Tata Technologies Ltd:Annual Report 2023-24 Analysis

Tata Technologies Ltd: A Comprehensive Overview #

About the Company #

Year of Establishment and Founding History:

Tata Technologies was founded in 1989 as the design arm of Tata Motors. It initially focused on providing engineering services to Tata Motors and other Tata group companies.

Headquarters Location and Global Presence:

• Headquarters: Pune, India
• Global Presence: Tata Technologies operates in North America, Europe, Asia-Pacific, and Japan, with a network of delivery centers and offices.

Company Vision and Mission:

• Vision: To be a global leader in engineering services, helping clients realize better products.
• Mission: To enable manufacturing companies to design, develop and realize better products.

Key Milestones in Their Growth Journey:

• 1989: Established as the design arm of Tata Motors.
• 2005: Acquired INCAT, a UK-based product engineering services company.
• 2013: Became a public limited company.
• 2023: Successful IPO and listing on Indian stock exchanges.

Stock Exchange Listing Details and Market Capitalization:

• Listing: BSE (Bombay Stock Exchange) and NSE (National Stock Exchange)
• Ticker Symbol: TATATECH
• Market Capitalization: (Varies based on market conditions. Refer to current financial data sources).

Recent Financial Performance Highlights:

• Refer to the company’s latest annual reports and investor presentations for up-to-date financial performance data, including revenue, profit, and growth rates.

Management Team and Leadership Structure:

• Chairman:
• Managing Director & CEO:
• Refer to the company’s official website for the latest information on the leadership team.

Their Products #

Complete Product Portfolio with Categories:

Tata Technologies offers a range of services categorized as follows:

• Engineering Services:
  • Product Engineering
  • Manufacturing Engineering
  • Digital Engineering
• Digital Solutions:
  • Cloud Solutions
  • Data Analytics
  • IoT Solutions
• Education:
  • iGetIT Learning Solutions

Flagship or Signature Product Lines:

• iGetIT: A digital learning platform that provides engineering and manufacturing skills training.

Key Technological Innovations or Patents:

• Tata Technologies invests in research and development, resulting in patented technologies and innovations related to product engineering, manufacturing, and digital solutions. Refer to company publications for specifics.

Quality Certifications and Standards:

• Tata Technologies adheres to international quality standards, including ISO 9001, ISO 14001, and ISO 27001.

Any Unique Selling Propositions or Technological Advantages:

• Deep domain expertise in the automotive, aerospace, and industrial machinery sectors.
• Strong relationship with Tata Group companies.
• End-to-end engineering and digital transformation capabilities.

Primary Customers #

Target Industries and Sectors:

• Automotive
• Aerospace
• Industrial Machinery
• Heavy Engineering
• Consumer Electronics

Geographic Markets (domestic vs. international):

• Domestic: India
• International: North America, Europe, Asia-Pacific, Japan

Distribution network and sales channels:

• Direct sales force
• Strategic partnerships

Major Competitors #

Direct competitors in India and globally:

• L&T Technology Services
• Infosys Engineering Services
• HCLTech
• Capgemini Engineering
• AKKA Technologies

Competitive advantages and disadvantages:

• Advantages: Strong brand name due to Tata affiliation, domain expertise, and established client relationships.
• Disadvantages: Dependence on specific industries.

How they differentiate from competitors:

• Focus on the automotive, aerospace, and industrial machinery sectors.
• Comprehensive portfolio of engineering and digital services.
• Strong domain knowledge and experience.

Future Outlook #

Expansion plans or growth strategy:

• Focus on expanding its digital engineering capabilities.
• Targeting new growth opportunities in emerging markets.
• Strategic acquisitions to enhance its service offerings.

Sustainability initiatives or ESG commitments:

• Refer to Tata Technologies’ sustainability reports for details on their environmental, social, and governance (ESG) initiatives.

Industry trends affecting their business:

• Increased adoption of electric vehicles (EVs) and autonomous driving technologies.
• Growing demand for digital engineering and Industry 4.0 solutions.
• Focus on sustainability and eco-friendly products.

Long-term vision and strategic goals:

• To be a leader in enabling digital transformation for the manufacturing industry.
• To provide innovative solutions that help clients create better and more sustainable products.

Comprehensive Performance Overview #

3-Year Trend Analysis of Key Financial Metrics #

• Revenue from Operations: Consistent increase, with 15.9% growth from FY2022-23 to FY2023-24, reaching ₹5,117.20 crore. 3-year CAGR of 29%.
• Operating EBITDA: Increased by 14.7% year-on-year in FY2023-24, reaching ₹941.28 crore, with a 3-year CAGR of 35%.
• Operating EBITDA Margin: Remained relatively stable with 18.4% for FY 2023-24. Slight decrease from 18.6% in the FY 2022-23.
• Profit Before Tax (PBT): Increased by 17.1% year-on-year to ₹932.05 crore in FY2023-24.
• Profit After Tax (PAT): Grew by 8.9% year-on-year, reaching ₹679.37 crore in FY2023-24, with a margin of 13.3%.
• Sales Outstanding: Improved to 83 days in FY 2023-2024.
• Earnings Per Share (EPS): Basic EPS increased to ₹16.75 in FY2023-24 from ₹15.38 in the previous year. Diluted EPS also showed a similar trend.

Business Segment Performance #

• Services Segment: Revenue increased by 12.8% year-on-year to ₹3,982.61 crore in FY2023-24, contributing 77.8% of total revenue. The segment result margin was 31.5%.
• Technology Solutions Segment: Revenue grew by 28.4% year-on-year to ₹1,126.57 crore in FY2023-24, making up 22.2% of total revenue. The segment result margin was 17.5%.

Major Strategic Initiatives and Their Progress #

• IPO: Successfully completed an IPO, listing at a 140% premium over the issue price and receiving a record number of retail applications, being the first from TATA Group in over 20 years.
• Software-Defined Vehicles (SDV) Ecosystem: Strengthened through partnerships with NXP, Arm, Intel, and Amazon AWS to profile SDV platform solutions.
• Generative AI: Progress made in deploying GenAI solutions for customers, with material investments in training and capability building, including training nearly 1,000 engineers in Q4 FY2023-24.
• Joint Venture with BMW: Established a JV for automotive software and IT development, focusing on automated driving, infotainment, and digital services.
• Collaboration with Agratas: Expanded upstream capabilities to enhance end-to-end Electric Vehicle design and development.
• Digital Transformation at JLR and Tata Motors: Accelerated deployment of S4 Hana at JLR and implemented a smart manufacturing solution at Tata Motors’ Sanand plant.
• Partnership with the goverment of Telangana: Secured a 30 Million dollar deal for modernizing 65 state owned ITIs.

Risk Landscape Changes #

• Geopolitical Risks: Increased geopolitical tensions in Europe and the Middle East, impacting global economic stability.
• Supply Chain Risks: Rebalancing of supply chains and economic recovery in global markets presented ongoing challenges.
• Technological Risks: Rapid advancements in AI and other technologies required continuous adaptation and investment.
• Client Concentration Risk: High dependency on the automotive sector and key clients, making the company vulnerable to industry-specific downturns.
• Credit Risk with New OEMs: Engagements with emerging OEMs lacking established financial track records introduced increased credit risks.
• Regulatory and Protectionism Risks: Rising protectionism in developed economies and changes in immigration laws could increase operational costs.
• Cybersecurity Risks: Heightened risks of system breaches and data leakages, necessitating robust data protection and compliance measures.
• Foreign Exchange Rate Risk: Exposure to fluctuations in currency that impacts the groups operational and financial results.

ESG Initiatives and Metrics #

• Environmental Sustainability: Initiatives include vehicle lightweighting, sustainable facilities management, and sustainable product design using digital thread approaches.
• Environmental Initiatives: Planting of 140 trees resulting in sequestration of 2,800kgs of CO2 and planting 125 saplings in a CSR-supported school.
• Energy Conservation: Measures included installation of 24 solar streetlights and APFC panels, resulting in energy consumption 14% lower than pre-pandemic levels.
• Water Conservation: Recycled and reused 12% (10,478 KL) of total water consumption.
• Waste Management: 28.686 tons of e-waste were disposed of through local recycling vendors.
• Social Initiatives: Impacted over 36,000 lives through CSR initiatives such as Ready Engineer, EVE program, and STEM initiatives.
• Diversity, Equity, and Inclusion (DEI): Programs like Rainbow, SHEnnovator, and LeaderBridge focused on enhancing gender diversity and empowering women leaders.
• Community Engagement: CSR spending of ₹5,74,96,285, impacting over 38,000 beneficiaries, with 292 girls from low-income families supported to become engineers.

Management Outlook #

• Optimistic Growth Projections: The global ER&D spending is projected to grow at a 16% CAGR through 2026, driven by innovation, digital engineering, and investments in SDV, AI, and advanced manufacturing.
• Strategic Focus: Strengthening capabilities in SDx, embedded software, AI, analytics, and smart manufacturing.
• Market Expansion: Targeting top R&D spenders and deepening engagement with existing accounts.
• Investment in Workforce: Continued investment in upskilling employees in new competencies, particularly in SDV and Generative AI.
• Sustainability Commitment: Focus on engineering a sustainable future, with initiatives aligned with the Tata Group’s Project Aalingana.

Detailed Analysis #

Financial Position Analysis of Tata Technologies Limited #

3-Year Comparative Analysis (Consolidated) #

(Amount in ’ Crore)

*Adjusted for share split and bonus issue.

(Amount in ’ Crore)

Significant Changes in Major Line Items (>10% YoY) #

• Other Intangible Assets: Increased by 80.47%, mainly due to software license acquisitions.
• Deferred Tax Assets: Increased by 66.52%, because of change in tax regime.
• Other Non-Current Assets: Increased by 49.9% due to a rise in prepaid expenses.
• Investments (Current): Increased significantly by 404.66%, primarily due to higher investments in mutual funds.
• Other Current Assets:Increased by 33.13%

Working Capital Trends #

(Amount in ’ Crore)

Debt Structure and Maturity Profile #

The provided financials show lease liabilities as its primary form of debt, with a significant portion due within the next five years.

Lease Liabilities Maturity Profile:

Off-Balance Sheet Items #

• Contingent Liabilities: Total contingent liabilities amount to ’ 29.71 crore for FY 2023-24 which includes primarily bonus related to retrospective period and tax demands disputed in appeals.

Operating Performance Analysis of Tata Technologies Limited (FY2023-24) #

Revenue Breakdown by Segment/Geography #

• Services Segment Revenue: Increased by 12.8% to ₹3,982.61 crore in FY2023-24 from ₹3,535.22 crore in FY2022-23, reaching 3986.64 in the consolidated financials.
• Technology Solutions Segment Revenue: Increased by 28.4% to ₹1,126.57 crore in FY2023-24. Consolidated financials show ₹1,134.59 crore.
• Total Operating Revenue (Consolidated): Grew by 15.9% year-on-year, reaching ₹5,117.20 crore in FY2023-24.
• Total Operating Revenue (Standalone): Increased by 29.3% during the financial year 2023-24.
• Geographical Revenue (FY2023-24):
  • India: 36.0% (up from 29.8% in FY2022-23)
  • UK: 24.2% (up from 19.7% in FY2022-23)
  • North America: 20.4% (down from 21.4%)
  • Rest of Europe: 5.0% (up from 3.1% in FY2022-23)
  • Rest of the World: 14.5% (down from 26%)

Cost Structure Analysis #

• Employee Benefit Expenses: 46.2% of revenue from operations in FY2023-24, compared to 43.7% in FY2022-23.
• Total expenses (excluding interest & depreciation) as percentage of total revenue: 81.6%, up from 81.4%

Margin Analysis (Consolidated) #

• Operating EBITDA Margin: 18.4% in FY2023-24, a slight decrease from 18.6% in FY2022-23.
• Net Profit Margin: 13.3% in FY2023-24, down from 14.1% in FY2022-23.
• Services Segment Margin: 31.5%
• Technology Solution Segment Margin: 17.5%

Operating Leverage #

• The increase in employee costs as a percentage of revenue suggests a potential decrease in operating leverage, while an increase of services segment revenue could increase the operating leverage.

EPS Analysis #

• Basic EPS: ₹16.75 in FY2023-24, increased from ₹15.38 in FY2022-23.
• Diluted EPS: ₹16.72 in FY2023-24, increased from ₹15.37 in FY2022-23.

Cash Flow and Liquidity Analysis #

OCF, ICF Components (Consolidated) #

• OCF: Increased to ₹294.33 crore in FY2023-24 from ₹401.39 crore in FY2022-23. The primary driver was the profit for the year of ₹679.37.
• ICF: The Group generated ₹393.64 crore in FY2023-24, and used (₹487.43) crore in FY2022-23. Significant cash inflows from redemptions of bank deposits, inter-corporate deposits were refunded.

Working Capital Management Efficiency #

• Days Sales Outstanding (DSO): Decreased to 83 days in FY2023-24 from 87 days in FY2022-23, indicating improved efficiency in collecting receivables.

Dividend and Share Buyback Trends #

• Dividends: A final dividend of ₹8.40 per share and a special dividend of ₹1.65 per share were proposed for FY2023-24, totaling ₹10.05 per share, dividend payout of 59.31% of standalone net profit.
• Share Buyback: No share buyback during FY2023-2024. A material buy-back happened in FY2022-23.

Liquidity Position and Cash Conversion Cycle #

• Current Ratio: 1.87 for FY2023-24 and 1.92 for FY2022-23, indicate a good liquidity position.
• Cash and Cash Equivalents: Increased to ₹519.85 crore as of March 31, 2024, from ₹382.82 crore as of March 31, 2023.
• Cash Conversion Cycle: Billed Days Sales Outstanding + Unbilled Days Sales Outstanding is 83.

Financial Analysis of Tata Technologies Limited #

Profitability Ratios (3-Year Trends) #

(Consolidated Data)

• ROE has decreased over the last three years.
• ROA slightly increased in FY24 after a dip in FY23.
• Operating EBITDA margin has slightly decreased in FY24.
• Net profit margin has shown some variation, declining over the last two years.

Segment-Wise Revenue and Results (%) (Consolidated) #

• Services segment constitutes a significant majority of revenue, and is relatively stable over the two years.

Liquidity Metrics (Consolidated) #

• The current ratio shows sufficient current assets to cover current liabilities.
• Slight decrease in current ratio in FY24.

Efficiency Ratios (Consolidated) #

• Asset turnover is increasing, indicating improved asset utilization.
• Receivable turnover increased indicating improvement in receivable collection efficiency.

Leverage Metrics (Consolidated) #

*Note: Debt is considered as Lease liabilities only. The company is debt free otherwise.

• The company has very low leverage, as indicated by the near-zero Debt/Equity ratio.
• The interest coverage ratio is exceptionally high, demonstrating strong ability to cover interest expenses, primarily due to the low debt levels.
• The interest coverage ratio has improved over last year.

Working Capital Ratios (Consolidated) #

• DSO has slightly improved, down from 87 days to 83 days.

Industry Comparison and Deviations #

• Without specific industry average data for each ratio, a detailed comparative analysis is challenging. However, in general, the presented Profitability ratios are strong.
• Liquidity as measured by the Current Ratio is above the commonly accepted healthy threshold of 1.0.
• The absence of debt is a significant deviation from many companies in capital-intensive industries, providing a very strong leverage and interest coverage position.
• The company has strong operational efficiency and cost management.

Segment-wise Financial Analysis: Tata Technologies Limited #

Strategic Risks #

Client Concentration #

• Severity: High.
• Likelihood: Medium.
• Trend: Increased revenue share from the Anchor account and other key clients.
• Mitigation: Diversification across industries and expanding the customer base.
• Control Effectiveness: Partially effective.
• Potential Financial Impact: High.

Competition #

• Severity: High.
• Likelihood: High.
• Trend: Stable.
• Mitigation: Continuous investments in capability developments and talent management.
• Control Effectiveness: Partially effective.
• Potential Financial Impact: Medium-high.

Operational Risks #

Dependence on Skilled Personnel #

• Severity: Medium-High.
• Likelihood: Medium.
• Trend: Attrition rate decreased from 21.7% in FY23 to 14.5% in FY24.
• Mitigation: Investment in TechVarsity and upskilling programs, DEI programs.
• Control Effectiveness: Shows improvement.
• Potential Financial Impact: Medium.

Third-Party Service Providers #

• Severity: Medium
• Likelihood: Medium
• Trend: Stable.
• Mitigation: Long-standing relationship with third-party vendors.
• Control Effectiveness: Partially effective.
• Potential Financial Impact: Medium.

Financial Risks #

Foreign Exchange Rate Fluctuations #

• Severity: Medium.
• Likelihood: High.
• Trend: Fluctuating.
• Mitigation: Use of derivative financial instruments.
• Control Effectiveness: Partially effective.
• Potential Financial Impact: Medium.

Interest Rate Risk #

• Severity: Low
• Likelihood: Low
• Trend: Stable.
• Mitigation: Sticking to fixed-rate borrowing
• Control Effectiveness: Effective.
• Potential Financial Impact: Low

Compliance/Regulatory Risks #

Regulatory Changes #

• Severity: Medium.
• Likelihood: Medium.
• Trend: Increasing.
• Mitigation: Continuous monitoring of regulatory requirements and compliance procedures.
• Control Effectiveness: Appears effective.
• Potential Financial Impact: Medium.

Cybersecurity/Data Protection Risk #

• Severity: Medium.
• Likelihood: High.
• Trend: Increasing.
• Mitigation: ISO 27001:2013 certification, and implementation of layered security.
• Control Effectiveness: Partially effective
• Potential Financial Impact: High.

Emerging Risks #

Generative AI Adoption #

• Severity: Medium.
• Likelihood: High.
• Trend: Increasing.
• Mitigation/Opportunity Exploitation: Investment in GenAI training and development, deployment of GenAI solutions for clients.
• Control Effectiveness: Early stages.
• Potential Financial Impact: Medium-High.

Climate Change Impact #

• Severity: Medium-High.
• Likelihood: High.
• Trend: Increasing.
• Mitigation/Opportunity Exploitation: EV development, lightweighting, sustainable facilities management.
• Control Effectiveness: Early stages.
• Potential Financial Impact: Medium-High

Strategic Analysis of Tata Technologies #

Long-Term Strategic Goals and Progress #

• Transitioning business mix towards software-defined vehicles (SDV) and embedded systems, capitalizing on megatrends like electrification.
• Expanding global footprint by opening new delivery centers and targeting tier 2 cities for cost optimization.
• Developing strategic partnerships with companies.
• Investing in upskilling the workforce in next-gen competencies like SDV and Gen AI.
• Demonstrating strong revenue performance, growth rates, profitability, and a successful IPO.

Competitive Advantages and Market Positioning #

• Holding a leadership position in the automotive ER&D services market, especially in India, with a focus on growing the EV market share.
• Maintaining a balanced onshore/offshore global delivery model for client proximity and cost-effectiveness.
• Leveraging deep domain knowledge of manufacturing, and extensive experience in physical and digital product engineering.
• Being positioned by Zinnov as the number one automotive engineering service provider in India.
• Committing to engineering sustainable mobility solutions.

Innovation Initiatives and R&D Effectiveness #

• Investing in proprietary accelerators and labs to drive product innovation and smart manufacturing.
• Focusing on software-defined everything (SDx), embedded software, AI, analytics, and smart manufacturing.
• Investing in training employees on next-gen skills, including AI and GenAI.
• Deploying Gen AI solutions for customers.
• Being recognized with multiple awards for innovation.

M&A Strategy and Execution #

• Executing a strategic Joint Venture with BMW Group for automotive software, SDV, and business IT solutions.
• Acquiring Escenda Engineering AB (now Tata Technologies Nordics AB) to expand global footprint.
• Restructuring operations to reduce subsidiaries.

Management’s Track Record in Execution #

• Overseeing significant revenue growth with a 29% CAGR in revenue from operations over the last 3 years.
• Successfully launching an IPO, the first from the Tata Group in 19 years, with significant oversubscription.
• Establishing strategic partnerships.
• Strengthening the leadership team with experienced professionals, addressing projected growth.

Capital Allocation Strategy #

• Maintaining sufficient liquidity with strong cash flow and operating profit.
• Prioritizing investments in the workforce.
• Preferring strategic joint ventures.

Organizational Changes and Their Impact #

• Appointing a new COO (Ms. S. Sukanya) to strengthen the leadership team.
• Implementing a new internal digital communication platform.
• Rolling out DEI initiatives.
• Establishing competency centers and the i GET IT platform for upskilling and reskilling.

ESG Framework #

Environmental Metrics and Targets #

• Energy Savings Initiatives: The company implemented energy conservation measures, including installing 24 solar streetlights and APFC panels. Energy consumption across India locations was 14% lower than pre-pandemic levels (FY 2019-20), but increased by 11% compared to FY 2022-23 due to increased employee footfall.
• CO2 Emission Reduction: Installation of solar streetlights helped reduce CO2 emissions, equivalent to 16.77 tons in the year. The use of 2 EV cars in the carpool has further reduced the carbon footprint. A total of 140 trees were planted, resulting in CO2 sequestration of 2,800 kg.
• Water Conservation: 12% (10,478 KL) of the total 86,727 KL water consumed across key locations was recycled and reused.
• Waste Management: 28.686 tons of e-waste were disposed of during the year through local recycling vendors. The company promotes the 3R principle (Reuse-Reduce-Recycle).
• Green Energy: A next-generation data center with smart rack solutions for power and cooling optimization was set up, supporting green energy initiatives.
• Emissions: The emissions disclosure for NOx, SOx and particulate matter is provided. But the provided amounts are mg/Nm3, without giving a total amount emitted, no comparison can be done.
• Net Zero Journey: The company is committed to reducing its carbon footprint and guiding clients toward sustainable futures, aligning with global sustainability goals.
• No liquid discharge: Not yet implemented a mechanism for zero liquid discharge.

Social Responsibility Programs #

• Ready Engineer 2.0: This program, in collaboration with industrial associations, enhances the employability of graduate engineers by improving technical and entrepreneurial skills.
• Empowerment Via Education (EVE): This program provided scholarships and guidance to 292 female engineering students from low-income families, supporting their academic and career development.
• STEM Education and Enhancement: In partnership with IISER Pune, this initiative fosters a tinkering mindset among educators and students.
• iRise: In collaboration with the Department of Science & Technology (DST), IISER Pune, the British Council, and the Royal Society of Chemistry, this program stimulates innovation among young students and trains educators.
• CSR Spend: The company spent ’ 5,74,96,285 on CSR, benefiting 38,000 individuals.
• Employee Well-being: Launched the RoundGlass Living program for holistic well-being, providing research-backed solutions for employees and their families.
• Diversity and Inclusion: The Rainbow program focuses on onboarding, training, coaching, and mentoring women. Other initiatives include the SHEnnovator Program and LeaderBridge WINGS Program, promoting gender diversity and empowering women leaders.

Governance Structure and Effectiveness #

• Board Composition: As of March 31, 2024, the Board consists of 7 Directors: 4 Independent Directors, 2 Non-Executive Directors, and 1 Managing Director.
• Board Diversity: The Board possesses a mix of skills, including entrepreneurship/leadership, engineering and technology, financial expertise, global exposure, and diversity.
• Board Evaluation: An annual assessment of Board performance, committees, and individual directors is conducted.
• Committees: Five statutory committees (Audit, Nomination and Remuneration, Corporate Social Responsibility, Stakeholders Relationship, Risk Management) and one non-statutory committee (Executive) are in place.
• Audit Committee: Consists of three Non-Executive, Independent Directors and met 10 times during the year.
• Code of Conduct: Adherence to the Tata Code of Conduct is mandatory for all employees, including the Managing Director, with specific training and awareness programs implemented.
• Whistle-blower policy: The Company has also adopted a global anti-bribery and gift policy.

Regulatory Compliance and Future Preparations #

• Compliance: The company states compliance with all applicable laws and regulations, including the Companies Act, 2013, and SEBI LODR.
• Secretarial Audit: A Secretarial Audit was conducted, and the report (Annexure II) confirms compliance with statutory provisions.
• Risk Management: The company has an Enterprise Risk Management (ERM) framework in place, guided by ISO 3100:2018 and ERM COSO 2017 Framework. A Risk Management Committee has been constituted as per SEBI LODR requirements.
• Data Security: The company has an Information Security Policy.
• Future Preparations: The company is preparing for a TBEM (Tata Business Excellence Model) assessment in 2024, as well as Data Excellence and Cyber Security Assessments.
• POSH Act: The company is in compliance with the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.
• IEPF: The Company is compliant with the transfer of unclaimed dividends and shares to the Investor Education and Protection Fund (IEPF)
• No benami property: The company has no initiated nor any pending proceedings against it.

Future Projections and Guidance #

Services Segment #

Management Guidance and Assumptions: #

• Management is focused on scaling existing offerings and accelerators such as eVMP.
• The leadership team is being strengthened, as demonstrated by the appointment of a new COO with experience in managing large, complex client relationships, to support scaling up relationships with top automotive, aerospace, and industrial heavy machinery customers.
• There is an emphasis on developing capabilities in SDV, embedded electrification, and digital solutions, alongside fostering partnerships.

Market Growth Forecasts: #

• The segment benefits from the overall growth in global ER&D spending, projected to grow at a 16% CAGR through 2026.
• The automotive ER&D outsourced market, a significant part of this segment, was valued between $18 and $20 billion in 2022 and is expected to grow faster than the overall ER&D sector.
• Zinnov positioned company amongst top 2 service providers for EV.

Planned Strategic Initiatives: #

• Strengthening software-defined everything (SDx) ecosystem by partnering with leading technology players.
• Expanding capabilities in software, embedded systems, AI, and smart manufacturing.
• Focusing on developing end-to-end product development offerings, especially for EVs and SDVs.
• Pursuing large-scale deals and deeper engagement with existing accounts.
• Joint venture with BMW for automotive software and IT development.
• Leveraging synergies with the Tata Group.

Efficiency Improvement Targets: #

• Implementation of Project Health Quality Index (PHQI) for continuous process improvement.
• Optimize global talent pool for cost-effective balance of onshore and offshore resources.

Potential Challenges and Opportunities: #

• Challenges: Client concentration in the automotive sector, exposure to economic slowdowns, and rapid technological changes. Competition from other ER&D service providers.
• Opportunities: Shrinking innovation cycles in the automotive industry, growing product complexity, and increasing demand for outsourced engineering services. Expansion into aerospace, IHM, and digital transformation services.

Scenario Analysis and Sensitivity to Key Assumptions: #

• Scenario analysis:
  • Best-case scenario assumes, continued success on all of the Company’s new products along with high growth rates in sales of existing popular products would likely result in robust growth for its services segment.
  • Downside scenario involves that any slowdown in the automotive sector will reduce revenue because of company’s substantial client concentration.

Technology Solutions Segment #

Management Guidance and Assumptions: #

• Management focus on value-added reselling of software (primarily PLM) and providing related services.
• Emphasis on ‘phygital’ education solutions and upskilling/reskilling in manufacturing technologies.

Market Growth Forecasts: #

• The segment benefits from the overall growth in digital transformation and the rise of Industry 4.0.
• The Ed-tech Sector is experiencing high demand.

Planned Strategic Initiatives: #

• Expanding partnerships with state governments and private institutions for technical training.
• Transforming ITIs into Centers of Excellence.
• Developing curricula and innovation labs to prepare students for industry demands.
• Offering joint certification programs in automotive education.

Efficiency Improvement Targets: #

• Optimizing curriculum development and competency center offerings.

Potential Challenges and Opportunities: #

• Challenges: Competition in the PLM software reselling market. Ensuring the relevance of training programs to rapidly evolving industry needs.
• Opportunities: Growing demand for skilled manpower in manufacturing, particularly in emerging technologies. Expansion of public sector and private institution partnerships.

Scenario Analysis and Sensitivity to Key Assumptions: #

• Scenario Analysis:
  • Worst Case Scenario: Economic slowdown in India and/or state government fiscal tightening could lead to reduced spending on upskilling initiatives, which may adversely impact segment.
  • Best-case scenario, expansion of large contracts with various state governments in India, could result in robust growth for its technology solutions segment.

Audit and Compliance Analysis #

Auditor’s Opinion and Qualifications #

• Consolidated Financial Statements: B S R & Co. LLP issued an unmodified opinion, stating the consolidated financial statements give a true and fair view of the Group’s financial position, performance, and cash flows, in conformity with Indian Accounting Standards. Audit observations related to the maintenance of accounting records were noted.
• Standalone Financial Statements: An unmodified opinion was issued, stating the standalone financial statements give a true and fair view, in conformity with Indian Accounting Standards. Observations related to the maintenance of accounting records were noted. There were no qualifications per the secretarial audit.

Key Accounting Policies and Changes #

• Adoption of New Accounting Principles: Amendments to Ind AS 12 (Income Taxes) were adopted, effective April 1, 2023, relating to deferred tax on leases. This change did not materially impact the consolidated financial statements.
• The company’s accounting policies include estimates around revenue recognition, useful lives, impairment, provisions, leases, and income tax.
• Revenue Recognition: The percentage-of-completion method is used for fixed-price contracts, requiring cost estimation. Revenue recognition also involves identifying distinct performance obligations and determining transaction prices, both of which involve judgement.

Internal Control Effectiveness #

• Auditor’s Opinion: An unmodified opinion was issued on the Company’s internal financial controls over financial reporting, stating that the Company maintained adequate internal financial controls, which operated effectively, in all material respects.
• Management’s Representation: Management represented that the Company has a robust internal control system.

Regulatory Compliance Status #

• General Compliance: The Company states compliance with all applicable laws and regulations, including the Companies Act, 2013, and SEBI LODR. The secretarial audit found full compliance.
• Credit Rating: The Company holds CARE AA+/stable and CARE A1+ ratings for long-term and short-term banking facilities. CSR compliance with the company’s act is reported.

Legal Proceedings and Potential Impact #

• Contingent Liabilities: Contingent liabilities are disclosed related to disputed bonus payments, income tax demands, and service tax demands.
• No Benami Property Proceedings: No proceedings have been initiated or are pending against the Company under the Benami Transactions (Prohibition) Act.
• No Material Foreseeable Losses: The Company stated it did not have any material foreseeable losses on long-term contracts, including derivative contracts.
• Undisclosed Income: No income was surrendered or disclosed during tax assessments that had not been recorded in the books.

Related Party Transactions #

• Material Related Party Transactions: The Company engaged in material related party transactions with Tata Motors Limited, Tata Motors Passenger Vehicles Limited, and Jaguar Land Rover Limited. These transactions were approved by the Members via Ordinary Resolutions.
• Arm’s Length Basis: All related party transactions during FY 2023-24 were stated to be on an arm’s length basis and in the ordinary course of business. The Audit Committee approved these transactions.
• Disclosure Compliance: Details of related party transactions are provided in the financial statements as required by Ind AS 24.

Subsequent Events #

• Joint Venture with BMW: On April 2, 2024, the Company signed a Joint Venture Agreement with BMW Holding B.V., Netherlands, to focus on automotive software and digital transformation solutions.
• Proposed Dividend: The Board recommended the payment of dividends subject to the approval of shareholders.

Accounting Quality and Regulatory Risk Assessment #

• Accounting Quality: The adoption of Ind AS, the external audit with an unmodified opinion, and the internal controls assessment suggest a generally high level of accounting quality. The use of estimates introduces inherent subjectivity.
• Regulatory Risk: The Company appears to be in compliance with major regulations. The pending legal cases represent a regulatory risk.