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Edited Transcript of TATAELXSI.NSE earnings conference call or presentation 21-Apr-20 9:30am GMT

Q4 2020 Tata Elxsi Ltd Earnings Call

Jun 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Tata Elxsi Ltd earnings conference call or presentation Tuesday, April 21, 2020 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* G. Vaidyanathan

Tata Elxsi Limited - General Counsel, Company Secretary & Compliance Officer

* Manoj Raghavan

Tata Elxsi Limited - MD, CEO & Director

* Pai Nitin

Tata Elxsi Limited - Head of Marketing and SVP

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Conference Call Participants

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* Ankit Kanodia;Smart Sync Services

* Bharat Sheth

Quest Investment Advisors Pvt Ltd. - Head of Equities

* Henrietta Seligman

Somerset Capital Management LLP - Co-Manager of EM Small Cap & Assistant Manager of EM Smid Cap

* Karan Uppal;Phillip Capital

* Madhu Babu

Centrum Broking Limited, Research Division - Research Analyst

* Mayank Babla

Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Research Analyst

* Mayuri Yadav;Equentis

* Ravi Naredi;Naredi Investments Pvt. Ltd.

* Vimal Gohil

Union Asset Management Company Private Limited - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Tata Elxsi FY '20 Q4 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Vaidyanathan. Thank you, and over to you, sir.

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G. Vaidyanathan, Tata Elxsi Limited - General Counsel, Company Secretary & Compliance Officer [2]

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Thank you, Sanford. Good afternoon. Welcome you all to the Q4 results conference call of Tata Elxsi, and hope you are all safe and healthy. As per the government's directive of social distancing, all the executives of this conference are taking the responsibility from respective homes.

Joining the conference is the management team consisting of Mr. Manoj Raghavan, CEO and MD; and Nitin Pai, Chief Marketing Officer and Chief Strategy Officer.

Manoj will give the overview of the performance of the company. Thereafter, we can have the Q&A. I would request each of you to restrict to 1 question so that you can give opportunity to other.

If time permits, you can join the queue, and the conference we will be having till 4:00.

Over to Mr. Manoj Raghavan to give the overview, please.

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [3]

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Thank you, GV. This is Manoj here. Am I clear and audible?

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G. Vaidyanathan, Tata Elxsi Limited - General Counsel, Company Secretary & Compliance Officer [4]

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Yes, yes.

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [5]

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Okay. Good afternoon, everyone. I hope you and your family are safe during this unprecedented time. So I'm pleased to report that we have delivered another quarter of steady performance despite the current COVID scenario.

In the past few weeks, we were forced to work in so many new ways and operating models that in large -- in such a large scale with such a short notice, we were agile and nimble in adapting to these changes. We have moved more than -- about 98% of our employees to work from home. And what is more pleasing is that we've not let any of this hamper any of our customer commitments.

Our customers have come back appreciating and thanking us for transitioning with minimum or no disruption whatsoever. I would take this opportunity to sincerely thank my IT team and management team who have really worked around the clock to make this possible.

I would also want to thank all employees who have accepted this as a new normal and continue to deliver and contribute to our success and, of course, to all our customers who stood with us in a very difficult situation. We were able to together deliver and keep up our commitments.

Last but not the least, I would also want to thank my senior management team who really over the last 4 to 6 weeks have been working tirelessly to ensure that we are able to deliver this performance in Q4.

Now our revenues for the quarter grew by 3.6% quarter-on-quarter and very credible 8.3% year-on-year. Actually, if you look at it, volume growth, almost 2/3 of it was volume growth. It is about 2.3% quarter-on-quarter and 5.5% year-on-year.

Our PBT also grew by 7.5% quarter-on-quarter and 2.8% year-on-year. And those of you who have been following our company, our 2 main divisions, EPD and IDV, both of them showed good growth.

EPD, our largest division, that contributed over 87% of our revenues this quarter, grew by about 4.1% quarter-on-quarter and 10.6% year-on-year.

Industrial Design & Visualization business grew 7.6% quarter-on-quarter and 5.4% year-on-year. Our -- however, our SI business was impacted this quarter, primarily because of the nationwide lockdown, and there were delays in hardware

(technical difficulty)

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Operator [6]

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This is the operator. Participants, the line for Mr. Raghavan has dropped. Please stay connected while we reconnect him.

The line for Mr. Raghavan is reconnected. Sir, you can go ahead.

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [7]

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So -- I -- where did you lose me?

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G. Vaidyanathan, Tata Elxsi Limited - General Counsel, Company Secretary & Compliance Officer [8]

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Yes. Manoj, we lost you when you just started to talk about system integration business.

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [9]

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Okay. So sorry, I think this is a cellphone issue. So our system integration business is impacted this quarter because of the nationwide lockdown. And if you understand that business, we get revenues when we really ship the hardware and software to our customer place and we install them and so on. But because of the lockdown, we were not able to ship any of the hardware and the necessary software. And that had an impact on our revenue recognition.

Within EPD, the growth was driven by Media and Communication vertical in Q4. We had 8.6% quarter-on-quarter growth. Our medical business continues to be steady, although last quarter it was flattish, but it has delivered 60%-plus year-on-year growth. So that vertical continues to grow at the rate that is faster than the rest of the company.

In the Automotive segment, we are seeing the existing softness. I mean we've always talked about the softness in automotive industry, even in the last quarter, and that is now amplified by the COVID-19. We are seeing muted sales forecast from OEMs and associated re-prioritization of their budgets and program funding. So we do anticipate delays and deferments of deals from the automotive suppliers as well.

So in some sense, the situation today, as we stand, is very similar to where we were at the beginning of the last financial year, although the reasons are very different, where the first quarter was significantly affected for other market reasons.

In Q1 last year, we had a significant budget cut in one of our top customers. And of course, there was softening in the auto market and that had led to a sharp decline in our revenues. But we have managed to recover strongly over the next 3 quarters to finish the year with a small but positive growth of revenues from FY '19 to FY '20. I think that's a pretty significant achievement for us given our status in Q1 last financial year.

We have also diversified our offerings and revenues further, and Automotive contributes now less to -- less than half of our revenues. We have expanded and deepened our offerings across verticals and also strengthened our footprint in the U.S. So we took various measures for cost management in the first quarter last year which were gradually relaxed over the rest of the year in line with what was needed to drive growth. While the market remains uncertain and the full impact of COVID on industry, markets and business for us in the first quarter and beyond is still not fully clear. But having been through this over the last year and having recovered well, I have the confidence in our capabilities and in our people to meet this challenge, too.

So we are right now focused on building a platform for growth and aim for performance and growth in every quarter that exceeds that of the comparable quarter last year. This really gives me confidence that we can tide over the current situation and come out of this even stronger.

So with this, I would hand over and we can -- let's start the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Vimal Gohil from Union Asset Management.

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Vimal Gohil, Union Asset Management Company Private Limited - Research Analyst [2]

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I hope you and your families are healthy and safe. Sir, my question is around the automotive vertical. If you could just give us some sense as to -- while Manoj did give some highlight on what's happening in the top customer, is this recovery expected to sort of continue in Q1 -- from Q1 onwards?

What about the automotive vertical ex your top customer? How is that expected to pan out?

More importantly, are you seeing any sort of cancellations in projects or are these more of deferrals at this point in time?

Separately, if you could just comment on your medical devices and communications vertical. I think in the call previously -- you did have a call previously on -- to give a separate update on COVID. In that, you had mentioned that those 2 verticals will be relatively more sort of -- be better off as compared to the company, that is the medical devices and your communications vertical. And in this entire background, how do you expect your profitability to pan out?

What are the cost-saving measures that the company is taking to save that profitability for the year?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [3]

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Sure. I mean that's not just 1 question, that is so many questions, right? So -- so yes, so the transportation vertical or the automotive companies will definitely be soft. There is no doubt about it. Your guess is as good as my guess in terms of where the other automotive companies and the suppliers, whether this will recover in Q1 or Q2. You should understand that most markets are still closed. When I say closed, most of the major European markets, whether it is Germany, U.K., France, Italy, Spain, whether it is U.S., and Japan is now getting into that cycle, China we're not sure whether -- is it fully open still. We are seeing very early signs. So it's very difficult to give a commentary on whether automotive industry would recover and how quickly that recovery would be. And -- I mean, it's not only Tata Elxsi, but I'm sure any other company in this scenario will not be able to give you a very concrete answer to that. But we are hopeful that over a period of time at least we see the maximum effect in Q1 and, hopefully, in Q2, we should see the economy gradually recovering. And in Q3 and Q4, we hope it will be a V-shaped recovery or a U-shaped recovery and recovery will happen. And we'll get back to our growth rates and so on across these quarters, right?

So yes, in line with what we're seeing in automotive industry. We are also very conscious of our costs. We are -- each of the cost elements that we have, we are taking very, very careful measures. Just to tell you that people are our assets. So we will not be retrenching anybody. The team that really has worked with us over multiple years and have contributed to the growth of this company, even though we may have some short-term blips, but I think this is a competency of the company that we have, our people, and we would definitely ensure that even during these tough times we take care of our employees. All the offers that we have made, we are honoring those offers. And of course, any further hiring, we are taking it a little slow. We are wanting to understand which way the -- when the market would open up and so on. And so any further hiring, especially lateral hirings and so on, we will really do it only on a very, very case-to-case basis where we really feel that we need certain skills for certain customer deliveries. So we are very conscious about ensuring that we control our costs and boost up the profitability.

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Vimal Gohil, Union Asset Management Company Private Limited - Research Analyst [4]

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Sir, are we going ahead with the normal salary hike? Because some of the larger players have deferred the salary hike for the year.

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [5]

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Yes, but we definitely have time for that. At this point of time, very clearly, there is no proposal that we have put, saying that we will give a salary hike. We would definitely look at how the economy recovers and take a call on that.

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Vimal Gohil, Union Asset Management Company Private Limited - Research Analyst [6]

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Fair enough, sir. Sir, if you can just highlight -- just 1 question got remained over there. If you could just highlight your view on your health care and comps vertical because that was expected to be less impacted as compared to the other ones. So...

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [7]

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Absolutely. So we see lesser of impact on both our media and communications business as well as the health care business. And if you see last quarter, our significant growth that we have achieved as an organization have been pushed by our media and communication business.

To me, 3 -- 2, 3 quarters ago or even 4 quarters ago, when we looked at from a midterm to long-term strategy in terms of diversification, in terms of our overall market verticals and the various areas that we are operating in, now I feel more certain that all the decisions that we have taken in terms of really pushing our investments in the media and communications side and the health care side has been a right decision.

And also, more importantly, the subsegments within -- that we're really focusing on, I think those are all the right decisions, and that will really help this company in this financial year and the coming financial year.

So media and communication, we -- it is not to say that there is no impact. There will be some small impact. But we hope to recover and cover up that impact and even grow in this particular vertical. Similarly, in the medical vertical also, what is happening is most of the medical equipment manufacturers and so on are reprioritizing all their R&D spend into COVID-related spend. So typically, in any hospitals, if you look at it, they make a lot of money on the so-called nonessential surgeries. So -- and a lot of manufacturers make money by selling equipment for all of those surgeries. Now with COVID happening, all of the other surgeries have been put on halt. And the entire thing -- the focus is on COVID. So for the latter half of the last quarter and even in Q1, we would -- we do not see that this situation changing. All hospitals will be busy with COVID and COVID-related issues. And on top of it, if you realize, a lot of our -- I mean, I won't say a lot, a significant portion of our revenues come from the regulatory work that we do for our customers.

Now what has happened in the COVID scenario is many governments in Europe, they have really pushed the regulatory time line. They have relaxed regulatory time lines. Now what has that done is, it has -- the customers are now able to have a breather and they can reprioritize and spend some of that money on COVID-related activities, right? So -- but having said that, it is a very, very temporary sort of a situation. We expect our medical business in the next -- in Q1 and beyond also to aggressively grow in the way that we have anticipated. It's just that this COVID-related scenario is putting some amount of caution in the way we project our revenues. Otherwise, I would still strongly believe that both media and communication and medical would be the saviors for this particular company in this financial year and the next.

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Operator [8]

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The next question is from the line of [H.R. Gala] from Finvest Advisors.

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Unidentified Analyst, [9]

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Your commentary was very helpful. I just wanted to know, when you talk about these medical devices, they are all focusing R&D on the COVID-related thing. Have we got any assignment from any company to develop something in our embedded design vertical?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [10]

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No. So COVID-related is primarily reprioritization in companies focusing exclusively on ventilators, right? Primarily ventilators and such devices. Yes, we have got inquiries in designing ventilators specifically for India. In fact, our Prime Minister has requested Indian companies to come forward and see what we can do for ventilators. So along with other Tata Group companies, we have been involved, and we have done some study to see how we can have home-grown ventilator in India. But that is nothing to do with -- there are no revenues there right now or nothing to do with -- it's some activity that Tata Elxsi as a company as a part of the larger Tata Group desires to go ahead in the interest of the country.

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Unidentified Analyst, [11]

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So it could be more like a social obligation.

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [12]

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Sure.

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Unidentified Analyst, [13]

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Okay. But anywhere else, have we got any inquiry in this situation?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [14]

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No, no. Not -- because ventilators are already well -- it's a well designed and well developed. It's just that more of the funding would go into assembly lines and manufacturing and rollout and so on.

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Unidentified Analyst, [15]

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Okay. Okay. And sir, another question is, now you say that the situation is quite heavy and we cannot guess, but how is the reaction of the customers now coming up based on whatever projects are in the pipeline? Do you think they will abandon it halfway? Or how will they go about it?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [16]

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No. So see, wherever there are long-term deals that we have with customers and so on, those would continue. I don't see mass cancellations or -- see, all said and done, most of the sectors that we have, they are unlike, say, hospitality or airline business or so on, who have 0 revenues, right? See most of my customers have revenues, and they have projections, and they have R&D that needs to be done. So from a product R&D perspective and existing projects and so on, cancellations and so on are far and few. But definitely, especially in the automotive industry, there is some amount of negotiation on terms, credit terms, on rates, volume discounts and so on, right?

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Unidentified Analyst, [17]

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So that is happening in the automotive segment?

Hello?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [18]

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Sorry, we couldn't hear you...

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Unidentified Analyst, [19]

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Yes, yes. Hello, can you hear me?

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Operator [20]

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Yes, sir, we can hear you.

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Unidentified Analyst, [21]

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Yes, yes. So you said that in automotive segments, customers are coming back for renegotiating on terms, credit terms, et cetera.

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [22]

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Yes. Sorry, I got dropped again.

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Unidentified Analyst, [23]

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Yes, yes, yes. You were telling that automotive segment, customers are coming for renegotiating terms, credit terms, et cetera. What are the other aspects of renegotiation?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [24]

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Those are the primary aspects of renegotiation, right? So companies are also trying to reduce their overall cash flows and so on to see if they can push it and get better credit terms and so on. So again, it is very difficult to tell you that it's an evolving situation. As you speak, we are communicating to each of our customers. There is some amount of discussions and negotiations happening. See, what we want to do is, we know that our customers are in pain, we want to be with them in this difficult situation. We don't want to be unreasonable. Even if it is to take a short term hit, we will do that, with the intention of a long term relationship. And we are very confident that whatever we do now will help us when the market recovers.

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Unidentified Analyst, [25]

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Okay. Okay. That's very good. Sir, last question from my side. What kind of, based on the delivery schedule, et cetera, which we had worked out, the revenue visibility for FY '21? Like this year, we had a flat year of INR 1,600 crores, what do you -- I mean, broadly look at FY '21.

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [26]

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Again, the current situation is -- it's very difficult for me to give a color to what FY '21 will be. But our focus, as we look at it, we have been through a tough year, last year. All of you guys know about that. All of you guys know that how we have recovered over the quarters, right, right from Q2, Q3 and Q4, how we have been able to recover and get this company back to its growth path. We will continue to do that. All the lessons that we have learned is very fresh with us. And we are seeing in Q1, a similar situation, and all the activities that we've done in the last year we'll continue to do, and we'll do it even rigorously. We will pursue each of our customers. We will work with them to ensure that we take care of their business. So what I can tell you is that we would go back and look at it and say, "Hey, every quarter, if you look at in Q1, we should be doing better than Q1 last year; Q2, we would be doing better than Q2 last year." And that is the focus for the company this financial year. We will take it quarter-on-quarter, each quarter. Because it's very difficult right now to say, "Hey, what Q3 will be, what Q4 will be." Because I have no clue how long the coronavirus influence will continue. Now I'm laser-sharp focused on Q1 to see, in Q1, can I be better than Q1 of last financial year. And that is a focus for us as a company. And we will also look at our costs. We will look at everything to ensure that we are able to manage the situation in a reasonable way.

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Unidentified Analyst, [27]

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Okay. And sir, to what extent our EBITDA margins then take a hit? Like in the fourth quarter, we have a very good margin of about 30%. And for the full year, it has been about 23%, 24%.

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [28]

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Yes. In the short term, I'll not be able to make those -- and again, I tell you, it's an evolving situation. We'll need to keep -- if we were any other company that ruthlessly cut people and ruthlessly reduce salaries and so on, I could have confidently told you that, yes, we will be in the 22% to 24% margin. I don't want to do that because that will hurt our midterm to long-term situation, right? So we will take it. We still -- our midterm to long-term target is to be in the 22% to 24% range, and we are very confident of that.

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Unidentified Analyst, [29]

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Correct. Sir, any capital expenditure plan for FY '20?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [30]

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We had plans. We had plans, but we are relooking at all of that because of the current situation. See, we wanted to invest in office spaces and so on. And we had plans across our delivery centers. But this is new normal, right? COVID has really opened our eyes, and we really say, "Hey, why do you really need more office space? We can work from home." So we are really relooking at all of that. And really saying that, hey, can -- see, those are some of the levers that we have to see how we can reduce the cost further and is there something innovative that we can do. And we're still on that path. So we will take some time before we get back to you on that.

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Unidentified Analyst, [31]

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Correct. Correct. Only thing is work from home, how do you protect the confidentiality of the data and all that stuff?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [32]

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Yes. So we have -- through various IT-related measures, right, including VPN. When people have to talk to our customers or talk to share data, et cetera, et cetera, it has to go through our office. It has to go through our firewall. Okay. So we are controlling our firewall. Everything is protected. All patches are regularly updated. We are monitoring regularly -- on a daily basis, our IT team is monitoring because it's a new normal for us, work from home. We are not sure what are the new risks or what further additional risks that would come in. We are talking to IT security firms to understand what other risks we should cover. You recently knew that Cognizant has been hit by Maze ransomware. So I quickly -- immediately, when that came out, I checked with my IT team and they've confirmed that they've -- all of that is patched up and covered, and we have nothing to worry on that. So we are looking at all these updates coming around the world, security incidents; immediately they are being evaluated; immediately, we are talking to our, what do you say, security companies, partners to understand, is there a risk for Tata Elxsi, what we need to do, any patches to be updated. Promptly, we're taking all that activity. And -- so we are very vigilant, I can tell you. Yes, rest is, if there are smarter people who can still figure out loopholes, yes, we'll have to figure out as they come.

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Unidentified Analyst, [33]

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Correct. Correct. Sir, do you see any significant change in your on-site revenue and offshore revenue mix?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [34]

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Yes. I think that is something that we will see, especially, because of the COVID scenario and because work from home has been pretty effective. We are talking to all our customers. And one of the measures that we are doing, especially when customers' budgets are getting reduced and so on, we are telling the customers that in the last few weeks, even though our engineers were on site, they were working from home, they were working remotely, and they were able to deliver value. So why can't we do the same thing moving work offshore, and I'll be able to meet your terms, I'll be able to reduce the overall expense for you, I'll be able to manage within your budget. So we are having those proactively. We're talking to our customers and having those discussions. And I -- and a lot of our customers are buying into it. So I think that is the direction that the industry will move. Tata Elxsi is definitely moving in that direction. We could see the revenue contribution from on-site come down, I would say. I'll not be able to tell you what percentage right now, but it will not be the current way. It will come down.

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Unidentified Analyst, [35]

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So that will be good for our margin accretion, is it not?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [36]

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Absolutely.

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Operator [37]

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The next question is from the line of Mayuri Yadav from Equentis.

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Mayuri Yadav;Equentis, [38]

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There are 2 very evident trends that are visible in your quarter-on-quarter performance. One is definitely the broadcast and communications division has grown at a faster pace compared to the other segments. And in the geographic segmentation, also, we see that the U.S. has contributed more whereas Europe has shown a marginal decline quarter-on-quarter. So would it be right to say that a large portion of this broadcasting and communications business has, therefore, come from the U.S. geography? And if yes, then just -- if you can elaborate a little bit more on the nature of work that has been done in broadcast and communications? And when we see this, will it be a savior for FY '21, this and medical devices? Then what are -- what is the news or what is the profile of projects that we are looking at that we contribute towards the FY '21 revenue from broadcast and communications?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [39]

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I'm sorry, I didn't get the last question clearly. Your voice was breaking.

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Pai Nitin, Tata Elxsi Limited - Head of Marketing and SVP [40]

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Yes. Manoj, do you want me to take that?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [41]

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Yes, go ahead, go ahead, Nitin.

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Pai Nitin, Tata Elxsi Limited - Head of Marketing and SVP [42]

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Yes, sure, because I think I did hear Mayuri completely. So Mayuri, right on both counts, if you look at the growth in Q4, a large part of it was led by revenues in the media and the communications business as well as in -- geography-wise from the U.S. But having said that, the 2 are not directly correlated. So U.S. did see broad-based growth. We did have wins in health care, in automotive and in media and communications. While media and communications grew across other geographies, too, including in India, where we saw growth even from some of our customers that are public in any case that we work with in India, and we have driven a large part of their growth even as OTT seems to be the flavor of COVID and lockdown, right? So therefore, the 2 are connected but not completely. But in general, if you look at it, on the media and communications vertical, if you look at big drivers for growth and where we see the future is 2, 3 ways. One is, we definitely see broadband in the home growing. It will grow not just because of entertainment and Netflix and Amazon, but it will also grow because lot more people work from home. So broadband consumption is not just driven by OTT consumption but also because you will see a lot more work from home, especially across enterprises. You will see broadband connectivity in fiber, in wireless growing. You will see OTT growing. You will see operators, even as they look at this kind of traffic, start to undertake some amount of network transformation and digital transformation on their own. And all 3 of these areas are growth areas for us because we have invested very strongly. We have a very good capability in these. I think we are kind of ready for the future.

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [43]

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Just to add on to what Nitin said, I think maybe few quarters ago, maybe Q1 of last year, we talked about how we are ramping up our U.S. sales team and how we are really focusing on the U.S. to give us that growth momentum. So I think we've done all the investments. I mean looking back, thinking in hindsight, we have done all the right investments there. And the set of things that we did then has really helped us in Q3 and Q4 to really boost up our revenues from the U.S.

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Mayuri Yadav;Equentis, [44]

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Absolutely. Your diversification strategy, which you laid out at the start of the year, is visible, be it at segment level or at the geography level. That is certainly visible. So in terms of automotive, just trying to understand the media and communication, we have, in this quarter, done around INR 155 crores in that division, and automotive has done around INR 180 crores. So do you see that in this year, we will see broadcast communications surpassing quarter revenue generation from automotive and, therefore, will be a large contributor as we go along in FY '21?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [45]

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Definitely, media and communication business will grow. That is not to say that we'll drop automotive like a hot potato. Automotive is still a good part of our business. So if it happens, again, in the post-COVID scenario, it's very difficult to say what will happen and so on. But whichever way it happens, if automotive grows, I'm happy. If my media and communication business grows, I'm happy. So it's a very hypothetical question. So end of the day, it's very good for me.

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Mayuri Yadav;Equentis, [46]

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Right, just because transportation may see some more pain in coming quarters and the broadcast/communication is growing at, whatever, 7%, 8% quarter-on-quarter. So just be sheer math, I see that surpass in your automotive contribution somewhere during the year. Anyway, if that would be foundational, I agree on that. My next question, Mr. Raghavan, is during our last con call and in our previous interactions, we understood that, pre-COVID, your overall deal pipeline was looking very healthy. So just want to understand, have those deals been put on hold completely? Or is there some negotiations, though, maybe moving at a much slower pace, but there is some negotiations going on in terms of the new orders across the key verticals?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [47]

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Yes. So you have all scenarios, right? We have business as usual. We have customers asking us to do more, a few of them in the media and communication and health care space where they are accelerating their business. We have a few customers who are negotiating for better terms, and there have been a few deferments also. So it is an evolving situation. So you have a whole spectrum of customers that we have. And depending on how each customer is -- each customer situation is, right, in this COVID scenario, the responses are different. So as I told you, at least the key customers that have been with us over the last 5, 6 years and that have contributed to the growth of this organization, we are very, very careful, and we are very -- we want to ensure that they also get out of this situation. And we really see how we can support them in this tough situation and how we can be with them so that when situation improves, we definitely grow with them and do a lot more with them. So that's the philosophy on which we are working.

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Mayuri Yadav;Equentis, [48]

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Right. Sir, my question is simple. Are we looking at some deal conversions happening even as of now amidst all this crisis? Also, are we seeing more deal conversions happening for us, maybe at a slower pace, but -- okay, okay...

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [49]

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Of course, we are having deal conversions, and that's an ongoing thing, right? So there are a set of customers who are continuing to increase their spend with us. It's a typical scenario.

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Mayuri Yadav;Equentis, [50]

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Right. Right. And sir, one last bit. We have also mentioned of having a larger deals, winning longer-term and larger deal. Size should -- average deal size should also have been increasing for us. So going by that, yes, there will be some deferment of execution. But whatever projects we have already started working on, the work on those projects is continuing. So even in Q1, it is not a 0 scenario -- zero growth scenario that we are looking at. There will be some growth maybe at...

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [51]

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Absolutely. So it's never a zero-sum scenario, right? So another strategy that we have in terms of looking at multiyear deals, looking at longer, significant deals and so on, right? And because of over the last 4 to 6 quarters we have been able to move the needle, the situation for us, even as we get into this COVID and post-COVID scenario, I would say it's not as bad as, if we would have been with smaller projects and so on. So smaller projects would have been cancellations immediately and our business would be -- every quarter, we'll really have to hunt for new logos, new business, so on. So we are -- I would say that we are -- I mean you can safely say that, look, a lot of that has past behind us. So we do have a lot of long-term customers and multiyear deals and that gives us a confidence that -- yes, it is tough, no doubt about it. But I think all the steps that we have taken has geared us to be a lot more confident on our future moving forward, in spite of all this crazy scenario we have now.

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Operator [52]

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(Operator Instructions) The next question is from the line of Madhu Babu from Centrum.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [53]

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Yes, sir, my question is on the transportation vertical. So these opened some of the futuristic projects on the [NG] as well as employment and all that. So one of a peer had been saying that some of the projects have been put on furlough and will be started again at a later date. So how are we seeing within multiple set of accounts that delay? And last time in 1Q, we saw almost like a 20% decline Q-o-Q in the transportation vertical in 1Q. So what is the quantum of business done especially in Q1 in the transportation vertical?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [54]

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I thought I will explain that, I'll not be able to give any quantum right now, right? It's an evolving situation. Very difficult for me to give you a number now and then later see that we are either better off or worse off, right? So, however, it's an evolving situation. We have customers who are with us, who continue to spend and for whom we continue to execute projects. There are a set of customers who have got into difficulty due to which we have some amount of deferment or some customers asking us relaxation for the quarter in terms of better credit terms and so on. So overall, from an organization perspective, as I said, what we have focused very clearly is to see how we can continue our quarter-on-quarter growth, especially with respect to the year-on-year growth. So it's sitting right now in Q4. We know that Q1, we will see a dip and not able to quantify the dip. But our focus is to ensure that we stay above Q1 or, in the best case, we are -- we reach our Q2 numbers. So that's the sort of modeling that we are doing right now. And approach is to ensure that year-on-year, we -- in each quarter, we show a growth or at least ensure that we are able to be around those numbers.

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Operator [55]

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The next question is from the line of Ankit Kanodia from Smart Sync Services.

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Ankit Kanodia;Smart Sync Services, [56]

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In our press release, you have mentioned that you have got some -- you have added some key customers in the rail and off-road segment. So can you explain a little bit more on what kind of orders you have got from there? And if you can highlight some of the customers. Who are the customers?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [57]

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We'll not be able to highlight the customer names. They're still new customers that we have gotten. Nitin, would you want to take this question?

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Pai Nitin, Tata Elxsi Limited - Head of Marketing and SVP [58]

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Yes, I can. So Ankit, just to give you a sense of the kind of work that we execute, we -- if you understand trains investments mirror automotive segment to some extent because we have the locomotive or the traction-related propulsion systems, which is like the engines. We also have rolling stock which is all the compartments and the passenger comfort and convenience systems, including communication, entertainment, seating, air conditioning and so on. So there is actual absolute mirror to what we do in the automotive segment. And the work that we execute also is of similar nature, working on electronics and software that go into trains, whether it's communication systems, whether it's passenger convenience or comfort or to support their propulsion systems and related. So the work (inaudible) similar nature.

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Ankit Kanodia;Smart Sync Services, [59]

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And in case of off-road segment, are you looking at OEMs there?

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Pai Nitin, Tata Elxsi Limited - Head of Marketing and SVP [60]

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That's correct. That's correct, and we have won some OEMs, too.

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Ankit Kanodia;Smart Sync Services, [61]

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Okay. So is there any long-term contract in these?

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Pai Nitin, Tata Elxsi Limited - Head of Marketing and SVP [62]

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So typically, if you understand, in our industry, you go through a journey of building trust. So you never -- there's not IT deals where they're saying, look, they're renewing an IT deal and, therefore, $20 million of a deal is now up for renewal and who is the best bidder. So unfortunately, R&D and engineering services don't work that way. And that sense you have to build it as you expand your presence into the customer project by project. So we are on that journey. And like, I think, Manoj has also said before, this is a long-term gain. So to that extent, diversification will not happen in a quarter or 2 quarters and so on. I think we're building customers, adding customers, working on projects, expanding projects within these customers. So I think we'll build it step by step. The good thing is we are on that journey and well on that journey.

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Ankit Kanodia;Smart Sync Services, [63]

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And roughly, how much would be this as a total percentage of that turnover revenue? Will it be a significant portion or a very minor portion, this rail and off-road segment?

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Pai Nitin, Tata Elxsi Limited - Head of Marketing and SVP [64]

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Right. So at this time line, I think we have declared that percentage earlier. We talked of the fact that it is still in single digits when you look at the overall transportation business. But it is growing quickly enough. So the idea is that, that accelerates a little faster than the rest of the automotive business, and that not only makes up for some of the gap but it also builds the platform for the future because the skills are adjacent.

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Ankit Kanodia;Smart Sync Services, [65]

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So this off-road customer is Indian or outside India?

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Pai Nitin, Tata Elxsi Limited - Head of Marketing and SVP [66]

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No. No, it's outside India.

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Operator [67]

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The next question is from the line of Henrietta Seligman from Somerset Capital.

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Henrietta Seligman, Somerset Capital Management LLP - Co-Manager of EM Small Cap & Assistant Manager of EM Smid Cap [68]

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Well done on the strong quarterly results. My first question is just how easy is it or possible is it to redeploy your staff from the auto vertical into other verticals, given that, that seems to where new demand is at the moment? And then secondly, what is the sort of utilization rate of your workforce looking like so far in April or at the end of March? Just so we get a sense of what the impact could be if this situation continued for a prolonged period.

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Pai Nitin, Tata Elxsi Limited - Head of Marketing and SVP [69]

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Manoj, do you want to take the first part? Did you get the question because I couldn't...

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [70]

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Yes. So maybe I'll take that, and I will rely on you to just check up the utilization percentage in the meanwhile. Henrietta, good to connect back again with you. Thank you for wishing us well. So very quickly, in terms of the ease of redeployment of skills from what may roll off automotive and how we can put them into other segments, I think the easiest ones are into adjacencies, that is, rail and off-road because just like I pointed out in the earlier question, the systems are similar, the technologies are similar, standards may vary a little bit. So in that sense, the first roll-off actually happens in terms of the use of skills into adjacencies, whether it's off-road or rail. And then beyond that, you go segment by segment. For example, people who work in infotainment domain again bring skill sets of handling multimedia or handling connectivity or handling communication within the car and that is fairly easily redeployable into the media and communications business. Similarly, some experience in control systems is relevant for medical devices because they also rely on mission-critical electronics very similar to some of the systems that you have in automotive. In fact, if you think about it the other way around, a lot of the car companies that are jumping to build ventilators is primarily because of that system's knowledge and that capability there. So in that sense, I would say, it's not 100% redeployment that I would tick off right away, but I would see it layer by layer, starting with adjacencies and then going domain by domain and then looking at where they fit into medical or into media and communications. And in general, I think we have done fairly well on utilization because utilization, I think, we have reached an all-time high. I believe it is about 72% or 73%, if I'm not mistaken. And given the context...

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Pai Nitin, Tata Elxsi Limited - Head of Marketing and SVP [71]

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About 74%, in fact.

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [72]

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Wonderful, wonderful. So we, I think, had some reasonably high number in terms of utilization. And in the context of COVID and the fact that we are all operating from home almost for the last 2 weeks, I think that's quite amazing.

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Operator [73]

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The next question is from the line of Ravi Naredi from Naredi Investments.

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Ravi Naredi;Naredi Investments Pvt. Ltd., [74]

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Sir, any plan -- concrete plan organic or inorganic to utilize heavy cash balance we are having around 600 -- more than INR 600 crores?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [75]

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Sorry, can you repeat that question, please?

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Ravi Naredi;Naredi Investments Pvt. Ltd., [76]

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We are having 600 -- more than INR 600 crore cash balance. So any organic or inorganic plan on concrete basis?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [77]

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No. We keep evaluating. There cannot be anything concrete in M&As, right? We are very conscious that we -- and especially in the situation, in COVID situation, cash is very important, right? We need to be very careful of how we spend our cash. So having said that, yes, it's also an opportunity to really pick up certain companies at cheap valuations and so on. So our M&A team is definitely working on it. We do have 2 or 3 opportunities that we are evaluating, but it is still in an early stage. But -- however, if we find something that is a good fit, only then we would move forward.

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Ravi Naredi;Naredi Investments Pvt. Ltd., [78]

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Okay. And sir, in quarter 4, other expenses were very much less. So how you controlled it?

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Pai Nitin, Tata Elxsi Limited - Head of Marketing and SVP [79]

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So Manoj, maybe I can answer that. Part of that expenses being less was also because a lot of the travel was put on hold because, if you think about it, we put domestic and international travel on hold fairly early into February. And subsequently, in March, travel was anyway banned in most of the countries. So in that sense, the direct business promotion expenses in terms of travel and so on and so forth was directly reduced.

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Operator [80]

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The next question is from the line of [Rajiv Nath] an individual investor.

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Unidentified Participant, [81]

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Yes, so I would like to know -- I'm sure in the auto and transportation segment to be precise, isn't there a part of business where your employees have to be at the manufacturing facility? So how much of -- is any part of business in any of your verticals where your employees have to be in the manufacturing facility in any of the verticals?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [82]

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No, we don't need to be in the manufacturing facility. At best, we have to be on -- in their R&D offices, not in the manufacturing facility.

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Unidentified Participant, [83]

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So let's say, in the case where you have to be in the R&D offices, how has that business been impacted? How has that movement been impacted because of the COVID situation?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [84]

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Yes. So as Nitin explained in the previous question, we were not able to travel to our customers' sites in March, okay? So what is happening right now is most customers and even where we have engineers who are working at the customers' site, after COVID, have been working from their home. They have not been visiting -- they've not been going to offices because offices are all shut down, right? So what is happening is we're talking to our customers and saying, "Hey, anyway we are not coming to office, but we're still able to deliver." Though, they are in -- whether in U.S. or Europe or wherever our engineers are, but they're working from home. So instead of working from home, they can as well work from India. It is the same situation because we're working remotely.

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Unidentified Participant, [85]

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So efficiency loss, right?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [86]

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So I wouldn't say efficiency loss. In fact, it's on a case-to-case basis. In some cases, working from home, we have even been able to show more efficiencies, okay? Of course, there are certain cases where we need access to some specific tools, infrastructure and equipment and so on. In those cases, yes, there will be some efficiency loss.

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Unidentified Participant, [87]

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Okay. Also, going back to your previous comments, you mentioned how this first half of this year is very similar to the first half of last year. You drew a comparison. So I wanted to understand. I mean last -- if you look at year-on-year performance, there's been about a 10% reduction in profitability. So moving ahead, I mean, how do you see the next year in terms of profitability? I know it's tough to predict, but also I wanted to understand more and deeper how do you see similarities in last year versus this year, if you compare the first quarters, because there's a big difference fundamentally what's happening, right? Last year, there was a general slowdown. This year, there's a lockdown plus a continued general slowdown. So how is it similar, I'm not understanding. Could you explain that more?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [88]

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No. Last year, when you look at it, we had a dip in our business from Q4 to Q1. We had a dip in our business because of one of our key customers going through difficulty.

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Unidentified Participant, [89]

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Which was Jaguar?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [90]

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Yes. This year...

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Unidentified Participant, [91]

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This year, there's Jaguar plus more, right? More customers...

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [92]

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Exactly, this year, particularly, as we move from Q4 to Q1, we see a similar stress in the -- it's not just 1 customer, but it's the overall economy.

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Unidentified Participant, [93]

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So the impact would be larger, right? The pattern is similar, but the impact would be larger, right?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [94]

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Yes. But over the next 3 quarters, which is Q2 to Q4, we have done certain diversifications. We have done certain things that brought back the growth rate, right, to where we are now in Q4. What we're saying is because of all those things that we have done, though there will be an impact on overall economy, but as far as we are concerned, we believe that, yes, there will be an impact, but the impact will be on similar terms like what had happened to us in Q1 of last year. To that extent, what we're trying to say is that, look, we are trying to see how sitting now, sitting where we are, how can you project revenues, and we're trying to see whether we can be better than Q1 of next year -- sorry Q1 of last year, I meant.

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Operator [95]

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The next question is from the line of Mayank Babla from Dalal & Broacha.

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Mayank Babla, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Research Analyst [96]

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Sir, I just had 2 small questions. One of them was that you earlier said that significant portion of revenues in the medical and health care segment came from regulatory work for customers. Could you just throw some light or give us some explanation regarding this piece of business?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [97]

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Yes. I think we have discussed this over multiple quarters. We are talking of regulatory standards in Europe. It's called MDR. And any company that has to sell devices in the European market has to be certified for this MDR regulatory standards. So anything that they do, right, the way they design their products all the way to packaging and so on has to be as per certain regulatory standards. And there is certain deadlines, 2021, 2022, 2023 and so on. There are different product categories that have to be certified. And if they are not certified, they'll not be able to sell those products in the European market. So many companies, because of the time crunch and so on and because of the fact that they don't have large internal teams to be able to do that, have come to companies like us to be able to support them to get these activities done so that they can continue to sell the products in their respective markets.

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Mayank Babla, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Research Analyst [98]

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And last question, sir, Nitin sir has said that within the broadcast and communications space, there was a surge in demand for broadband consumption, OTT consumption and teleco digitization. So are these the only 3 segments or subsegments which are showing some sort of strength or there are others also?

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Pai Nitin, Tata Elxsi Limited - Head of Marketing and SVP [99]

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Yes, this is Nitin here. There are others, too. I was just picking up ones that are most obvious for everybody because you will be directly able to relate to the fact that OTT has picked up in terms of demand even otherwise and especially in this particular time, so has broadband connectivity. And we believe all these are trends that are here to stay. So there are other clients, there are other service areas. Correct.

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [100]

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There are definitely others, like, for example, telemedicine, right, or videoconferencing solutions, the entire 5G requirements. So definitely, there are more.

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Operator [101]

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The next question is from the line of Bharat Sheth Quest Investments.

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Bharat Sheth, Quest Investment Advisors Pvt Ltd. - Head of Equities [102]

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Congratulations, Manoj and team, on good set of number in trying time as well as wish all the family members of the Tata Elxsi are well. Manoj, now when you say that some of -- I mean we will be reasonable, if you have to put the word, with our customer in their bad time, so that in future it can really help us in getting more business. And so in that scenario, also, do we see that we are working with some Tier 1 as well as OEM also in automotive and transportation segment? So some of that were -- and they also want to reduce the cost. So some of them actually they are doing in-house may tomorrow we get an opportunity. And second is on the vendor rationalization. In that also, we can really participate?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [103]

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Yes. Definitely, in this situation, there could be customers who would look at vendor rationalization and so on. And Tata Elxsi being a significant player in some of these technology areas, we stand to gain at the expense of other competition. So yes, it is an evolving situation. All of these are open and available on the table for us.

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Bharat Sheth, Quest Investment Advisors Pvt Ltd. - Head of Equities [104]

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And second, I mean, whatever they are doing in-house some of the things also make in -- I mean revolve on Tata Elxsi?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [105]

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Yes. See, it depends on regions, right? For example, in Japan, they would want to save their own employees' jobs. They would want to continue to do a lot more internally in this -- whenever you have a tough situation. In the western countries, many of them are not so sympathetic to their employees. They would want to look at their overall cost and so on. And if there is another party who can do with similar productivity and similar quality expectations at a cheaper rate, definitely, they will go for that option.

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Bharat Sheth, Quest Investment Advisors Pvt Ltd. - Head of Equities [106]

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Okay. And one more question, if you can permit, just one question, sir. When we are talking of working from home, so tomorrow or maybe after say 3 quarter, 4 quarter and whenever the things are in much better way, so working home, so offshore can really grow much better way. So offshore which will be a very margin lucrative business, but in that just give some kind of a sense because then the top line also will shrink in that case, correct?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [107]

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Sure. Yes, there will be...

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Bharat Sheth, Quest Investment Advisors Pvt Ltd. - Head of Equities [108]

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How that ratio is -- broader ratio, if you can really share?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [109]

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Yes. So we -- as we're sitting right now it's very difficult to tell you whether it will be 40-60, whether it will come down to 35-65, whether it will be 30-70. It is very difficult...

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Bharat Sheth, Quest Investment Advisors Pvt Ltd. - Head of Equities [110]

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No. Longer term, I mean, from, say, 2 -- say, 4 quarters, 6 quarters...

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [111]

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I would say that across the industry, if this thing works out well, we might look at a 30-70 scenario.

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Bharat Sheth, Quest Investment Advisors Pvt Ltd. - Head of Equities [112]

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Okay. And shrinking the top line will be significant then?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [113]

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No. So obviously, we will look at more volume growth, right? When people can realize that they can do more with lesser budget and so on, they're not going to say, "Hey, I'm going to shrink my budget" and so on. Maybe one quarter they might shrink the budget because that is what they have -- they have certain budget issues and so on. But subsequent quarters and so on when the situation improves, and they say that, "Hey, we can do more with limited budget," so obviously, they will also increase their outsourcing.

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Operator [114]

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The next question is from the line of Karan Uppal from Phillip Capitals.

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Karan Uppal;Phillip Capital, [115]

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Sir, just one question on the communications vertical. Since that is the only vertical which is less impacted than most of the other verticals, sir, what is the outlook over there? And second is, in that context, sir, 2020 was the year when the 5G CapEx was supposed to start in a big way. So where are we on those -- on that journey? And any color would be very helpful.

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [116]

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Yes. The media and communication business will continue to grow for us. There is no doubt. We have some of the leading companies from the world as our customers in this particular space, plus this entire -- I think somewhere we talked about our adjacencies, and we talked about new media and where we are going to focus on and that is something that we would really focus on, especially in the U.S. market. We are targeting that particular space. We hope that we will be able to help our customers in their overall digitization initiatives and so on in this particular space. We would expect our media and communication to continue the steady growth that we are seeing in the next financial year also.

5G, regarding 5G, yes, so we are involved in the 5G space, especially from the complete -- the virtualization space, the software-defined networking and so on. We are part of various industry forums. Our technical people are participating, contributing. We are seeing opportunities in that space so that we would continue our investments. And hopefully, in this financial year, we could see some good returns from that investment.

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Karan Uppal;Phillip Capital, [117]

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Sir, at the moment, are you seeing the spend on the 5G getting delayed by, let's say, a year or something or things are fine pre-Corona?

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [118]

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No, it's pretty -- it's still very early to say whether spend will increase and so on. There are certain countries that have already committed in a big way to go into the 5G. So I suppose we won't see any slowdown in those particular countries. There are a few countries where it will -- who have not decided and so on. So there it will definitely slow down a little bit, given the COVID scenario.

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Operator [119]

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Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.

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G. Vaidyanathan, Tata Elxsi Limited - General Counsel, Company Secretary & Compliance Officer [120]

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Thank you for joining the con call in this testing condition. I'd like to thank Manoj and Nitin also for taking the questions. We hope to come out of this situation at the earliest. Stay safe and stay healthy. Thank you all.

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Manoj Raghavan, Tata Elxsi Limited - MD, CEO & Director [121]

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Thank you. Thank you, everybody.

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Pai Nitin, Tata Elxsi Limited - Head of Marketing and SVP [122]

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Thank you.

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Operator [123]

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