Tata Elxsi Ltd Management Discussions

Global Economic Overview

The fiscal year 2023–24 was marked by volatile macroeconomic environment and related challenges that led to a modest expansion in the world economy. These issues presented a complex backdrop for economic strategies and policy-making on a global scale. During the first half of 2023, global central banks implemented higher policy interest rates, resulting in a more constrained credit environment.

The global economy is set to navigate through a period of moderated growth in 2024, with various regions facing distinct challenges and opportunities. It is anticipated that the worldwide economy in 2024 will expand by 3.1%, with the United States expected to grow by 2.7% in 2024 and in the Euro zone by about 1%. This is likely to be fuelled by an upswing in consumer spending, which bolstered the growth of real income and stimulated the overall recovery.

Outlook

The outlook for the global economy in 2024 is one of cautious optimism, with growth expected to be moderate but resilient in the face of continuing challenges. Indias GDP growth is estimated at 7.6% for the year ending March 31, 2024, with Moodys projecting a growth rate of 6.8% for CY 2024.

Trends to look out for include the impact of AI on productivity, cyber security, quantum computing, and cloud technology.

Industry Overview

The demand for enterprise software and IT services witnessed muted growth during the previous financial year. Focus towards driving efficiencies resulted in large-scale cost optimisation and automation projects. According to NASSCOMs Strategic Review 2024, global tech spending grew slower in CY 2023, at 4.4% YoY, primarily due to degrowth in hardware and devices.

The technology industry in India mirrored the global trend by experiencing a slowdown in growth during 2023, with the industry witnessing a 3.8% growth, adding $9.3 billion in incremental revenue, and reaching a total of over $253.9 billion (including hardware).

The potential uptick in the industry through 2024 is likely to come on the back of several factors. These include anticipated higher digital spending in sectors like BFSI, Hi-tech, TMT, a stronger deal pipeline and project execution, and accelerated adoption of Artificial Intelligence across various industries.

Engineering Research & Development (ER&D)

Engineering Research and Development (ER&D) is critical to growth prospects of organisations with evolving demand for efficiencies, innovative engineering, and increasing adoption of digital technologies. ER&D spending is estimated to have grown 7-8% CAGR in 2020-2023 globally. With several sectors facing technological disruptions, there is a growing need for ER&D investments to transform business operations.

Global business ER&D spending is expected to continue to grow at 8-9% annually in the next couple of years. Spending on ER&D is rising as a result of trends such as the need to improve traditional products and services by integrating them with digital technologies. These raise awareness of sustainability issues and the need to reduce carbon emissions, leverage artificial intelligence to improve service orientation. Automotive, Software, and Healthcare & Medical Devices are expected to be top three ER&D spend contributors.

The ER&D sector in India presents a promising outlook, with significant growth potential over the coming years. India is renowned for being an innovative middle-income economy and for having a sizable pool of highly skilled talent, hence, it would receive a sizable portion of this global ER&D outsourcing. The software, automotive, and semiconductor sectors are expected to be the key drivers of growth of ER&D outsourcing to India.

This positive industry outlook indicates a favourable environment for companies operating in the ER&D space within India. The projected growth presents opportunities for both domestic and international players to leverage Indias unique combination of talent and innovation capabilities.

Business Growth Drivers in 2024-25

Softwarization of product design and engineering (software-driven everything – Software Driven Vehicles, Software Driven Networks, etc.)

Advanced automotive markets of Europe, US, and Japan

Tech-led innovation in supply chain and sustainability

Automotive

In an environment where staying competitive has become imperative for automotive companies, automotive engineering services help enhance operational efficiency through the integration of advanced electronics and streamlined manufacturing processes. On the demand side, innovative technologies, new services, and increased connectivity are increasingly influencing consumer purchase decisions, nudging the OEMs to keep the technology refresh going. Global car sales in 2023 were robust in both the US and Europe, as supply-side constraints receded significantly during the year. As we move into the year 2024, the focus is expected to shift from supply side constraints to market demand, more so in countries where the incentives for electric vehicles are expected to be gradually reduced. In Automotive ER&D, the continued momentum in Software Defined Vehicles (SDV) is helping to counterbalance mild short-term market sluggishness in EV and autonomous vehicles. It is expected that during the year 2024, the automotive ER&D market would grow at a healthy pace of 8% to 10%.

The dominant deal themes across transportation are software defined vehicles and in-car/cabin experiences, electric power-trains, autonomous mobility, including off-highway vehicles, and battery charging solutions. Also, there is an increased focus on sustainability and green engineering in the transportation sector. Growing environmental concerns are prompting a focus on fuel efficiency, emission reduction, and sustainable manufacturing practices, requiring specialized engineering services. Tata Elxsi offers customers a compelling range of SDV service offerings with its complete SDV transformation engineering solutions, which includes its Connected Vehicle Platform - TETHER, digital services with AI/ML, cybersecurity, automotive core software, hardware, and cloud deployment services

Media and Telecommunications

After the spurt in Media and Communications growth during the pandemic years, there has been a continuous softening of the market situation. Consequently, the industry is witnessing a rapid shift in investments by media and telecommunication players – leaning more towards network and operations transformation with the objective of efficient and cost optimized operations. According to Everest Group, during the first half of 2024, the market outlook for media and entertainment looks conservative, and is expected to marginally improve during the second half of 2024. Overall, in the media and entertainment vertical, the Engineering services outsourcing growth is anticipated to be low to mid-single digits.

Telecom service providers are yet to see the benefits of their 5G investments and are concentrating on developing new revenue sources, thus growth in the telecom sector is predicted to be muted in 2024 and in low single-digits. Key deal themes shaping the media and telecommunications industry are media platform enhancements, optimisation of network operations, and automation. These include network modernization with intelligent solutions to automate maintenance and support, end-to-end private networks, network design and deployment & managed services development, deployment and managed services support.

In view of the changing market demand, Tata Elxsi has been continuously evolving its product and services offering to address the emerging opportunities. As the market demand has changed, Tata Elxsi has been adapting its product and service offerings to take advantage of new opportunities. An award-winning suite of solutions from Tata Elxsi offers network automation and orchestration solution NEURON, test automation, Quality of Experience (QoE) testing platform QoEtient, OTT/IPTV platform TEPlay, CPE management and monitoring platform iCX, and extensive capabilities in Ad-Tech services and new-media design services. Artificial Intelligence has enhanced each one of these products to provide clients with faster, more effective, and valuable solutions. All these solutions have been enriched with AI to deliver superior speed, performance and value to customers.

In line with the adoption of AI and Generative AI in media and entertainment industry, Tata Elxsi is developing a comprehensive suite of AI services offerings around production, monetization, metadata extraction and management for media assets, distribution and delivery, infrastructure monitoring using AIOps, video and image analysis for content moderation and many other AI and Gen-AI based offerings.

Tata Elxsis partnership with RDK and wide gamut of service offerings in the area of network orchestration, SD/SD-WAN and Android TV is helping its customers pivot to next-gen entertainment, broadband and connectivity services.

Healthcare

The healthcare industry has witnessed a revolution with integration of digital technologies. Platform spending for connected medical devices and digitalization of healthcare; cybersecurity regulations and regulatory compliance for pharma and medical devices industry are some of the key trends defining the growth of engineering services in the industry. A significant growth driver fuelling investments in the healthcare sector is the increasing trend of consumers self-monitoring their health via virtual health. The increasing use of patient-level data by companies to improve customer experiences and outcomes, intelligent platforms that enable personalized medical treatments based on every patients needs, medical history, and payment based on patient health outcomes are all driving substantial investments in predictive healthcare.

It is expected that in 2024, engineering outsourcing in healthcare and life sciences would be growing at around 6% over the previous year. As compared to the traditional ER&D, the digital ER&D outsourcing is anticipated to grow at a faster pace during the next couple of years. Amongst the digital ER&D in healthcare, patient monitoring and patient provider engagement solutions are expected to grow strongly. Patient monitoring includes telehealth, health monitoring using wearables and medication adherence tracking. Patient provider engagement solutions includes self-service machines and omnichannel communication experiences for patients. Over last few years, Tata Elxsi has developed strong capabilities in medical device design and engineering, digital health engineering, medical device regulatory compliance and pharmaceutical & biotechnology compliance. In line with market trends, we have developed unique AI enabled telemedicine solution which integrates continuous glucose monitoring (CGM) systems with insulin delivery devices. To address the opportunities arising in the remote health monitoring and care segment, Tata Elxsi has developed strong capabilities in developing an integrated care management platform. This helps our customers in seamless integration of next generation intelligent applications with the providers digital health platform.

Business Analysis

As one of the specialists in Engineering Research & Development (ER&D) with presence across North America, Europe, Japan, India and APAC, Tata Elxsi continues to drive innovation in Transportation, Media & Communication and Healthcare verticals. Our unique combination of domain expertise, digital capabilities and design-led approach allows us to secure our niche as a differentiated technology partner to deliver significant long-term value to our stakeholders, including business partners, clients, and shareholders.

The Company reported operating revenues of Rs. 3,552.1 crores in FY 2024, an increase of 13% year on year (YoY). This growth was volume-led with constant currency growth of 9.6% YoY. Our operating profit (EBITDA) was Rs. 1,046.4 crores, up 8.9% YoY, with EBITDA margins of 29.5%. Profit before tax stood at Rs. 1,048.7 crores, up 11.9% YoY. The Companys PAT for the year was registered at Rs. 792.2 crores, up 4.9% YoY.

The offshore revenue share was at 74.9% for the year. Your Company remains true to its fundamental model of offshore-led delivery, allowing us to focus on quality by leveraging the Company-wide expertise and optimising utilisation of specialised skills. The trust our customers place in us is the testimony to our track record of delivery excellence in this model.

During the year, the workforce grew by 13% with a net hire of 1,535 Elxsians. We continue to lead industry peers in employee retention, reporting an attrition rate of 12.4%. This aligns with our strategic focus on providing meaningful employee engagement that inculcates a strong sense of culture and identity. Tata Elxsi remains one of the most sought-after companies to work for and we have been able to attract world-class talent by rewarding performance and excellence at all levels.

The customer revenue concentration from our top 10 clients increased from 48.1% in FY 2023 to 53.1% in FY 2024, in line with our intent to increase wallet share and become strategic partners for our customers. Our geographical revenue contribution continues to remain diversified in line, with our long-term strategy, with the US contributing 38.3%, Europe 39.6% and India 16.6% as against 42.5%, 34.4% and 17.0%, respectively, clocked in FY 2023.

Our operations are classified into two business divisions, i.e., Software Development and Services and Systems Integration and Support.

Software Development and Services

Software Development and Services (SDS) delivers integrated design, software and digital offerings across key verticals.

Our design offerings and capabilities are deeply integrated with our key industry verticals, complementing our software and digital business with a design-led proposition.

This offers our customers a seamless end-to-end proposition from ideation to market introduction, and enhances our competitive differentiation, providing early visibility into customer product roadmaps, and creating larger downstream development deals.

The Software Development and Services business operates in three primary verticals: Transportation, Media & Communications, and Healthcare & Life Sciences. During FY 2024, the SDS business generated Rs. 3,452.8 crores in revenues, registering a growth of 12.8% YoY. This growth was primarily led by Transportation and Healthcare & Life Sciences, with Media and Communications growing at a relatively muted rate owing to difficult business environment globally for this industry.

Transportation

The Transportation vertical posted strong growth of 24.6% YoY, generating Rs. 1,723.9 crores revenue which comprises 49.9% of SDS operating revenue. Transportation continues to be a strong beacon of growth for Tata Elxsi, powered by landmark deals in the software-defined vehicle (SDV) and electric vehicle (EV) space driven by our differentiated software capabilities.

This growth results from our sustained customer traction of being the leading provider of transformative technologies for connected, autonomous and electric cars, with solutions like TETHER, AUTONOMAI platform for driverless cars, and e-Cockpit.

We also have a suite of EV solutions and expertise to provide OEM support for the design and development of inverters, electric motors, and battery management systems for EVs.

Software Defined Vehicle Platform is a key trend in the automotive industry, with OEMs investing in developing in-house SDV platforms.

We are now embedded in the SDV programs of 5 global OEMs, including a landmark multi-year large deal for SDV from one of the leading Automotive OEMs.

TETHER, Tata Elxsis flagship Connected Vehicle Platform, is a cloud-based platform powered by IoT and AI/ML to allow a whole range of value-added services and monetisation for OEMs. It enables our customers to offer end customers a range of customer-centric and digitally enhanced features. With over 10,00,000 vehicles are now powered by TETHER, including personal vehicles, commercial vehicles, and EVs, the potential to leverage this platform for global OEMs is significant.

The design-led differentiation of Tata Elxsi is best illustrated by its engagement with Tata Motors for the Gen 3 HMI, a futuristic digital cockpit experience designed primarily for Electric Vehicles (EV) and Internal Combustion Engine (ICE) Vehicles. This solution won the esteemed German Design Award 2024. Tata Elxsi was involved across consumer research, detailed digital and experience design, prototyping, and validation. The Gen 3 HMIs features are inspired by global trends in HMI design that can cater to international markets. The Gen 3 HMI has already been introduced in the new range of SUVs such as the Harrier, Safari, and Nexon.

Tata Elxsi has been honoured with gold award at the

Exchange4Media India Design Excellence Awards for Best Design for Automotive and Transport category.

We see strong demand for our connected vehicle offerings, having won a multi-year deal with a leading OEM for product engineering for a connected infotainment system, and another deal for multi-country licensing and deployment of our Connected Vehicle Platform (CVP) with a global top 5 OEM.

Apart from its offerings for the mainstream passenger vehicle segment, your Company has adjacencies such as off-road vehicles and rail to expand the addressable market while leveraging its strengths in automotive vertical. These adjacencies serve to provide some measure of risk diversification while still allowing for fungibility of domain expertise and application of deep domain knowledge into related fields.

Media and Communications

Our Media and Communications vertical posted a modest growth of 0.2% YoY, generating Rs. 1,217.5 crores revenue which comprises 35.3% of SDS operating revenue.

As beneficiaries of the accelerated spending during the pandemic period, media and telecom companies are now witnessing a demand correction and have significantly reduced spending during FY24. While there is macro-scale slowdown that the Media and Telecom sector is witnessing, we have been able to grow our market share, continuously engage with our partners and attract new customers, as displayed by our win of a product engineering consolidation deal for a leading multiple-system operator (MSO) in North America.

During the period, we have expanded into LATAM and MEA Region, winning large deals and customers in these two regions. In the LATAM region, Tata Elxsi has been chosen as a strategic partner for transformation of video services across multiple countries for a LATAM headquartered multi-country operator. This is a 5-year deal to develop and deploy next generation video technologies. Tata Elxsi won the Broadcast Pro Manufacturer award for ‘Best in Linear Distribution for its work with OSN in Dubai for the successful development and launch of the OSNTv Box.

We continue to grow our offerings in media and telecommunication and see sustained interest in our solutions including QoEtient (Video Test automation and Quality of Experience monitoring), AIVA (Intelligent Video Analytics),

TEPlay (White label OTT Platform) and iCX (device monitoring and management solution for operators) among others.

Tata Elxsis AI-powered OTT platform won the prestigious iF Design Award 2024 for OTT User Experience design. This is testimony to the design-led digital offerings to enhance the value proposition to clients in the industry.

In FY24, we launched NEURON, our autonomous network platform that enables telecommunication operators to progress towards Zero-Touch Automation. Serving millions of subscribers with 10,000+ virtualised network functions (VNFs/CNFs), NEURON integrates seamlessly with existing infrastructure, including IT, legacy systems, and OSS/BSS. This creates secure, multi-domain, multi-cloud networks that are easy to manage and deliver significant OPEX savings.

We are proud to mention that Tata Elxsi has been awarded Platinum Winner for the ‘Best Network Orchestration Solution in TELCO at the Future Digital Award by Juniper Research and Product of the Year at the Industry DevOps awards event at London for our ground-breaking network automation product – NEURON. These awards recognize the best products and platforms in the world for telecom sector.

NEURON was chosen by a leading telecommunications company for its upcoming network rollout and deployment, that will encompass customization, deployment, and support for the next 10 years.

Healthcare & Life Sciences

The Healthcare & Life Sciences vertical posted a growth of 10.8% YoY, generating Rs. 484.9 crores revenue which comprises 14% of SDS operating revenue.

The healthcare industry is at the inflection point of a digital transformation, with more institutions investing into connected and smart devices, shift of operations to digital workflows, usage of analytics and increased awareness of regulatory norms, resulting in the opening of new opportunities to enter the field of digital diagnostics and connected healthcare.

Tata Elxsi continues to build business traction on its multiple award-winning solutions, including TEngage (the first-ever digital health platform for omnichannel care that offers a unified patient experience), TEDREG (global regulatory intelligence platform that monitors and captures real-time updates to global healthcare standards to allow companies to stay updated and ensure their products are compliant with global policy), Digital Health Platform (digital front door to all telehealth services) and TEcare (configurable platform for digital therapeutic solutions).

We continue to solidify our position as one of the leading digital healthcare providers and this effort can be seen through our multiple deal wins. Tata Elxsi won a design-led New Product Development (NPD) deal from a Global Healthcare company to innovate a new line of next-gen Smart Hospital equipment. Additionally, a global medical devices leader has selected Tata Elxsi for global regulatory services using the latest AI and algorithm-based technology to improve compliance and reduce spend.

Other Industries

The Company continues to invest in exploring offerings and customer projects in new industries, winning awards and global recognition for its innovation and seamless blending of consumer-centric design with technology. The ‘Aha! Tea Vending Machine for Chaayos was the recipient of the prestigious iF Award for product design.

In the UAE market, Tata Elxsi also unveiled a cutting-edge container design for Daburs Vatika Shampoo line. The pack design cut down on plastic consumption without sacrificing the structural integrity, usability, or functioning of the bottle.

The rest of SDS revenues comprises of innovation and design-led projects in other industries, including consumer packaged goods, retail, energy and utilities, manufacturing, adding diversity to the application of design and digital technologies, and creating possibilities for future verticals for the Company.

AI and Gen AI Focus

On the AI and Gen AI front, we continue to invest strongly in solutions, POCs and projects, ramping up talent across the Company.

We are applying Gen AI to workflows and processes, regulatory work, automation of network operations as a new service framework and solutions.

We have created and deployed specialized programs to get 25% of our engineers AI-ready in the third quarter of FY 2025. We are creating programs to enthuse our talent base to experiment and innovate using Gen AI across design and software. For example, we hosted a Gen AI hackathon in January 2024 with over 70 teams participating from across the country.

The large deal that we announced in the healthcare regulatory space already uses automation and AI to deliver efficiency, speed and higher quality to workflows for our customers. We are also enriching our in-house platforms such as NEURON, iCX, and TEcare with Gen AI to enable new use cases and customer experiences.

Systems Integration and Support (SIS)

Tata Elxsis System Integration and Support business traditionally focussed on reselling and maintaining infrastructure, compute and connectivity solutions for enterprises. Over the past few years, it has been pivoting to value-added professional services, as well as monitoring and management of cloud-based applications for enterprises.

It is on a transformation path of becoming a natural extension of our design and software development services to customers in our key verticals. With the integration of cloud-based technology into our offerings, we have observed shift of client engagements from Product to Product Plus as the IT & Infrastructure pipeline gets extended and integrated.

Revenue generated through System Integration Services (SIS) stood at Rs. 99.3 crores, reporting growth of 19% from FY 2022-23, underscoring the pivot from traditional reseller and support services, to include multi-year annuity driven managed professional services.

We are now extending our customer engagements beyond the deployment/release of our products and platforms and are part of critical post-release services including bug-testing, software updates, analytics, and customer care. We are strengthening our value proposition to our customers, thereby allowing us to remain relevant through their entire product cycle.