Tata Technologies Limited analyst Q&A

Thank you. Our first question comes from the line of Chandramouli Muthiah from Goldman Sachs. Please go ahead.

Hi, good evening and thank you for taking my question. My first question is just on the broader environment for your core automotive segment. Just trying to understand, I think you made a few comments around sizes of deals being slightly smaller and they're waiting for a couple of quarters for more clarity on how the growth might start to rebound in the EV investing end market. So can you just provide a little more color around those comments and then maybe what you're seeing in your core customers, I think one of your peers had mentioned that JLR is not mainly the primary growth driver for the balance of this fiscal year, it's s ome of the other OEMs, which might be driving most of the growth. So just that angle between anchor customers and non-anchors as well.

Yes, it's a great question. And I'll reiterate my comments that in a medium to long term, we fully expect that the pendulum has swung and there will be increasing EV adoption rates as we get through the short- term challenges. And even in the short term, we expect the EV penetration to continue to grow. But there's really 2 things that are covering the short-term decision making of our customers. In North America, the election is essentially presenting at 2 very polarized policy positions as far as clean energy is concerned. And I think that our customers are waiting for clarity in terms of who wins | 17 next week. And I think that will then provide the basis on which decisions will then be made. I think in Europe, I think that there is concern about the chip -- the threat from China and the ability of the Europeans to react from a technology step perspect ive and also from a pricing perspective. And I think that they are waiting for regulatory help in Mainland Europe specifically. And our view through the discussions that we're having with the OEMs and their supply chains is that, that clarity will be provided in the early part of the next calend ar year. So, we anticipate short-term headwinds, some tactical headwinds over the next 6 to 9 months, but then we expect the type of accelerated growth that we've seen in the last couple of years to reinstate itself.

Got it. That's helpful. Second question is just around some of the useful comments you had shared with us on BMW. So thanks for that. So just trying to understand, I think at this point, we seem to be guiding for over time, that could be $100 million revenue opportunity. Just want to understand a couple of things around that. Do we expect to account this in the revenue line? Or is there clarity around whether it comes below the EBITDA line of share of profit from JVs? And also, just related to that trying to understand given that it's a JV, would you expect this to be as an entity, more profitable than your current core business? And what will be the sort of start -up costs associated with setting it up? When do you think it migh t achieve steady-state profit?

Yes. I think the fact that the JV does not begin to operate until the 1st of November means one that we are constrained by confidentiality | 18 agreements with regard to our commitment to the BMW. So, we're not at liberty to share specific details on revenue ramp-up and margins. As far as the accounting treatment is concerned as far as consolidation is concerned, we are still working with our auditors to determine the best approach for us to be able to present the contribution that the JV will make to our business. And so, as that becomes more clear, and we expect that to happen in the next couple of months we will bring that to the investors and share the details.

Got it. Thank you very much and all the best.

Thank you. The next question comes from the line of Abhishek Kumar from JM Financial. Please go ahead.

Hi, good evening and thanks for taking my question. First is on second quarter revenue growth. When I look at the constant currency growth sequentially for services, it was muted at 0.3%. So, was it in line with what you were expecting? Or were there some negative surprises through the quarter? And related question is, we saw a sharp jump in offshore revenue and one of your peers indicated that clients are correctively asking for work to move offshore. So, did that happen in our case? And if yes, did that had a deflationary impact on the revenues for the quarter?

Yes. I think in terms of the performance vis -a-vis our forecast. I think the performance was relatively in line with regard to our expectations. Say for the comments that we've made about some of the decision - making being right shifted and some of the deal s that we expected to close coming in at smaller quantum’s than originally anticipated. So, we signalled at the end of Q1 that we expected to return to growth. We've | 19 achieved that. We had at the beginning of the quarter, expected to do a little bit better than we actually delivered. But we've factored that into our expectations for the second half of the year. And as I've positioned in my opening comments, we expect the second half of the year to be better than the first half of the year. So, we are reacting to the market dynamics and the challenges in the U.S. and in Europe in the automotive market. But we're still relatively optimistic in terms of the momentum that underpins the business performance.

Sure. Next, I had a question on margins. We've done well in terms of utilization and also offshore mix. Now going forward in the second half, with probably wage hike, I'm not sure if you decided on the wage hike. But with that still ahead of us, how should we think about margins going forward?

We'll be rolling out our merit increases this month. And we expect that the merit increases together with the impact of festivals and holidays. We'll likely see a small decline in margins in Q3. But we are optimistic, and we've modelled that we should preserve margins in the second half of the year. So we expect to recover in Q4 and at the full year end we do not see any deterioration in margins from our current position.

Great. Very helpful. Thank you. And all the best.

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

Hi, thank you for the opportunity. What I just wanted you to share some color with regards to the growth within anchor customers, given some | 20 of the details that have been provided in our annual report. That's question number one. The second question was with regards to the BMW joint venture. Given that BMW does work with a number of Tier 1 IT services companies as well as some ER&D companies. D o you think over a period of time, there is an opportunity for us to consolidate that the ones that BMW may be doing with other vendors?

Yes. Let me start with answering that question first. I think one of the things that has characterized the partnership that we've established with BMW is that it has been driven by the executive leadership team of BMW. The decision to partner with Tata Tec hnologies was primarily made by the Head of Automotive Software and the CIO. They are on the Board of the joint venture, and they will work with Tata Technologies to ensure that the joint venture delivers against the expectations that BMW have had. And what that's allowed us to do is profile at the top of BMW, the breadth and depth of our capabilities. And it's also helped us influence decision -making at BMW in favor of plans not just for the joint venture, but for the direct business that we expect in the future to deliver. So, we are very bullish about the opportunity with BMW. Now as far as whether they consolidate the work that they're doing with other third parties into the JV or into a direct relationship with Tata Technologies, that will be obviously a decision for BMW. Bu t we will work very, very hard to continue to do everything that we can to ensure that our share of wallet continues to grow. As far as the anchor relationships are concerned, I think we've signalled now for some time that given the success of both JLR and Tata Motors, | 21 their capex has increased significantly, and we have been the beneficiary of that. Our share of wallet continues to not only be protected but in areas that are of strategic interest to Tata Technologies, we've seen growth. And we remain bullish for the ongoing support that we can provide for those 2 group companies and the impact that, that will have on both our top and bottom line.

Sure. Thank you and all the best for the future.

Thank you. The next question is from the line of Aayush Rastogi from B&K Securities. Please go ahead.

Yes. Thank you. So, I just wanted to understand on the automotive side of the business. So, we have heard that the global players are focusing towards profitability. And today also there were some -- from the one that they are getting kind of job and closing of plants. So, what is the confidence that is giving us that the 2H should be better than 1H? And what are the capabilities that are leading us to have an edge in comparison to the peers that we are seeing kind of a traction in the automotive segment.

Yes. Great question. The confidence in the second half of this fiscal year is really driven by our order book and pipeline. We have continued to win business and continue to add to the order book. And so, the guidance that we've provided for H2 is informed by that. In terms of why we continue to be bullish about our position in automotive, is that when you look at the automotive value chain and you look at the investments that are being made by our customers. | 22 They are investing not just in electric vehicles and in the transition to software-defined vehicles, but they're also having to optimize legacy products in order to ensure they are profitable to be able to invest in the future. Tata Technologies has capab ilities across the entire portfolio. So, the traditional internal combustion engine propulsion solutions and the associated vehicles as well as electric vehicles, the move to connected and again, the move to software-defined vehicles. And so, we are in a position to be able to partner with our customers in automotive as they navigate the vectors of change that will define the industry in the next 10 years. So, we are seeing a shift in emphasis in the short term, but we are not seeing any decline in the traction that we represent as far as the relationship that we've got with our primary customers.

Okay. Thank you, sir.

Thank you. The next question is from the line of Bhavik Mehta from JPMorgan. Please go ahead.

Thank you sir. A couple of questions for question. Firstly, when you say 2H is going to be better than 1H. But also, we think about the quarterly growth momentum in 3Q and 4Q versus what we are seeing into Q-on- Q growth accelerating over the next couple of quarters?

We certainly see the top line accelerating in both Q3 and Q4. Having said that, Q3 will be impacted by the festivals and the holidays that typically impact the third quarter of our fiscal year. And so, the underlying momentum will improve. But the reported top line and | 23 bottom line will be impacted by the seasonality that defines our industry on every year basis.

Okay. Got it. The second question was on the Air India deal, which was announced today. Can you share any color in terms of when do we expect to start the ramp-up of the deal and how big this deal could be over, let's say, for the next couple of years?

We've been working with Air India since it became part of the Tata Group. We've spent a significant amount of time, and we've invested a significant amount of resources in reengineering parts for legacy vehicles. And we've also worked with the OEMs and the ir supply chain to accelerate the delivery of product for Air India. So, both direct business with Air India and the associated business that we derived from Air India has continued to grow. The partnership that we are announcing today will further accelerate the growth of that business. And I referenced the investment that Air India are making in maintenance, repair and overall, the MRO facility that they will be starting up in Bangalore and we will be one of the key partners in the deployment of that facility. So, it's a relationship that's growing but it's a relationship that will accelerate and drive further growth, particularly as that facility comes on stream.

Thank you. The next question is from the line of Chirag Kachhadiya from Ashika Institutional Equities. Please go ahead.

I just want to understand the demand environment. So, some of our peers reported that the slowdown in the Europe, mainly they're facing execution related challenges, whereas we think that in H2 | 24 situation will improve and we like to report a better performance compared to H1. So how we feel that H2 will be better? And any conversation with our existing client that they're going to accelerate the spend and all?

Yes. As I had previously commented, our confidence in H2 is informed by the order book that we're carrying into H2 and the deals that we've previously won. We do see a tapering of demand in the short term, and that is driven by the elections, specifically what's happening in the U.S. and the challenges that the Europeans are facing, particularly as far as the competition with the Chinese OEMs in the EV space. But as I commented in my opening remarks, we expect to get clarity next month in terms of the policy position of the U.S., and we expect the regulator in Europe to provide some level of protection and some level of clarity to the European OEMs early part of the new calendar year. And we think that, that clarity will provide the basis on which our customers and the market will accelerate decision-making. So, we do see a softening of demand in the short term for new business, but our H2 is not informed -- we're not dependent upon that because it's really dependent upon the business that we've already closed. I think the outlook as we move into the next fiscal year, I think we we're relatively confident about that because, again, we see the short term - - we see the slowdown in the short term being informed by issues that should be resolved way before the start of the new fiscal.

Okay. Thank you. | 25

Thank you. The next question is from the line of Abhishek Shindadkar from InCred Capital. Please go ahead.

Hi, thanks for the opportunity. Just 2 questions. First, you mentioned about a right shifting of some of the work from customers. So, what I wanted to understand is that when did the customers kind of highlighted the same to you? Was it early part of the quarter, mid - quarter or it was a very short notice kind of a scenario. The second, you mentioned about the chip threat from China, esp ecially for European auto. Now is this a more structural problem? Or are you feeling -- I mean, what's your sense? Is this a structural or the resolution could be early next year?

I think if we look at the market dynamics, it's different in different regions. If you look at the beginning of the last quarter, I think when Mr. Biden was competing with Mr. Trump, there was relative confidence in the Republican camp that they were going to be successful. And I think that the industry was gearing up for a change in administration in November. I think the change of candidate at the top of the ticket, has presented a situation where right now, it's too close to tell. And so, I think as the race in the U.S. started to tighten, I think the concerns within our market and within our customer have heightened because the policy positions of both our size are somewhat tolerized and represent fundamentally different market conditions. I think in Europe, I think the threat and the concern about Chinese OEMs has continued to build over the last 12 months. But I think that the OEMs had anticipated that the regulator would move more quickly than they | 26 actually have. And I think it's only in the last month or so, that confidence has started to be established about policy positions that will be an active early part of next year. So, I think it's a detailed explanation of the fact that the situation has kind of evolved during the course of the quarter. And what we started out with at the beginning is somewhat different in terms of market conditions for the situation that played out in the last month of the quarter.

Very helpful. Just a follow -up to your answer. Does that mean that the tariffs on Chinese OEMs can keep on increasing? What is your assessment basis your interactions with the industry participants?

Yes, I think it's likely, regardless of who wins on November 5, the tariffs against Chinese OEMs in the United States will continue to increase. And that's primarily because the American OEMs don't sell a lot of products in China. I think it's much more difficult for the Europeans because particularly in the premium segment, the German OEMs and to a lesser extent, some parts or some divisions of the French OEMs do sell product in China. And so, I think that they will have to balance regulation with the ability to continue to service that market, which today is by far and away the largest market in the world. So, I think it will play out in different ways in different regions.

Thank you. The next question is from the line of Rajiv Berlia from Citigroup. Please go ahead.

Yes. On your comments on 2H better than 1H. I just wanted to understand how much confidence is coming from anchor clients and non-anchor clients? | 27

Well, I think it's relatively balanced. Our services revenue from anchor clients makes up a significant portion of our services revenue. And given the extent of the relationship that we have and the closeness of the working relationship, it means that we h ave very clear visibility on the business there. But we worked hard over the last 10 years to diversify ourselves, and we've built significant and sizable relationships outside of the group. And the business that we're in is a relatively sticky business. It doesn't change based upon the sales dynamics that our customers have to grapple with. When you invest in new product, you're investing in the competitive position of that company 3, 4 year s from now. And so typically, there is a short-term price shifting. There's sometimes some tactical reduction in discretionary spend. But for the most part, order books are protected and commitments that customers have made to us, they remain relatively intact. And it's that, that's really inspired and informed our confidence in the second half of the year.

Thank you.

Thank you. The next question is from the line of Kshitij Saraf: from Tusk Investment. Please go ahead.

Hi, good evening. Thank you for taking my questions. Warren, would you see this as an opportune time amidst a little bit of auto decision - making slowdown to ramp up the aerospace and the industrial heavy machinery bit. There's an announcement from Tata Advanced Systems as well. So how do you see Tata Technologies positioned to capture the broader opportunity over there? | 28

Again, a great question. And we're incredibly bullish about our aerospace business. The accreditation that we've achieved with Airbus, I think not only provides us with a platform to grow within that customer. I think it really provides us with an endorsem ent in the aerospace market. And if you look at the macro trends within aerospace, there's about 22,000 to 23,000 commercial aircraft in productive use today, that's set to double in the next 20 years. And right now, the big OEMs, Boeing and Airbus, they can't build enough aircraft quickly enough to satisfy the demand. So, we think that there's a tremendous opportunity in the areas product engineering. We also think that there's a tremendous opportunity in smart manufacturing and accelerating manufacturing throughput. We also are confident and I'm glad you've referenced it in the tailwinds that the group are providing in terms of the investments that they are making. Obviously, Air India is an important part of that. But what Castle are doing in terms of the work that they are undertaking to develop in a final line assembly capabilities here in India, we believe will provide tremendous opportunities for our company, particularly now that we've received the accreditation of a company like Airbus.

That's very helpful. And just to recap, we have the BMW JV coming up. We had the collaboration with Agratas, which I believe would only start to materialize once production starts. So where are we with Agratas? And are there any other major joint ventures or similar initiatives such as that of BMW in the middle of all of this?

Well, just let me clarify on Agratas. We're doing business that we are booking now for Agratas. There’re really 3 aspects of the partnership | 29 with Agratas at the moment. One is pack design. So, we are able to advance our coverage of the EV value chain to include now pack design. Previously, we were really focused upon systems integration and software development for batteries. Now we're actually standing up teams that are contributing to the dev elopment of packs for different use cases, not just within the 4 -wheeler or passenger vehicle space, but also in the 3-wheeler and 2-wheeler space. We're also working with Agratas to help them digitize their enterprise. So, we are rolling out ERP and PLM systems for that organization. And we're also working with them to help them industrialize the 2 giga factories that they are selling out in Gujarat and the Southwest of the U.K. So, we expect that partnership to continue to scale and to continue to grow. But we are today booking revenue from that partnership, and it continues to grow as we expand our coverage.

Thank you. Ladies and gentlemen, we take the last question from the line of Santosh Keshri from SKK HUF. Please go ahead.

Thank you so much for taking my questions. I just have 2 questions. One is, first, is the amount that invested for the BMW JV. Have we invested in any amount so far? And what is the plan of investment for the next 2 years? That's my first question.

Well, we are, again, constrained by confidentiality in terms of confirming specifically what we've done to help the JV get established. But what I can say is that we have invested in the transfer of resources, and we have invested in the setting up of infr astructure in Pune, in Bangalore and in Chennai. And that investment is part of the commitment that we are making to the partnership and to the joint venture. | 30 And we are fully confident given the business plan that we've established with BMW that those investments will be recovered in the relatively short term. Not only that, we also see that the direct business that we are delivering to BMW will continue to gro w and scale. So, we think that, that investment is an investment that has been very well made and an investment that should help our organization, not just in terms of the financial results, but also in terms of the strategic endorsement and the brand end orsement that it represents for our organization.

Yes. But the thing is that what I can see in the balance sheet that's there for the 30th of September '24, the property, plant and equipment line as well as the intangible assets line doesn't have much of growth. It's actually a reduction as of September '24 compared to the March '24 numbers. So, it appears that as you say that there has been some transfer of resources and some infrastructure is created. So of course, not telling you to reveal the numbers, but may I ask that is that appearing somewhere in the profit and loss account? That's why the profitability has gone down this quarter?

No, the actual investment as far as the joint venture is concerned, at this point of time, financially speaking is really just the share capital investment from Tata Technologies, and that's not a very material amount. Therefore, what you see as change in fixed assets is simply the natural erosion because of depreciation and amortization of assets. There are no special or one -off effects because of JV or otherwise on that particular line item. | 31

Okay. Great. And Savitha, one more question about other income. That is that though our cash balances have been increasing, we can -- I can see that the number for the other income has reduced based in the scenario and the yields have hardened -- sorry, th e return on the assets have risen up generally in the economy. So, what is the reason that our other income has gone down from INR23 crores last quarter to the INR16 crores this quarter?

So, I did address this as part of my opening remarks. To reiterate the point, there are 2 elements that have seen movement between the last quarter and this quarter. One is, like you rightly pointed out, there has been a reduction in the interest income that we earned. And you would recollect, we made a dividend payment of over INR400 crores - - nearly INR410 crores that happened towards the end of Q1. So, the second quarter didn't really benefit from the full effect of the cash build -up that we've done during the course of the quarter. Therefore, the overall yield has been lower. This is also impacted because the cash for us is distributed across the vario us material geographies in which we operate. And there, as you know, we have started to see some reduction as far as rates are concerned. So therefore, there's been about INR2 crores of reduction in interest income sequentially. The second impact is the notional impact because of the -- some of the forex hedges that we currently have. These were contracted several months ago. And the rate, especially as far as dollars and pound is concerned, has moved adversely. So, this is more a translation effect | 32 that you've seen. The swing of that between quarter 1 and quarter 2 is roughly about INR5 crores to INR5.5 crores.

Okay. Got it. Thank you so much.

Thank you. Ladies and gentlemen, that was the last question. I would now hand the conference over to Mr. Vijay Lohia for his closing comments.

Maybe before we close, let me just extend a very warm and happy Diwali to everybody on the call from everybody here in this room and everybody at Tata Technologies.

Thank you. Thanks, Warren, and thank you, everyone, for joining us on today's call. We hope that we've been able to answer most of your questions. If there are any further questions, please do not hesitate to get in touch with the Investor Relations team, and we'll be happy to answer your questions. Goodbye from all of us here. Thank you.

Thank you, members of the management. On behalf of Tata Technologies, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.