Tata Technologies Limited analyst Q&A

Thank you very much. We will now begin the question -and- answer session. The first question is from Chandramouli Muthiah from Goldman Sachs.

My first question is just around the environment for spending on electric vehicle R&D and autonomous vehicle R&D. You did mention in your prepared remarks that you expect more policy clarity around climate change and electrification-related incentives from different governments around the world? So just want to understand, post the inauguration of the US presidency last night, there are press articles talking about his focus on trying to come a little lower on the electric vehicle mandate, focus a little more on local fossil fuel production. Just want to understand what your initial thoughts are on some of the emerging news flow soon after the Presidency inauguration last night?

Yes. Thank you for the question. And I think it's particularly relevant given the timing of yesterday's inauguration. We fully expect various components of the Inflation Reduction Act to be revisited. We think some of the incentives that have been provided in the United States for EVs will either be removed or will be resized. And so, we think that that will prompt some tapering of demand for full battery electric vehicles. And we think that the industry response is going to be that the OEMs will invest in a much more balanced portfolio of propulsion propositions. So, they will not only invest in EVs, but we think that there will be much greater investment in plug-in hybrids and also optimizing and refining in the United States, legacy internal combustion engines. And I think the great news for us at Tata Technologies is the strengt h of capability we have in all three of those areas. We have a particularly strong EV proposition given the work that we've done with the likes of VinFast and Neo and companies like Rivian. We have a plug -in hybrid set of references, the most notable of which is the work we did with Polestar when we completed the Polestar 1. And we've been in the automotive business for over 30 years. And so, the breadth and depth of our legacy propulsion system capabilities is something that has helped us define the brand over the last 25 - 30 years. So, for us, what's kind of exciting is the fact that policy clarity, we think, will prompt a release of R&D budgets, which will stimulate the type of demand that we intersect with. So, we're somewhat agnostic in terms of the type of investment, we're much more dependent upon investments being made. So, for us, policy clarity is very much a good thing.

Got it. That's helpful. My second question is just a follow-up on the aerospace business. You mentioned there is an impressive sort of 39% Q -o-Q growth there. Just want to understand, post that sort of growth, what the rough size of the aerospace business could be just ballpark as a percentage of our total revenues today?

We're incredibly ambitious for our aerospace business. And I think we've signaled in the past the investments that we've made, not only in relationships and capabilities, but also in terms of accreditation. One of the big customers that we are working with has recently granted design authority for the work that we undertake. And what that means is that we can actually sign off on our own work, and it's not -- it doesn't have to go through an approval process with the client. That's an accreditation that typically takes 2.5 - 3 years. And so, the fact that we have that now has certainly helped us scale that particular relationship. And so, whilst I don't -- we don't give out specific guidance and quantify what the aerospace business will mean in terms of mix. What I can say is that we certainly expect aerospace to grow at the fastest rate of all 3 verticals off a relatively small base, but we expect it to increasing ly become a very important and material part of our business mix.

Got it. That's helpful. And just lastly, a housekeeping question around the deferred income that was discussed earlier. So, you mentioned that the share of profit from the BMW contract will come in share of profit from associates and JVs line below the EBIT line. Just want to understand the deferred income a little better, how that's getting accounted? Is that going into the top line? Is that going into any of the other lines in the P&L? Just want to understand that a little bit better.

Sure. Thanks for the question, opportunity to clarify, Chandramouli. As you rightly said, there are 2 effects in our P&L this quarter from our partnership with BMW. One is the share of profit, as you can see above the face of the P&L, it's above the PBT it em. The other effect is the deferred income, which technically as per accounting standards, we are forced to show that as part of the other income because as I said, it reflects the fair value gain on the option that the partners hold in the joint venture company. But it is a continuing effect that we expect to receive in the foreseeable future. And therefore, from our perspective, given our ability and intention to collect this, we are covering it as part of our other income, and that's why it's called out as included in our EBIT for this quarter.

And let me just reinforce, this is compensation for the work that we are undertaking for BMW. We've taken the responsibility of setting up the 3 centers in Pune, Bangalore and Chennai. We have -- we've provided the leadership team for this joint venture. And many of the systems and processes benefit from the infrastructure investments that we, Tata Technologies, have made. So, although we are constrained by the way in which we are accounting for this compensation through the various accounting rules, this, again, should be seen very much as a return for the investment that we've made in the joint venture.

Yes. As I said, for the foreseeable future, we do see this coming through on a quarterly basis.

Next question is from Bhavik Mehta from JPMorgan.

So, my first question is around the broader demand in auto ER&D. Obviously, there has been a slowdown. But if you have to characterize the extent of slowdown that's across US, Europe, and Asia, how will you define that in terms of where is the slowdown highest? And also, the related question is, as you expect the pace of recovery to happen, which geography could be the first one to recover from this downturn?

Again, a very fair question. If I look at this geographically, what we've seen in the US and Europe, we've not seen it in Asia. So, the slowing of demand that we've seen in the Western markets - we've not seen in Asia. We've not seen in China. We've not seen here in India. So, the demand here continues to be relatively robust. As far as the US is concerned, I think the extreme policy positions of the Democrats and the Republicans have presented a challenge for the industry in terms of aligning investment with what the regulatory framework is likely to look like. And so now that we have clarity, at least in terms of what we expect, then I think you'll see investments return much sooner in that region than you will in Europe. I think Europe is still grappling with the fac t that many of the OEMs are still selling a significant number of units in the China market. And so, any regulatory reaction to the competition that Chinese OEMs represent in Europe is likely to be considered and thought for and calibrated. And we expect the clarity around that to take several months. There will be a response. There is no doubt about that, but it will probably clarify after we see the administrative position of the new admin istration in the United States. So, Asia, we've not seen any real dip in demand. Europe is likely to come -- is likely to rebound after the United States. But what I will say, overarching in terms of the relative positions of the different regions is that the automotive industry is going through somewhat of an existential challenge. If you look at the recent merger discussions that are going on between Nissan and Honda, there is significant change that is really being driven by the competition that is expected to manifest itself in and around the movement to EVs, the movement to conne cted, software -defined vehicles and autonomous driving. And for those organizations that are committed to not only survive but to thrive, they have to continue to invest and invest in a way that is not exactly linked to the sales performance of the individual company. And that's one of the reasons that we continue to be bullish certainly in the medium to long term in terms of the opportunity that automotive represents for our company.

Okay. That's very helpful. The second question was, because of the slowdown we are seeing in Europe, does this impact the planned capacity additions with the BMW JV in India? Is there any risk to it?

Not at all. In fact, even when I make high-level comments about the regions, you need to look at the individual positions of each company before, I think, you can judge what the implications are for the various brands. And one of the things that I think characterizes BMW is: one, a very strong balance sheet; and two, the focus that they always have on the medium to long term. So, the cyclical nature of the automotive industry typically does not impact the R&D commitment of the more successful companies and BMW is certainly one of those.

The next question is from Abhishek Kumar from JM Financial.

I think a good performance in a difficult environment. First question, Warren, you mentioned in your initial remarks that you expect the slowdown to be temporary. Just wanted to understand how do you define temporary? Is it like two quarters, a year or longer? And a related question is, what are the kind of conversations that we are having with some of these OEMs, which are under pressure, especially the mass market OEMs in Europe, etcetera. Are there any talks around more outsourcing, larger cost takeout deals that will help them in the current environment? Thank you.

Yes. Two great questions. I think we will continue to calibrate and recalibrate expectations every day, every week, every month, and every quarter. But I think if we look at our current visibility, our anticipation is that within the next couple of months, the big three in Detroit and the new energy vehicle companies on the West Coast will return to the type of investment that we saw running up to the beginning of last year. I think, again, Europe will take a little bit longer, but organizations like BMW will stand out and continue to invest. And again, we don't expect any real change to the demand environment here in Asia. And so, if you aggregate all of that together, we're expecting improvement in the early part of the next fiscal year. As I said before, we'll continue to calibrate and recalibrate, but that's our view. This is a short-term slowdown. And certainly, the type of conversations that we are having with our customers right now and the opportunities and the deals that we are adding to the pipeline certainly reinforce confidence around that. As in response to the second question, one of the things that I always reinforce to our business development teams is that when things are tough for our customers specifically, that represents massive opportunity for us. One, it gives us an opportunity to communicate to our clients that we're there for the m in the good times -- we're there for them in the bad times as well as the good times. So, it's an opportunity for us to reinforce relationships. But it's also an opportunity for us to look at creative ways of increasing the value that we can deliver to those customers. And one of the things that we've seen recently is conversations with customers whereby we've been looking at opportunities to deliver things like hardware infrastructure and deliver that back as a service, wrap a service around that. We've looked at ways o f carving out capabilities from our customers and delivering that from offshore locations. None of these things are baked into our operating plan as yet. None of them are based into our forecast. But I share that with you primarily to signal that during these types of times, the conversations that we're having with our customers provide the opportunity for us not only to do more from an offshore perspective, but also enter into white space that typically we've not competed or delivered services in. So, we're seeing those conversations play out in many of our strategic customer relationships. And it's another reason, another data point that we continue to be optimistic about the future.

That's very detailed. One question for Savitha. Savitha, our medium-term margin aspiration of 20% plus, do you think in the current environment that kind of gets pushed out? I know we have not given any timeline, but still given the growth challenges, etcetera, do you think it will be a lot more gradual now to reach to that aspiration level?

Yes, thanks, Abhishek. So, I would say we continue to remain bullish on the medium to long term also on the structural tailwinds available to the industry and the market. And therefore, we believe that our performance, both from a top line and a margin perspective, should benefit from that. So, to your question, the aspirational goal of 20% definitely continues to be live for us.

Next question is from Karan Uppal from PhillipCapital.

So, Warren, just a question on our anchor clients. What's the outlook there, both within JLR and Tata Motors? You sounded quite optimistic on the APAC business, which includes Tata Motors. So, what's the outlook there? And the larger context of the question is, is Tata Tech to an extent, insulated from the headwinds which other ER&D players might be facing because of their higher exposure to the Western OEMs?

I think in terms of Q3, the performance of the anchor clients was robust. We didn't see any runoffs. Both of those organizations, in terms of their sales performance continued to do well. And we obviously have visibility on their investment plans, and we are confident that we will continue to support them in many of the ways that we are currently supporting them. So, we do not see any material change to the relationships and the performance of the anchor customers. In terms of - does our mix protect us vis-a-vis some of the competitors that are more exposed to Western geographies? I think the fact that we have a global footprint in terms of people and customers, I think that does interject some balance and some form of protection against the ebbs and flows in different markets. It's something that we've worked hard to build over the last 20 - 25 years, and it's something that I think we'll continue to invest in.

Okay. Great. The second question is on aerospace. So, you sounded quite optimistic on the aero growth story. So, I just wanted to check with you in terms of the service mix, which services are finding traction at this point of time? Is it new product development? Is it MRO? Is it avionics? Any color would be helpful.

Yes. Again, another fair question. We look at aerospace in the context of 4 areas. We look at aerostructures, which for us includes interiors. We look at propulsion systems, we look at MRO and we look at digital. And those are the relevant areas for us. Where we are seeing traction is digital, particularly in the context of manufacturing throughput. The likes of Airbus and Boeing and their associated supply chains can't build aircraft quickly enough. And so, they're leveraging technology to optimize the way in which they build aircraft, and we are playing a big part of -- a big role in that, particularly at Airbus. As far as the other sectors are concerned, MRO has been relatively stable for us. And aerostructures has really started to contribute in a material way. I announced in the last quarter, one of the deals that we had won with a business class seat manufacturer in Europe. And that has scaled during the third quarter and has now come online in terms of contributing in a material way. So that's going well. On propulsion, we are seeding the relationships with a number of North American engine providers through the placement of people and through some small project work. And that's helping us build relationships. And those things are going well and certainly give us confidence that we'll continue to scale that through this quarter and into the next fiscal year.

Next question is from Rajiv Berlia from Citigroup.

Two questions from my side. On the, I'll say the client bucket, 10 million to 15 million , we saw one drop-in client. Can you please clarify that? And secondly, you mentioned in the opening remarks that you won four deals. From a trend perspective, can you talk about on the TCV, how the TCV has been the last three, four quarters?

Could you repeat the first question? I got the TCV question, but if you could repeat the first part of the question, I'd very much appreciate it.

Yes. So, in the clien t metrics, if you look at it, 1 0 million to 15 million size of clients, we saw on a sequential ba sis, a drop in client?

So, in terms of the drop-in clients, I think the primary impact has been the way in which VinFast is dropping through our various customer categories. The baseline effect of VinFast in terms of year -on-year comparisons continues to impact the way in which we look at not just customer categories, but also the growth trajectory of the company. I think Savitha commented in her opening comments that we've grown at 17% outside of VinFast in the last 12 months. So, we continue to perform well, but obviously, the runoff of that material engagement has impacted on our performance at an aggregate level. In terms of TCV, we don't disclose the quantum of deals that we closed. But what I would say is that from a large deal perspective, our performance in Q3 was commensurate with the performance in the first two quarters of this year. So, we've not seen a drop- off in terms of our large deal conversion capability.

The next question is from Kumar Saurabh, who's an Individual Investor.

I'm Saurabh, a retail investor. I'm trying to buy stock of Tata Technologies for a long time, but unfortunately, its falling stock price is stopping me from enter into the stock. Now as I'm fortunate to talk with the management, I want to ask two questions. With a large portion of our revenue coming from the automotive sector, isn't there a significant risk of overdependence on this cyclical industry? What steps are we taking to diversify into other sectors? And what measurable progress have we made so far in diversifying our revenue stream?

Yes. We have a significant amount of business in automotive. There are three verticals that we support, automotive, aerospace, and industrial heavy machinery. And we've built our brand and our reputation on the back of the value that we deliver to automotive. One of the things that distinguishes Tata Technologies is that we are still the only ESP in India that demonstrated its ab ility to be able to develop a full vehicle from concept all the way through, the launch of the vehicle and the delivery of the vehicle to the consumer. So that's a very strong part of our value proposition. And when we look at the industry, if we look at the market size, and we look at the growth projection, we think that there is more than enough headroom for us to satisfy the growth aspirations of our business in that space. There will be -- as we have seen over the last couple of quarters, that there will be tactical slowdowns that we have to navigate our way through. But if we look at medium to long term, we think that there is a massive -- there will continue to be a massive opportunity in automotive. And that will be driven by the once -in-a-generation shift that we are seeing in the automotive sector as the industry pivots towards alternative propulsion systems, as the importance of software becomes more pervasive, and as the industry embraces the move to autonomous. These vectors of change, we believe, provide a significant amount of opportunity, and we think we are ideally positioned to take advantage of that. Now there is some diversification that we have in the business through the investments we made in aerospace and industrial heavy machinery. And those sectors, as we profiled previously, are growing at a very healthy rate. And one of the things that I think we benefit from is particularly as it pertains to smart manufacturing, there's fungibility across the three sectors that we're able to support. And so, we are able to leverage the investment we've made in automotive in these other sectors. But we constantly look at our strategy, and we always look at the balance that we need to affect between focus and diversification. And right now, we think we have the balance about right for where the company is at.

That's very helpful. Next question. In the Investor Presentation, leadership mentioned that policy clarity would drive future growth. Does this indicate that our growth strategy is overly reliant on external factors? Shouldn't we place a stronger focus on internal readiness to ensure growth regardless of external conditions?

In terms of what we're doing to stimulate growth -- if I understand the question correctly, what are we doing to stimulate growth despite the impact of the external factors. I think -- I outlined in my opening comments, the investments that we are making i n capitalizing our experience in IP and investing in technologies such as AI and GenAI. And through the investments that we're making in these platforms and these technology accelerators, we believe that we are building compelling propositions that not only make sense for our customers during times of good performance for them, but these are propositions that will make sense when things such as budgets are a little bit tighter. So, we're taking the opportunity to complement the headcount growth commitment that we are making by investing in IP and using both aspects of that value proposition to stimulate the type of growth that will help us navigate through the ups and downs of the various markets that we support.

Next question is from Vidyadhar Ginde from Sohum Asset Managers.

You did mention in one of your answers that the automotive industry in the West is facing an existential crisis. So, do you think that if some of the big auto players in the West, especially in Europe or the US, if they were to not survive or -- would it take considerable years before that happens? Or is that an event which can happen in the next 12, 18, 24 months?

Well, I think it's a great question that I'd love to discuss over dinner with you. But I think if I look at how things are likely to play out, the existential crisis does not mean that the capability that's in the automotive industry today will go away. The volumes still need to be delivered by somebody. And the plants and the IP and the skills and the capabilities will still continue to be relevant. I think that there are likely to be more mergers. I think there is likely -- there's likely to be more consolidation. I think you'll likely see new energy vehicle players continue to evolve in terms of their market position and the influence that they have over the overall market. So, I think that the industry is likely to change. And I think it's incumbent upon organizations like ourselves to ensure that we are agile and flexible. And we are in a position to take advantage of the change as it manifests itself. So, we're not intimidated by this existential challenge that I referred to before because we actually think there will be more and more opportunity that will be generated through the investments that the various players would have to affect.

My understanding is that in terms of the EV part, except for Tesla and some of the top Chinese guys, almost all other players in the West are way behind. And so, is that correct? And so even if they merge some of these guys, how does it really help in a sense? And is-- the gap between these top players in China and Tesla, can it be narrowed much in, say, 12 -24-month time frame? Because from the other thing I understand is that one of the big issues for these guys is providing an EV, which -- in terms of quality, which matches these top guys plus at the price at which they are able to deliver, especially with the Chin ese guys.

Yes, I'm sure you'll understand that I can't comment on individual companies, particularly those companies that are our customers. But what I will say is that, yes, China enjoys today a tech and a bill of materials advantage over the players in the West. But don't underestimate the capabilities of the European automotive industry and certainly don't underestimate the ability of the Americans to innovate and to play catch-up. And so, whilst there is an advantage that China has today, I'm fully confident that the Europeans and the Americans, those organizations that make the progressive calls and invest in the right areas, they will affect increasingly greater balance in terms of the EV marketplace. So again, this is an exciting space for us to be in because of the imbalance, again, in terms of the tech stack and in terms of bond cost, all of the players that are committed to being competitive in the future, all of them are having to invest, which by association provides opportunity for organizations like ourselves.

Thank you for the opportunity and congratulations on the resilient performance. I wanted to check, Warren, in terms of client conversation, do we see any change in the commitment from our clients on the existing projects like deferral or temporary pauses? And secondly, on the new deals tha t we are winning, are they ramping as per the expected timelines?

In terms of customer decision making, what we've seen over the last six months is not really that delays the existing projects. The projects that have been committed to and the projects that we are engaged in have continued as expected and as planned. What we've seen is a delay in decision-making particularly as it pertains to things like power-trains. And as I referred to before, we expect clarity to be provided, particularly in the US and Europe during the early part of calendar year 2025, and that will, what we believe, translate into those decisions that have been delayed being made. So, we've not really seen any show closing of existing projects. The impact has really been on new business.

We'll have to take that as the last question. I would now like to hand the conference back to Mr. Vijay Lohia for closing comments.

Thank you all for joining us on today's call. We hope we have addressed most of your questions. If you have any additional queries, please feel free to reach out to the Investor Relations team, and we'll be glad to assist you. Wishing you all the best and goodbye here from all of us. Thank you.

Thank you very much. On behalf of Tata Technologies, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.