TATATECH - Tata Technologies Limited Share Price

Management's outlook for Tata Technologies indicates optimism for a sequential recovery in Q2 FY26 and a stronger second half of the fiscal year. Key points include:

1. Performance Review: Q1 FY26 revenue declined 3.2% sequentially, with an EBITDA margin contraction of 210 basis points due to operating deleverage. The Services business, representing 77% of total revenue, saw a decline of 5.9% QoQ in INR terms, influenced by deal ramp-up delays and client investment pauses.

2. Recovery Expectations: Management is optimistic about Q2 recovery, supported by a strong deal pipeline that is better than the same time last year and increasing visibility into improved conversion rates.

3. Strategic Customers: The commitment from key customers like Tata Motors and JLR to new product investments bodes well for future growth. Both customers plan to focus on innovation, electrification, and digital development, creating opportunities for Tata Technologies.

4. Aerospace Segment Growth: The aerospace segment reported a 13% sequential revenue increase, driven by ongoing demand and effective execution across various engagements.

5. Recent Deals: The company closed six significant deals during the quarter, with four exceeding $10 million and two between $5 million and $10 million, suggesting a turnaround in client sentiment.

6. Long-Term Viability: While Q1 experienced short-term challenges, management remains confident in the longer-term trajectory, pointing to a diversified portfolio and strong anchor customer relationships.

7. Financial Health: The company ended the quarter with a net cash position of $159 million and maintained operational efficiency, despite a slight increase in days sales outstanding (DSO) to 87 days.

Overall, management maintains a focus on navigating the current challenges while capitalizing on opportunities in growth sectors, particularly aerospace and digital transformation initiatives.

Major Questions and Answers from the Q&A Section:

Question 1: "Is this expected sequential growth recovery in Q2 based on the 6 strategic deals we have won, or do we see an uptick in business beyond these 6 deals as well?"

Answer: Yes, we entered the fiscal year with momentum, closing deals in Q4 and adding those 6 deals recently. The recovery is driven by our strengthened order book and improved customer sentiment. While the macro concerns persist, increased confidence suggests a favorable environment for decision-making in Q2.

Question 2: "Can you specify which segments are facing challenges in the non-auto sector, since aerospace is performing well?"

Answer: Aerospace shows robust demand. However, we've seen softness in industrial heavy machinery, primarily due to one specific project that closed early. Overall, the softness in non-auto sectors isn't as pronounced as in automotive, which has faced significant challenges.

Question 3: "Can you quantify the current order book?"

Answer: We haven't provided specific order book details. However, I'm pleased to report that our order book at the end of Q1 is better than it was at this point last year, which gives us confidence in the outlook for the remainder of the year.

Question 4: "Has the demand from OEMs improved, specifically among your anchor customers?"

Answer: Yes, we've observed sustained demand from both Tata Motors and JLR, contributing positively to our confidence moving forward. Broad market sentiment is enhancing our optimism beyond just anchor customers.

Question 5: "Regarding the drop in EBITDA margin, can you clarify how much of this was from operating leverage versus on-site vs offshore shifts?"

Answer: The decline is primarily attributed to operating leverage rather than structural changes in capacity. We still retain a balanced mix of on-site and offshore engagements, which hasn't changed dramatically relative to our capacity.

Question 6: "Are you planning for wage hikes soon, given the margin drop?"

Answer: We haven't made any decisions on wage hikes yet. Discussions will be held internally, and appropriate steps will be taken based on our strategic needs and financial conditions.

Question 7: "Have you seen any deal cancellations in Q1, and how has pricing been impacted?"

Answer: There were no significant cancellations in Q1, aside from one project in the industrial heavy machinery space that faced early closure. We've encountered pressure from customers regarding pricing, but we've managed to resist that pressure effectively so far.

These answers summarize the discussions and key sentiments expressed during the Q&A portion of the earnings call.