Tata Technologies Limited (TATATECH) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Tata Technologies 1Q FY '27 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Prateek Rampuria Associate Manager, Investor Relations, like Tata Technologies. Thank you, and over to you, sir.

Hello, everyone, and a warm welcome to Tata Technologies Q1 FY '27 Earnings Conference Call. I'm Prateek Rampuria, Manager, Investor Relations at Data Technologies. Joining us today from the management team are Mr. Warren Harris, Chief Executive Officer and Managing Director; Ms. Sukanya Sadasivan, Chief Transformation Officer; and Mr. Uttam Gujrati, Chief Financial Officer. We will begin today's call with opening remarks from the management team covering the company's performance for the quarter and key business highlights, followed by a Q&A session. Before we proceed, I would like to remind everyone that certain statements made during today's call may be forward-looking in nature. These statements should be viewed in conjunction with the risks and uncertainties outlined in Slide 2 of our quarterly fact sheet, which is available on our website. Our press release, financial results and investor presentation have been submitted to the stock exchanges and are also available on the Investor Relations section of our website www.tatatechnologies.com. We trust you've had an opportunity to review them. With that, I now invite Warren to share his opening remarks. Over to you, Warren.

Good evening, everyone, and thank you for joining us today. As we begin FY '27, I want to be very clear about the way we see the year ahead. FY '26 was a year of transition, and investment for Tata Technologies. FY '27 is poised to be a breakout year. That confidence is not based on aspiration alone. It is based on the quality of the demand we are seeing the strength of our order book, the momentum and large deal conversion, the visibility we now have across our pipeline and the operating discipline we are bringing to margin expansion and productivity improvement. The first quarter reinforces that view. For Q1 FY '27, total revenue was $175.4 million, representing growth of 4.3% quarter-on-quarter and 25.2% year-on-year in constant currency. Services revenue was $136.6 million, up 4.3% quarter-on-quarter and 24.4% year-on-year in constant currency. While Technology Solutions revenue was $38.8 million growing 4.2% quarter-on-quarter and 27.9% year-on-year in constant currency. Services remains the core engine of our business, representing approximately 78% of of total revenue. Our operating EBITDA was approximately $28 million, translating into an EBITDA margin of 16.1%, an increase of 10 basis points sequentially. Margin performance during the quarter reflected a combination of business mix and the deliberate upfront investments required to support the ramp-up of several large strategic wins. The external environment remains dynamic. Customers continue to be selective with how they allocate engineering budgets, particularly across the global automotive value chain. But that selectivity is increasingly working in our favor. Customers are prioritizing programs that accelerate product launches, improve efficiency, reduce cost strengthened software capability and support the transition to intelligent connected software-defined products. That is precisely where Tata Technologies has been investing and where our capabilities are becoming more relevant. Over the last 2 years, we have deliberately built a more resilient, diversified and future-ready Tata Technologies. We have strengthened our customer portfolio expanding our global footprint, deepens our capabilities in high-growth technology areas and position the company closer to where long-term engineering and manufacturing transformation spend is moving. The quality of that growth is equally important. Automotive remains our largest vertical, but the business is becoming healthier and more diversified. Automotive non-anchor revenue reached $43.9 million , growing 6.7% quarter-on-quarter and 56.3% year-on-year, reflecting continued progress in reducing customer concentration and expanding our presence across global OEM. Beyond automotive, we continue to see encouraging momentum in our diversification protege. Aerospace revenue grew to approximately USD 10.2 million up 6.4% quarter-on-quarter and 38.1% year-on-year, while IHM revenue reached approximately USD 15 million. Together, aerospace and IHM are becoming increasingly meaningful contributors to growth and provide additional evidence that our diversification strategy is delivering results. We're also seeing encouraging geographic momentum. Europe has become an increasingly important growth engine for the business, supported by the successful integration of spec and our growing presence across the region. Q1 revenue from Europe reached approximately $67.9 million, representing growth of 10.1% quarter-on-quarter and reinforcing our belief that the region will remain a significant contributor to future expansion. Germany continues to strengthen from a strategic white space to one of our most important growth markets, specifically BMW Tech works continue to scale successfully and have now crossed the bar down of 2,000 engineers. While BMW tech work is not consolidated into Tata Technologies revenue, it remains an important strategic relationship that strengthens our software-led engineering credentials enhances our access to next-generation mobility programs and reinforces our position as a trusted partner to one of the world's leading automotive manufacturers. Let me now turn to deal momentum. During the quarter, we continued to see strong traction in large strategic deal pursuits reflecting customers increasing willingness to address data technologies with business-critical transformation initiatives. The most significant win was our $100 million strategic engagement with Tenneco, which expands our relationship beyond traditional engineering services into a multiyear transformation program, spanning engineering, digital technologies, AI-enabled processes and operational modernization. We also secured a strategic engagement with a leading North American industrial equipment manufacturer, expanding our role across systems engineering, software engineering and embedded software development. The program will leverage AI-enabled engineering methodologies to improve development productivity, accelerate product realization and reduce time to market. In Automotive, we deepened our relationship with a leading global OEM for a range extender vehicle program that draws upon our capabilities across vehicle engineering, out integration validation and system development. In addition, we were selected as a preferred engineering partner by a leading off-highway manufacturer to support both the new product development and total cost of ownership. Optimization initiatives. In addition to these new wins, we continue to make strong progress on the strategically significant full vehicle development program with a leading Japanese automotive OEM, a that we discussed during our previous earnings call. What makes this engagement particularly net worthy is not simply at scale, but what it represents. As many of you will appreciate, Japanese OEMs have historically been highly selective in their choice of engineering partners, particularly for programs of this strategic importance. To be entrusted with the complete development of a vehicle program by a customer with whom we had no prior relationship in this space is a remarkable achievement and in value a powerful validation of the capabilities, credibility and value proposition that Tata Technologies has built over many years. This engagement reflects the growing confidence customers placing our ability to deliver end-to-end product engineering solutions across the entire vehicle life cycle. It also demonstrates that our investments in vehicle engineering, software-defined vehicles systems engineering, validation, manufacturing engineering and global delivery capability are enabling us to compete for and win some of the most strategic programs in the industry. Collectively, these wins reinforce a clear trend. Customers are increasingly engaging to other technologies on larger, multiyear programs that combine engineering software, AI and digital transformation capabilities to accelerate innovation while improving efficiency and competitiveness. This is why our guidance for FY '27 should be viewed with confidence. Based on current visibility, we continue to expect strong double-digit organic revenue growth for FY '27 with services of the primary growth engine and margin expansion supported by scale utilization, delivery productivity, AI-led efficiency and disciplined cost management. AI remains a central pillar of this confidence. Our AI strategy is built around 4 priorities. Transforming service delivery, building differentiated offerings, strengthening AA partnerships and delivering AI-ready count. We are anchoring this strategy on enterprise-wide adoption with trust responsible AI built in from the start. Through chrome, we are codifying decades of engineering knowledge into repeatable frameworks, accelerators and solutions that improve productivity quality, scalability and delivery speed. We see AI both the margin lever and as a strategic differentiator, helping our clients engineer better products, faster and more efficiently. Talent is the other half of this equation. Through [indiscernible] internal University, we have delivered over 9,000 learning hours across Gen AI, software-defined vehicles and cybersecurity this quarter, strengthening capabilities of over 2,000 employees. Customer recognition during the quarter has also reinforced the progress we are making. Other technologies was honored with JLR's visionary Supplier award in June 2026, recognizing our role in supporting JLR's enterprise and manufacturing transformation journey across multiple initiatives and programs. In summary, Q1 FY '27 transforms the Tata Technologies is entering the year with real momentum. We have stronger visibility on growth -- we delivered 25.2% year-on-year revenue growth in Q1, while continuing to improve the quality of our portfolio through diversification, large deal conversion strategic customer wins and expanded software and AI-led capability. We are scaling in priority areas through initiatives such as [indiscernible] We are improving diversification through continued growth in automotive non-anchor accounts, aerospace and IHM while reducing our dependence on any single customer geography or end market. We are investing in AI as both the delivery productivity lever and a differentiated customer proposition, and we are translating this growth into margin expansion through productivity, utilization, operating discipline and scale. With that, let me hand it over to Uttam to take you through the financial performance in more detail. Thank you.

Thank you, Warren, and good day. Thank you for joining us all. Building on the business update shared by Warren, I will now walk you through our financial performance for the first quarter of FY '27 and discuss the key drivers underpinning our results. I'm pleased to note that the growth momentum we established in the second half of FY '26 has continued in Q1 with Services segment growing 6.3% Q-o-Q in INR and 4.3% in constant currency to INR 1,297 crores. The Technology Solutions segment saw sequential revenue growth of 4.3%, led by our education business, which saw a 9.3% growth while the product business saw a degrowth of 2.6%, primarily due to seasonality as it typically experienced strong demand in the final quarter of the calendar year. As it aggregate revenues increased 5.9% Q-o-Q in INR and 0.3% in constant currency to INR 1,665 crores. I am particularly pleased with the quality of our revenue growth this quarter, which once again underscore the diversified and resilient nature of our business mix. But are touched upon some of these trends. Let me add a few data points that further highlights the strength and balance of our portfolio. Within automotive, our non-anchor business continued to grow at a healthy pace, reflecting our success in broadening customer relationships and diversifying revenue streams. Resultantly, the contribution from anchor accounts to our services revenue reduced to 48.9% in Q1. An improvement of 150 basis points sequentially. This continued diversification enhances the resilience of our revenue profile by creating a broader base of future growth. We also saw encouraging momentum in our embedded and software business, which grew 8.5% Q-o-Q in dollar terms. The strong growth in ended and software not only reflects the increasing software content in vehicles, but also positions us well to characterize on the long-term industry shift towards connected, autonomous and software-defined mobility services. We maintained strong operating discipline during the quarter, with operating expenses increasing 5.8% slightly below revenue growth of 5.9%. As resultantly, EBITDA grew 6.1% sequentially to INR 267 crores while EBITDA margin improved basis points Q-o-Q to 16.1%. Margin performance during the quarter reflected a combination of business mix and strategic investments to support future growth. Our Services business delivered a healthy 120 basis points improvement in gross margin, which was partly offsetted by 250 basis points decline in Technology Solutions margins resulting in an unfavorable mix impact. In addition, several large strategic engagements and full vehicle programs entered the mobilization during Q1 requiring upfront investments in talent, ramp-up, capability development, transition activity and delivery readiness ahead of the revenues of meeting steady state level. While these investments created some near-term margin dilution, they are critical to successfully scaling these multiyear programs and capturing the growth opportunity ahead. We are also navigating some temporary headwinds within parts of our Germany business as certain customers walk through restructuring and cost optimization initiatives. As we implement annual rate increase in Q2, we expect to absorb the associated cost impact while still delivering sequential margin improvement through operational discipline and execution. While these factors may moderate the pace of margin expansion in near term, they do not alter our confidence in long-term opportunity. Overall, our confidence in the growth outlook has strengthened materially. As we move to FY '27, we will continue to balance the investments required to capture this opportunity with our commitment to margin improvement. We remain confident that prioritizing high-value turnkey and end-to-end engineering engagements today will create greater long-term value while supporting our medium-term margin ambitions. Our operating profit or EBIT increased by 8.3% sequentially, reaching to INR 239 crores. Our partnership with BMW continues to scale well BMW has now crossed a key milestone of 2,000 engineers and continues to strengthen our credentials in test walled automotive engineering while expanding our participation in next-generation mobility programs. In Q1, our share of profit from the joint venture increased 43.5% Q-o-Q INR 9.5 crores. And the total contribution stood at INR 17.8 crores, including the deferred income of INR 8.3 crores. Other income increased 19.3% Q-o-Q to INR 36.9 crores, driven largely by a profit on sale of investments. Profit before tax for the quarter was INR 252 crores compared to INR 283 crores in the previous quarter. It is important to note that Q4 included a onetime reversal of the provision related to the new labor got. Excluding this nonprofit nonrecurring benefit, our underlying profitability improved meaningfully with PBT increasing 10.8% Q-o-Q and a growing 11.3% sequentially to INR 181 crores. Maintaining a strong balance sheet with robust liquidity is a key focus for us. At the end of Q1, the net cash position stood at INR 880 crores, while the DSO remained stable at 97 days, reflecting healthy collection. Our bill DSO came in at 65 days compared with 59 days in Q4, while the unbilled DSO were at 32 days compared with 36 days in Q4. Moving on to the operational metrics, as highlighted our total head count stood at 12,579 associates at the end of Q1 representing a net reduction of 67 employees or 0.5% sequentially. This primarily reflects a continued optimization of our delivery capacity with a balanced approach towards managing the mix between full-time employees and outsourced less. As demand conditions continue to improve and deal momentum strengthened, we remain disciplined and selective in our hiring, focusing investments on strategic skill areas and growth priorities. This approach enables us to align talent deployment with client demand while maintaining operational efficiency and supporting future growth. Our talent metrics continue to remain healthy with trailing 12 months voluntary attrition declining to 16%, an improvement of 20 basis points year-over-year. This reflects the strength of our employee value proposition, investment in learning career development and our efforts to provide employees with opportunities to work on leading-edge engineering and digital transformation programs. We remain focused on attracting, developing and retaining high-quality talent as we prepare for our next phase of growth. Building a future-ready workforce remains central to our strategy as we scale in high-growth areas, which is emitted software, software-defined cycle, cybersecurity, digital engineering and AI-led engineering services. Our learning ecosystem continued to build traction with over 20,000 training hours delivered to 3,000-plus employees this quarter. Tenacity continues to be an important enabler of this capacity building journey, having conducted 90-plus programs, including focused technical learning across 40-plus niche skill areas. In summary, as we look ahead, we remain encouraged by the healthier customer engagement levels we are seeing across our markets. and the constructive demand environment that continues to support strategic investments in engineering, digital transformation and make generation mobility. While we remain mindful of the evolving macroeconomic backdrop, our focus remains firmly on disciplined execution, operational excellence and prudent capital allocation. These priorities, together with our diversified business mix and resilient margins, position us well to capture emerging opportunities and continuing to invest in capabilities that strengthen our long-term competitiveness. Above all, our commitment remains unchanged to create a sustainable value for all our stakeholders, including customers, employees, shareholders and partners through consistent execution and profitable growth. Thank you, and we can now open the floor to questions.

[Operator Instructions] Our first question comes from the line of [indiscernible] with Hika.

And also on the technical deal. Sir, largely, I wanted to understand that you repeated double-digit organic growth for 2017 after delivering a very strong number -- so does this imply some moderation in H2? Or has the visibility actually improved further since the beginning of the quarter?

Thanks for that question, Joe. I think when we began the fiscal year, we referenced double digits, our expectations for double-digit growth. I think in the narrative that we've surrounded the Q1 results, we've referred to strong confidence in double-digit growth. So I think that as we've gone through the quarter, given deal signings, given momentum, given the engagement that we've built with customers, our confidence has only grown. So we do not see a tapering of growth in the second half of the year. We actually see growth accelerating as we move through the course of this fiscal.

Understood. And second question, are we seeing any OEM shifting engineering budgets away from EV platform toward hybrid or refresh program over the last 3 months and how the demand we are getting from Europe and U.S.

Yes, I think a great question. And certainly, we have over the last couple of years start to see the investments in EV tapering and a much more balanced proposition as far as proportion options that our customers are building and investing in -- and that's great news for Tata Technologies because as far as the policies concerned, we're agnostic. We are, at the moment, delivering work packages and full vehicles in the ice in the hybrid, plugged hybrid and full best arenas. And again, the key to the improvement that we've seen is that over the last kind of 18 months, demand has been somewhat compromised by the tariff announcements and again, that tapering of EV demand in geographies like the United States. We're seeing those periods now start to come to an end. Clarity being provided for the customers that we're working with. And based upon that clarity, investments are being made, and we are very pleased that we've been on the right side of that.

Your next question comes from the line of [indiscernible] Axis Capital. At really good color. One of you can as a kind of optimism of infections. I just wanted to understand, I mean, what's really underpinning this because most of your peers who our office specialist seem to be seeing quite a dissenter. So this is about your client portfolio being different. So portfolio in different or even a lot more diversified in is about involvement in hybrid platforms. What's actually the reason why your outlook very different compared to the peers?

Yes. Great question, Ravi. And I think what's really playing out is essentially the thesis around which we are investing and growing the company. And for some time, we have believed that as the clock speed of technology change accelerates, we think that our customers and the market will increasingly strict their focus on to the things that are called to the DNA of their brand, and they will increasingly look to outsource. And I think the propensity to outsource will be positioned predominantly for those organizations like ourselves that have demonstrated over many, many years, our ability to be able to take on turnkey responsibility for complete work packages and complete products. And that's really where we are seeing the tailwinds that we are currently intersecting with. And I think 1 of the associated points that I've made is that when a customer of ours makes a decision to outsource a complete product. That said, that decision is typically made at the top end of that customer hierarchy. So it's typically made within the C-suite. So it's the tip exact. It's the head of engineering or it's the those relationships that we've cultivated over many, many years give us the opportunity to not only influence product engineering decisions, but also all outsourcing decisions. And so we are seeing a broad-based improvement in demand. It's certainly very much predicated upon the outsourcing of full vehicles. But the head of effect of that and the influence that, that affords has given us the opportunity to grow in a relatively broad-based way. As Uttam pointed out, we've seen growth not just in terms of engineering, but also in embedded software and also in digital and again, I think those represent proof points of the principles that I've just yet.

You spoke about how its turnkey engagement. So can I think about the AI impact as not being really dictionary for you, it's not something that you're seeing because what kind of impact are you seeing at all on pricing

Great question, Ravi. I think one of the things that examining our value proposition on the full product space. is our ability to be able to deliver China speed and China cost at the quality standards that the global automotive market expects. Now we're doing that because we've had a footprint in China for more than a decade now. And so we understand the players, we understand how they do things. But we've been able to capitalize that experience through the investments that we're making in AI. And so the contribution that AI is making to us is really a force multiplier in terms of productivity and a force multiplier in terms of being able to do things that are increasingly difficult, not just for the competition, but also in part for the industry at large. If you look at the many of the Western OEMs. They're still developing vehicles that between 36 and 48 months. We are routinely and have demonstrated this consistency able to develop full vehicles and top apps anywhere between 18 months and 24 months. And again, we've demonstrated that. And we've got vehicles on the road today that are, again, proof points against those -- against those claims. Then we can just say that we shouldn't think of them the volume of work is constant.

Can we just think of that as the product cycles are accelerating, but that's a real net impact of that we don't just think about as singing the pie.

I think that's a great way to summarize it.

And on one clarification on the technology product side, the margins are lower. What's the reason for that this quarter?

So basically, that's a mix impact that we are seeing in the Technology Solutions business. The education business grew faster than the product piece in it. and disproportionate growth mix change within the 2 led to the decline in the margin.

The next question comes from the line of [indiscernible]

So first of all, congratulations with the warrant comment via for a great set of numbers and great execution. You have outdone yourself. So congratulations network. My question is first to one is you announced the [ Tenneco ] deal and on full vehicle program. Now last quarter, you had mentioned that you were positive on closing 2 full vehicle programs in the next 8 to 12 weeks out of which one you have already closed and I'm sure, given the confident tone that you're speaking with, you will be closing the second one soon. But could you give us a sense of how many such full vehicle programs do you have in pipeline now at this point in time that you are confident of closing in.

Well, thank you for the generous comments first and foremost. I think as you picked up our confident on is really informed by the momentum that we continue to build in and around feel signings, large deal signings and specifically full vehicles. We've pointed in the narratives and the press release that we've accompanied the Q1 numbers or at least the debt that we published, we've pointed to a number of large deals. But that's not an exclusive list. And so we have closed additional business and we've taken that momentum into the second quarter. So I'm not at liberty to give you too many details in terms of customer names or the size of these deals. And hopefully, we'll be able to share more at the end of Q2. But rest assured, the deal we had some continues to build. And it's that really gives us renewed confidence in the guidance that we previously shared.

Sure, sure. My second question is in 2 parts. The first part to Uttam. If you could give us the aerospace revenue and the Q-o-Q and Y-o-Y performance in this quarter. And then the second part, I'll address to Warren, is that if you could give us some outlook. I know you don't give guidance, but quality retail, if you could give us a direction of how big can this vertical be so that we can get a grip on the size and scale of opportunity, especially given that Airbus has announced a new CNG program last year. So yes, these were the 2 part questions.

So let me go with the aerospace piece first. Our aerospace revenue grew to approximately $10.2 million. This was up 6.4% Q-o-Q and 38.1% Y-o-Y. And the second question, what you had was?

It relates to what the potential be for the aerospace vertical.

I think we have consistently messaged in the last couple of years, our confidence in scaling this vertical, at a faster rate than the automotive sector. And that's driven by a number of different things. it's been driven by the fact that we've been able to secure an involvement in Airbus' strategic supplier outsourcing list. It's been informed by the investments that the Tata Group is making in aerospace. It's informed by the fact that the demand for air travel is increasingly being centered upon Southeast Asia and specifically here in India and by association, the fact that there is going to be a significant amount of infrastructure investment in things like MRO capabilities and assembly and build capabilities here. So the growth that we've seen in the last 4, 5 years, which I think has represented a CAGR of about 40%. I think that, that is a CAGR that we can continue. And I certainly think in the next couple or 3 years, I think that we can trend very successfully towards the $100 million target for Aerospace. Now how quickly we get there will depend upon a number of factors but I think that we have -- we've cemented not only the relationship with Airbus, but with key components of Airbus' supply chain and we've also been able to build a very strong relationship with some of the propulsion players in North America. So the growth now is not just predicated on a single customer. It's much more broad both than by association, it's much healthier.

Your next question comes from the line of Ankur Pant with IIFL.

Congratulations on a good set of results. My first question is picking on volume statement that we go to accelerate towards the second half of the year. So when you say accelerate, does it mean that on that...

Your voice is slightly muffled.

Is it better now? Yes. So I'll repeat my question. My question is that Warren highlighted that we expect acceleration in growth towards the second half of the year. So just wanted to understand that we achieved 4.3% growth this quarter. Is that the benchmark that we are using to say that the growth would be accelerated into it? That is my first question.

I think we will maintain guidance in terms of double-digit growth. And I think in terms of the quantum of growth that we will drive in Q2, Q3 and Q4. In fact, will be driven by the ramp-up of the deals that we have closed. And our ability to ramp up is dependent not just upon the teams that we can mobilize but also the readiness of our customers and the investments that need to be made in infrastructure. I expect growth to be much greater in the second half of the year than in the first half of the year. But how that spreads across the quarters will be predicated upon the factors.