ongoing improvements in productivity and efficiency.

Overall, while cautious of geopolitical uncertainties impacting customer spending, the management remains confident about winning new contracts and revitalizing growth in all business segments. They view the coming year as a pivotal period for executing their growth strategies and developing new verticals, including aerospace and defense, battery energy storage, and manufacturing.

1. Question: Of the deals you have won recently, how much of the value is coming from existing customers expanding their engagements or wallet share versus entirely new logos, and how has this mix evolved over the last two or three years?

   Answer: Generally, new customers contribute about 2% to 2.5% of our revenue each quarter, so most comes from existing clients. However, we do see new customers entering our fold. For instance, we recently signed a deal with Terumo, our first in the Healthcare space, and another in the automotive sector from an APAC customer. So, it's a blend of expanding existing relationships while also attracting new clients.

2. Question: Is there a pattern where the new logos typically take X number of years to scale up or does it depend from customer to customer?

   Answer: The ramp-up period really depends on the client and industry. Typically, once a deal is closed, meaningful revenue impact starts to materialize after about 9 to 12 months of onboarding and execution. Each client's journey varies based on their specific needs and our engagement depth.

3. Question: On healthcare, we've declined 13% Q-o-Q on constant currency in revenue, you previously indicated Q3 was the bottom. Is Q4 now the bottom or are there factors at play?

   Answer: While we were cautiously optimistic about Q4 marking a recovery with pending deals, unfortunately, key deals did not close as projected. This delay affects our results for Q4, leading to a downturn. However, we have recently closed some deals and remain confident that we will bounce back in Q1, positioning Q4 as a potential low point.

4. Question: How do you see the media and communication business growth trajectory given the background of consolidation in the USA?

   Answer: Although our media and communication segment has seen growth recently, overall, we're still in a challenging environment due to industry consolidation. However, we've won significant deals and ramp-ups from previous contracts are happening, indicating potential for better performance going forward despite ongoing market volatility.

5. Question: Can you provide insight into the impact of AI-led changes on pricing and contract structures?

   Answer: The impact is twofold"”we leverage AI for internal efficiencies, but customers also increasingly seek better productivity. This pushes us towards improved pricing power because delivering higher efficiency often means justifying our pricing. So, while we're using AI to enhance our operational efficiency, it's also influencing our pricing strategies positively.

6. Question: What kind of margin expectations do you have going into FY '27, given your recent performance?

   Answer: We are optimistic for FY '27, but adjusting our expectations to anticipate single-digit, high-single-digit growth instead of double digits, primarily due to shifts in both the healthcare and transportation sectors. The geopolitical context has made us cautious, yet we hope to maintain overall growth across our businesses.

7. Question: Regarding the transportation vertical's outlook, can you tell me how you're looking to achieve double-digit growth?

   Answer: Moving forward, we aim for our OEM revenues, which account for 77% of our transportation business, to ramp up through a combination of recently secured multimillion-dollar deals. However, considering geopolitical considerations, we might settle for high-single-digit growth rather than double digits in the immediate future because of potential market risks.

8. Question: Can you discuss expected sustainability for the margin improvements you've seen this quarter?

   Answer: We've worked hard to improve margins, particularly focusing on operational efficiencies and achieving better utilization rates. However, while we anticipate gradual margin increases, they may not be as sharp as those observed this quarter. We're aiming for a target EBITDA margin of around 27% as we progress through FY '27, but this will depend on top-line growth aligning with our efficiency gains.

9. Question: Can you share any updates regarding new vertical explorations your company is pursuing?

   Answer: We are actively exploring aerospace and defense as new verticals, where we're engaging with local and global players on substantial projects. We're also looking into battery energy storage, which is gathering significance amid rising data center demands. Each of these areas is at an incubation stage with promising potential for revenue over the next several quarters.