Results 5th Nov

If DPU of Rs 2 per Quarter is sustainable and going to increase by Rs 0.25 after 3 years, then the current yield of 13.5% is attractive. Any comments?

H1FY25 Concall Summary

Financial Performance:

For the first half of FY25, total income grew by 33% year-over-year, with Q2 showing a 30% increase compared to the same quarter last year. This robust revenue growth drove a significant rise in profitability, with profit after tax nearly doubling and profit before tax up by approximately 78%. Despite an equity capital increase from a June-end preferential infusion, return on net worth improved from 21% to 22%. The company’s balance sheet remains strong with cash and cash equivalents totaling ₹31.5 crore as of September 30th.

Segment Performance:

• SupTech (formerly Collect): Reported a 48% year-over-year revenue increase, mainly due to the South African Reserve Bank (SARB) contract implementation.
• RegTech (Iris Carbon and Iris iDEAL): Achieved approximately 20% growth.
• TaxTech: Recently expanded to Malaysia, this segment grew by about 15%.
• Geographic Performance: Revenue from Africa now comprises over 36% of total revenue, attributed to the SARB SupTech contract.

Margin Guidance:

While no specific margin guidance was provided, the company benefits from operating leverage, evidenced by a 27% growth in total expenses against a 33% rise in revenue for H1FY25.

Management’s Future Outlook:

Management is optimistic about future growth, supported by strategic investments in sales and marketing. Key growth areas include:

• SupTech Expansion: Aiming to capitalize on the demand for standardized regulatory reporting, especially across Africa, with new shared revenue business models.
• RegTech: Plans to boost growth by converting clients to enhanced offerings like Disclosure Management and capturing market share from competitors.
• TaxTech & DataTech: Although in the early stages, DataTech is viewed as a potential long-term growth driver, with more details to be shared as developments occur.
• ESG Reporting: Focus on the Middle East, targeting energy-rich regions where ESG adoption is increasing.
• Artificial Intelligence (AI): Exploring AI for productivity and product enhancement, particularly within the Litigation Management System to automate tax notice tasks and leverage case law.

Key Risks:

• Competition: Potential intensification in both RegTech and SupTech from established and new players.
• SARB Contract Dependency: Any decline in SARB contract revenue could impact financial performance.
• New Business Models: Uncertainty surrounds the success of shared revenue models.
• AI Implementation: Challenges may arise, and benefits may not meet expectations.
• Regulatory Changes: Shifts in regulation could affect product demand.

Industry Perspective:

• SupTech & RegTech Consolidation: Larger firms are acquiring smaller players, intensifying market competition.
• Demand for SupTech: Increasing as global regulators adopt standardized reporting.
• ESG Reporting: Growing adoption of ESG standards opens opportunities, particularly in regions like the Middle East.
• AI’s Role: Expected to drive efficiency and enhance product capabilities industry-wide.

Early-Stage Focus: DataTech & TaxTech

The DataTech and TaxTech segments are in the “very, very infant stage,” with limited revenue impact currently. However, management has “high hopes” for DataTech’s potential to contribute to future growth. Specific strategies and details for this segment will be disclosed as the business develops.

Pricing Strategy:

In the RegTech segment, management is implementing pricing enhancements by adopting a consultative sales approach, demonstrating added value, and introducing features that justify premium pricing. An example cited in the concall highlights a customer willing to pay four times the initial rate for an expanded Disclosure Management solution.

Overall, Swaminathan’s tone throughout the call suggests a leader who is confident in the company’s direction, optimistic about its prospects, and committed to transparent communication with investors.

Disclosure: Invested & the above is AI generated transcript

Tata Technologies Q2 FY25

Key Financials (Q2 FY25)

• Revenue: ₹ 1,296 Crore (2.2% sequential growth)
  • Services: ₹ 1,005 Crore (2% sequential growth)
  • Technology Solutions: 2.8% sequential growth, driven by 19.5% growth in the Education segment
  • Products: 21% decline due to seasonality, expected to reverse in H2 FY25
• Operating EBITDA Margin: 18.2% (flat quarter-on-quarter)
• Profit After Tax: ₹157 Crore (2.9% sequential decline)
• Net Cash: $145.3 million (up from $131.4 million in Q1 FY25)
• DSO: 85 days (improved from 92 days in Q2 FY24)
• Free Cash Flow: ₹ 453 Crores in the first half of FY25
• Headcount: 12,680 employees (1.4% sequential increase)
• Attrition: 13.1% (down from 13.7% in Q1 FY25)
• Offshore Revenue Mix: 43.7% (up 470 basis points sequentially)

Key Pointers

• Services Segment Return to Growth: The Services segment, after a decline in Q1, returned to sequential growth in Q2 FY25, although at a moderated pace. This indicates some resilience in the core business despite the challenging market conditions.
• Robust Education Segment Performance: The Education segment within Technology Solutions continued its strong performance, exhibiting a 19.5% sequential growth. Successful project deliveries in Bihar and Telangana, coupled with new wins with state governments, are driving this growth.
• BMW Joint Venture: The strategic partnership with BMW, forming BMW TechWorks India, is expected to be a significant growth driver in the coming years. The JV will focus on advanced software development for SDVs, AI-based solutions, and enhancing customer brand experience.
• Focus on Digital Engineering: The company is witnessing increased demand for digital engineering services like smart manufacturing, digital thread solutions, and Gen AI.
• Resilient Margins: Despite headwinds, the company has maintained stable operating EBITDA margins, demonstrating strong cost management and focus on efficiency initiatives.
• Strong Cash Position: Tata Technologies continues to maintain a debt-free and cash-rich balance sheet, providing financial flexibility to navigate market uncertainties and pursue strategic investments.

Outlook

• Stronger Second Half Expected: Management anticipates a stronger performance in the second half of FY25 compared to the first half. This optimism is based on the company’s healthy order book and pipeline, positive momentum within anchor accounts, and expected improvement in market clarity in early 2025.
• Growth in Aerospace and Industrial Machinery: The company is bullish on the aerospace and industrial heavy machinery sectors. The recent partnership with Air India and accreditations in the aerospace sector position the company for growth in these areas.
• Continued Focus on Digital and EV Solutions: Tata Technologies will continue to invest in building capabilities in areas like software-defined vehicles, digital engineering, and AI. This strategic focus is aimed at capitalizing on the long-term growth opportunities presented by the evolving automotive landscape.

Challenges

• Short-Term Demand Slowdown: The company is experiencing a slowdown in customer decision-making, primarily in the automotive sector. This is attributed to a strategic reconsideration of EVs versus hybrids, geopolitical tensions, and uncertainties surrounding elections in key markets like the US.
• Competitive Landscape: The automotive engineering services industry is becoming increasingly competitive. Tata Technologies needs to continuously innovate and adapt to maintain its market position.
• Talent Acquisition and Retention: Attracting and retaining skilled talent, particularly in areas like software development and digital engineering, is crucial for the company’s growth. The ongoing efforts to enhance employee engagement and upskilling initiatives are crucial in this regard.

Overall, Tata Technologies is navigating a challenging environment while maintaining a focus on its long-term growth strategy. The company’s strong fundamentals, strategic partnerships, and commitment to innovation suggest it is well-positioned to capitalize on emerging opportunities and deliver value to its stakeholders.