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Ladies and gentlemen, good day, and welcome to the Q4 FY '22 Earnings Conference Call of Cyient Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Krishna Bodanapu, Managing Director and CEO. Thank you, and over to you, sir.
Thank you very much. Ladies and gentlemen, good evening. Welcome to Cyient Limited's earnings call for the fourth quarter of the financial year 2022. I am Krishna Bodanapu, Managing Director and Chief Executive Officer. Present with me on this call are Mr. Ajay Aggarwal, Executive Director and Chief Financial Officer; and Mr. Karthik Natarajan, Executive Director and Chief Operating Officer. Before we begin, I would like to mention that some of the statements made in today's discussions may be forward-looking in nature and may involve risks and uncertainties. A detailed statement in this regard is available on our -- in our investor update, which can -- which has been e-mailed to you and is also posted on our corporate website. This call will be accompanied with an earnings call presentation and the details of this have already been shared with you. With this, let me take you through the highlights for the quarter. In U.S. dollar terms, we posted a revenue of $156.7 million, which is a growth of 4.6% year-on-year and a slight degrowth of 0.8% quarter-on-quarter or 0.4% in constant currency terms. In rupee terms, we posted a quarterly revenue of INR 1,181 crores. This signifies a growth of 4.6% year-on-year and flat quarter-on-quarter. Services revenue stood at $130.6 million, a growth of 9.2% year-on-year and 1.1% Q-on-Q or 1.6% in constant currency terms. DLM revenues stood at $261 million (sic) [ $26.1 million ], which is a degrowth of 13.8% year-on-year and 9.3% quarter-on-quarter. We posted the highest ever group EBIT in Q4, which stood at INR 170.8 crores or INR 1,708 million. Group EBIT margin stood at 14.5%, which is up 182 bps from last year and also 56 bps quarter-on-quarter. Profit after tax stood at INR 154.2 crores or INR 1,542 million for the quarter, which is a growth of 39.3% year-on-year and 17.1% quarter-on-quarter. As a summary, I'm very happy to report that most metrics, [ aside then ] absolute revenue have been the highest that they've ever been, and especially, we're very proud of what we have achieved on the profitability and the profit side. Next, let me take you through the highlights for the full year. Total revenue stood at INR 45,344 million or INR 4,534 crores, signifying a growth of 9.7% on a full year basis. In U.S. dollar terms, the revenue stood at $608.2 million, which is a growth of 9.2% and 8.7% in constant currency terms. Services revenue for the year stood at $503.5 million, signifying a growth of 9.2% or 8.5% in constant currency terms. DLM revenue for the year stood at $104.7 million, which is a growth of 9.7% (sic) [ 9.5% ] on a year-on-year basis. Group EBIT, which is the highest ever, stood at INR 6,297 million or INR 629.7 crores, which is up 51.3% compared to last year. Group EBIT margin stood at 13.9% for the year, which is up by 381 basis points and is also the highest in the last 7 years. Services margin stood at 15.3% higher by 432 bps and DLM margin stood at 7.2%, which is higher by 7.2% -- which is higher by 142 bps. Profit for the year stood at INR 522.4 crores or INR 5,224 million, up 40.6% compared to last year. Free cash flow generation stood at INR 5,776 million with cash conversion at 62.5% (sic) [ 65.2% ] on EBITDA or a conversion of 110% of PAT to cash. We also declared the highest ever dividend for the full year at INR 24 per share, which included an internal dividend of INR 10. In the last 2 years, we have generated free cash of INR 1,338 crores and have paid out a cumulative dividend of INR 451 crores to our shareholders. Coming to other highlights for the quarter, we signed a memorandum of understanding with the IIT Hyderabad for research collaboration to set up a private 5G center of excellence. The enterprises across industries now recognize the benefit of private 5G network, and they're looking at network solutions that cater to the unique business context and enable their digital transformation. We partnered with iBASEt for implementing the manufacturing systems for maintenance, repair and overhaul solutions. And this is also a very exciting opportunity because it's another great foray into digital for us. We launched firmware over-the-air -- sorry, launch of the firmware over-the-air, FOTA solution for connected devices. As you can imagine, with the number of devices that are being connected and the old connected equipment that's coming in, it's quite important that there is a robust way in which the firmware can be updated, and this is a unique solution that we've come up with. We're also proud that Cyient is positioned as a major contender in Everest Group's PEAK Matrix for Digital Product Engineering Services. And we've been investing heavily, as you know, in semiconductor, embedded software, hardware, et cetera, and also we will come up with the solution suite of CyientflQ and IntelliCyient and all these -- or the -- these recognitions from Everest and a few others that we reported in the previous quarters are a validation of the right things that we're doing, especially on technology enablement in areas like digital. With this, I'd like to hand over the call to Ajay, who will take you through the detailed financial performance for the quarter. Thank you. And I will answer questions after the presentation.
Thank you, Krishna, and I'm very delighted to say that we have excellent set of results for the quarter on all the parameters, and I'll start with revenue. We have delivered $156.7 million of revenue for the quarter, which is flat overall in terms for the Group. In services in real terms, we have got 1.6% growth, while in dollars, it is 1.1% because the cross currency, the constant currency growth is 1.6%. We have done $26.1 million in DLM, which is a 9% degrowth in the quarter, and this is in line with our expectations. Overall, you can see our growth from year-on-year is about 9.2%. DLM has degrown year-on-year. There have been supply side issues. And overall growth for the Group is 4.6% year-on-year. Next one, please. In terms of the full year, we have clocked our revenue at $608.2 million split between $503 million for services and $104.7 million for DLM, and that translates into a constant currency growth of 8.7% for services and 9.2% in terms of the dollar for -- in terms of DLM, we have done $104.7 million, and we have done a growth of 9.5%. Definitely, we were gunning for a growth of -- at the beginning of the year, 15% plus, but due to some of the supply side challenges, I think we have not been able to get we have been talking about quarter-on-quarter. But this is in line with what we anticipated for this particular quarter. In terms of the income statement for the quarter, I think our EBIT margin has been for the Group at 14.5% compared to quarter 3 of 13.9%, which is 60 bps improvement. And again, this is in line with what we have done, and we will see later that for the whole year, the margin expansion is about 380 bps. So I think our focus on operational improvements and other initiatives that we have been talking about, I think, has played out both in quarter 4, as well as in full of the year -- for full year. We have also tried to provide you the bridge separately that you can read in terms of what has happened in terms of the change between the 2 quarters, as well as for the full year. But at a very high level, the focus of the Company has been on operational improvements, which includes utilization, offshoring as well as doing more revenue with the higher quality, which means higher margins. All these improvements have given us a 5%, 6% kind of improvement, then we have the headwinds of investments into people and long term, we also have the benefit of scale. So net-net, I think we have got the -- I think I'm talking about the full year, right, already, but just to give, I think these levers have been there, all these levers that I talked about were applicable for the quarter, as well as for the full year. And I just wanted to give a comfort to all the shareholders that when you are looking at 14.5% for the quarter or 13.8% for the year, we have made adequate investments during the year and also planned for the next year in terms of the long term. And typically, we are spending 1.5% to 2% in terms of the investments into the business for future, and we are doing the right investment for retention of the people and motivation of the people. In terms of the PAT, you can see we have increased it 40.6% year-on-year and about 17% quarter-on-quarter. ETR is 24.6%, but I would say ETR, as a overall level is going to be more like 27% for the next year, we'll talk more about it, but we are looking at ultimately a rate of about 25% for India, and with a little higher interest, the tax rate for U.S., we will be up 27%. And I would say the most important highlight in this is that on 10% growth, definitely, we are not meeting what we would have planned to do at the beginning of the year, but at about 19% growth on the top line, we have delivered a growth of [ 40% ] on the bottom line and up about [ 40% ] in terms of the -- 50% at the EBIT level. Since there has been a lot of focus to make sure that we focus on the delivering the profit and the profitable growth, and that is in line with what we had done internally. Good. I would let you read. We are completely providing you the details of what has helped us both for the quarter as well as for the year in terms of various levers that have worked on the margin. This really helps you, especially our analyst friends to understand what has happened. Cash generation. First, I think in terms of the cash, we have a healthy cash position, INR15,689, and I say, which is about $200 million plus. We have generated a cash of 1,284 million in the particular quarter, which is a conversion of about 51%. I would like to call out that in last quarter, we had a conversion of 70% plus. So when you look at this number of 51%, with some exceptional collections and some other things that happened in quarter 3, we are not worried for H2 [indiscernible] we are continuing to be at 65% plus. And if I come to the year, we have free cash flow of [ 5,776 million], which is, again, a conversion of about 65.2% for the full year. And if you see our conversion of net profit, I would like to, you to have a look at the financial year '22. We are able to convert hundreds of net -- of net profit into the free cash flow, and we are confident of these levels of 65% plus/minus 5% in terms of very high growth year versus other scenarios in terms of more investments. But I think we are confident that 65 to 70 for services and about 50 to 60 for DLM, we will continue to generate. You will also note that we have generated 499 million of free cash flow in DLM compared to 84 million, which is a significant increase. And we still want to improve further, and we will see in the coming years, there will be a further significant improvement in case of DLM, which will also help for us as a Group. There -- one more thing, I would like to mention, you will see in the detailed investor update that there is a continuous focus on all the levers of free cash flow. One of the important ones has been that we have been able to achieve 6 days reduction in DSO for the particular -- for this particular year. That's on top of 11 days that we had done in the previous year. I think that 17 days reduction is really helping us. And also, I think CapEx is further optimized. And of course, there is a profit increase that is also helping us. And last comment from my side that in terms of the other income also if you look at there have been some headwinds from some of the European currencies because of the situation. But I'm happy to inform that whatever is the impact on P&L, the gains in our other income has far exceeded the losses. And we are for the next 4 quarters as well, [ plays like ] a very nice situation, so that our other income will also help. This also impacts our cash generation. That's how we are confident of maintaining these levels of conversion for the Company. With this, I'll hand over to Karthik.
Thank you, Ajay, and good day, everyone, and we are pleased with the performance of Q4 and continuing on what Krishna and Ajay has talked about, and we have witnessed a services growth of 1.6% in constant currency, and this is a third successive growth in services. I think we want to continue to build the momentum on services. And also if you take a view on the table on the left-hand side and Aerospace, which is starting to grow at 10% close to year-on-year. I think we have not reached the peak of aerospace yet, but 10% is something that we are really happy with the progress that we made. We talked about last year same time saying that's the bottom that we hit, I think that's definitely continuing. The momentum is there, but it's not to the extent that we want it to be. And the rail transport, I'll cover it in the next slide. And communication and utilities definitely are building a scale and with 3.8% quarter-on-quarter growth and specifically, comps has grown by 6.4%. And this is something that we expected to continue even for the next financial year. And also in terms of portfolio, which has grown by about 18% year-on-year, I think we expected the portfolio of sectors to lead our growth. I think that happened to be true for this year. And also with offshore mix at 51.6%, and this is highest ever we have seen on the offshore mix about 1.8% higher as compared to the last quarter. And also the utilization continue to be at a high levels of 86% [indiscernible]. We also won about 7 large deals, and we talked about our focus in terms of winning more large deals, I think that's continuing. And interestingly, 6 from services and within that 3 are from telecom and 1 from auto, medical and semiconductor, and one is a composite build to spec need, and that is from the transport vertical. And in terms of our quarter intake and our Cyient services order intake is up by 13.1% year-on-year, and the Group order intake is down by minus 11.9%. But this is only a seasonality, and we don't really have any challenges in terms of the order book et cetera, order intake. So in terms of full year, and we have seen growth across all the segments, I think that's definitely good. Transport has grown by 1.1%, and communications and utilities have grown by 12.6% year-on-year and portfolio has grown by 17.5%. And interestingly, [ for us ] we talked about rail, and we have seen a volume growth of 7% in terms of build hours, but the revenue was down by 3% due to a significant amount of offshoring. And I'll also touch upon the trends for next financial year and some consolidation in the customer segments is going to push more cost savings and synergy benefits, and that will probably drive more offshoring. So we will find some kind of a muted growth for H1. But H2 of fiscal '23, we'll continue to see a growth in the rail business as well. And in terms of growth for the Group stood at 8.7% in constant currency. And we are also pleased to see our EBIT performance growth of 51% year-on-year. And this is led by offshoring to the extent of [ 500% ], utilization improvement by 3%, and all this helped us to manage EBIT performance of 50% plus. And also in terms of 5 pillars, and we continue to see momentum on 5 pillars, which has grown by 21%, which is close to 2x of the Company growth. And we have added about 580 heads last quarter. I think that's definitely a positive sign for what we expect to see for the next couple of quarters. If I tried to deep dive into each of the segments and starting with transportation. I think as we talked about fiscal '22, we have seen double-digit growth close to it, and we expect this is going to be a still sluggish sector as far as aerospace is concerned. We will still see growth in the next financial year, which is fiscal '23. And as far as rail is concerned, we expect the first half to be muted, and we do expect the second half to really drive significant growth. And some of the key wins that we had in the last quarter, which includes areas in aftermarket and some of the ITAR work and embedded and Industry 4.0 as well as the urban air mobility segment. I think these are some of the expansions that we are getting into. It's not about conventional aerospace, and we really start moving into the segment of air mobility, and that's where we are really seeing the growth that's been built up. And as far as rail is concerned, and we talked about some of the consolidation, interestingly, we are seeing momentum on rail signaling and embedded systems and digital solutions, and we expect this to lead to growth for us in the next financial year. And DLM, which has witnessed steady growth, which is due to the material availability and the long lead-time for some of the materials. And we do have a robust order book, but the execution as per the plan is going to be difficult with the challenges on semiconductors that is faced by the entire industry. If you go to the next Slide, the Communications segment, which continues to build the robust growth that we are anticipating even for fiscal '23. And we won 3 major deals in Q4, which I talked about. And 1 of them is for a customer, who wants to roll out the broadband network in Canada. And this is an interesting one for us that we are able to bring a digital solution for the fiber roll out, and this is going to be first of its kind for us, and we hope to continue to build on similar deals with many of the customers. Private 5G networks center of excellence, collaboration with IIT. I think this is going to allows us to test various use cases and really allow the intraoperability of network components from various industry leaders. And we continue to remain positive for fiscal '23, and we hope this segment will show a double-digit growth even for fiscal '23. Utilities, which has witnessed a small degrowth in Q4, and this is more to do with the cyclicality of the major project execution. We continue to make progress with some of the recent wins in APAC to deploy a cloud native next generation spatial information system. And we are continuing to make progress on digital utilities, and this will grow the [indiscernible] growth segment for us even in fiscal '23. Digital, I think this is one area we -- we have come a long way in the last 18 months, 24 months, and the growth is driven by operational technologies, combined with our domain expertise. And we are able to really establish ourselves as the digital transformation partner for our customers. And the proof of the pudding is some of the engagements we are starting to do include the industry 4.0 implementation for an [ Indian ] manufacturing customer in North America, as well as setting up a consulting road map in terms of the implementation of MRO solutions for an APAC customer, and which includes the asset tracking, smart operations, as well as supply chain. And some of the recognition from analysts have also reinforced [ the sales ] in terms of our robustness of the digital solutions that we are [ building now ]. Go to the portfolio of services, I think we have seen growth of more than 35% from medical, and we expect that to continue. And the growth is led by demand from digital engineering services for medical device platform development, embedded software and software services for next generation products. And also quality and regulatory services in compliance with regulatory requirements. I think the regulatory environment is getting tough, and we do see this as a potential opportunity for us to provide the QA/RA services for many of our customers. Semicon, and which witnessed a small degrowth last quarter, but we are continuing to build momentum on semiconductor. And we have capabilities both on turnkey as well as services. I think that's giving us confidence that we will continue to really show growth in fiscal '23. And this is going to be one segment, which will definitely witness more than 20% plus growth for the next financial year. Mining and Natural Resources, this has seen close to 70% growth in fiscal '22, and we have added about 12 logos in this segment. And the acquisition that we made about 15 months ago with IG Partners is really proving to be very well for us, and we continue to see momentum around ESG, sustainability and digital transformation initiatives for the mining segment. Go to the next Slide, which is on the Energy, industrial and plant engineering. This has grown about 20% year-on-year, and we will continue to make progress on this segment. And we are adding new logos, and we are also expanding into some of the customer relationships in these areas. So we are seeing growth led by digital technology transformation around the portfolio of our customers. Geospatial, which has witnessed marginal decline, and except for one customer, I think this segment has seen the growth in fiscal '22. And we continue to build momentum of expanding our capabilities into a Earth's Observatory in various domains like mining and communication, automotive, utilities, as well as expanding into the high-tech segments. And this is really an exciting segment for us in the next 12 months, 18 months based on the plans that we laid out. Automotive and mobility, which has witnessed a sequential growth in Q4, and we continue to see a strong robust demand from automotive side, and we expect this to grow significantly in the next financial year. We started making investments over the last 24 months, and that's starting to pay out for us. With that, I'll hand it over to Krishna for providing outlook for fiscal '23.
Sorry. In terms of the outlook for FY '23, in terms of revenue, we are quite confident that the growth in revenue will be in the 13% to 15% range in constant currency for the Group. In DLM, we continue to have supply side challenges, which means that we're anticipating that the growth for DLM will be lower. It will be in the high single digits. So of course, the inference is services will do a little bit better than DLM. In terms of EBIT margin, we expect the full year margin to be in the range of 13% to 14%, which is in line with what we've done this year. Again, we continue to anticipate a tough supplier environment from a people perspective. And therefore, we believe it will be -- it will be -- it will -- it may be quite difficult to significantly improve margins from where they are at least in the coming year. In FY '23, our effective tax rate would be around 27%, given all the jurisdictions, et cetera. We will -- we believe that we will be in that range from an effective tax rate perspective. So net-net, I just want to summarize this by saying I think we've had a reasonable year obviously, in FY '22, but we have a much greater degree of confidence in terms of what will happen in FY '23. This is the outlook that we're giving is based on the backlog that we have based on the customer mix and various other parameters, which will [ give us a ] fair degree of confidence that we can deliver within -- within that range. With that, I'll hand it back to the moderator to curate the question-and-answer session.
[Operator Instructions] The first question is from the line of Sanjay Awatramani from Envision Capital.
Good evening, sir, and thank you for giving me this opportunity. So my question was on the line of the attrition rate. Can you highlight something on the full year accretion rate.
Yes, of course. So for -- just give me one second. So give us one second [indiscernible] full year is not under.
Yes.
[indiscernible] do you have the full year number. I'm sorry. Why don't we come back to that because the quarterly attrition rate actually came down about 250 basis points compared to Q3, and it is at 26.9% compared to 29.3% that was in Q3. So for the -- for the quarter, it was 26.9%. And if you look at the -- actually, the full year number is also more or less there. I think it was a 27% number. But the good news is, it's actually trended downwards. And from a -- obviously, from -- I think we started off with 26%, went to 27%, then 29%, and now we're back to about 26%. So that's the trend of attrition for the year. And actually, we are now quite confident that this is on a lower trend, which is a good situation because that really has been the biggest challenge for us in terms of delivering some of the revenue growth we're anticipating.
So is my understanding correct that you previously mentioned that 27% is the tax rate for financial year '22?
I think in terms of the tax rate, we are saying it will be 27% that's '22.
And just to confirming that the revenue is -- the guidance you've given is 13% to 15% change in constant currency for '23 and EBIT margins will be 13% to 14%.
That is right. Both assumptions are correct. That's what [indiscernible].
So sir, just a follow-up question on this attrition side. I mean, do we, I mean, plan to hire some additional hiring, then train them and then we [ bore ] them for these work in the IT sector. I mean as we see, I mean, the other competitors are hiring, I mean in bulk for these fresher hirings. Are we -- are we on the same page? Or we are moving ahead in the same, I mean, another direction in this?
Yes. Sanjay, I think Karthik here and let me take this question. And the way we are really looking at it, there are 3 ways that we are trying to strengthen our recruitment practices. One is the fresher and hire and train, deploy model. And second is, we are also trying to look at [ few hires ], which is something that we are trying to onboard resources through our rebadging model. And third would be what we call the most [ lateral ]model. So we started off with laterals. We started moving into [ few hires ], and we are in the plan of adding significant resources over the next 12 months, both on the fresher, as well as on the lateral side. We are starting to create a skill academy, which would really help us to build the skill pool, and we would definitely have more progress to update in the next 1 or 2 quarters on that.
And also, we have got the full year number 26.2% is…
So this is the attrition for FY '22? That is 26.2%, right?
Yes. That's right.
So sir, can you -- I mean, just to reiterate, I mean, can you give us some count, I mean, what is the planning -- plan to hire for FY '23? I mean just an overall count of the employees?
Yes. I think it's a little bit difficult to give an exact count. I mean, we obviously are hiring quite aggressively, and we're also hiring in line with the revenue outlook that we just talked about. So I mean, we don't anticipate -- if anything, we anticipate offshore to increase a little bit from where it is, we anticipate that growth to be quite across the board. So it's not that it's one industry. So it's just an extrapolation at that point, right? I mean, if offshore is going to increase, we're going to grow 13% to 15% most, say, most likely we will add 15% to 17% or something like that.
The next question is from the line of Sandeep Shah from Equirus Securities.
Just the first question is in terms of guidance. So when I strip out the DLM growth assuming 7% to 9% within the guidance for FY '23, I get a number of roughly 15.5% to 17.5% for the services business revenue growth in FY 2023. And this will require roughly 4% to 5% compounded Q-on-Q growth from 1Q to 4Q of FY '23. So just in FY '22, we started with a double digit constant currency growth, which we downgraded to U.S. dollar revenue, double digit growth. And actually, we have come out with a 9% U.S. dollar revenue growth. So there has been a miss in terms of what we started originally in terms of guiding our services business versus delivery in FY '22. So what makes us confident that the same thing may not repeat in FY '23, because FY '23 may have a higher number of macro issues as a whole?
Yes. I mean, we have to strip out the macro issues, and let's assume that there's -- there's nothing that comes at a -- at an existential level like us because that's a different story. But a fair commentary that if you look at the biggest reason for that challenge this year has been some of the supply side issues, right. We haven't been able to fulfill the supply at the rate at which some of the demand has come in because we still remain in a fairly robust demand environment. Now also, the other thing in terms of the supply that's happened is, we were historically strong in some areas like mechanical, data, et cetera, whereas the growth is coming in some newer areas like embedded digital. For example, our digital pipeline, I think, grew by 50% even last quarter, and our order intake was up, I think, [ 60% or 70% ] compared to last year, and so on with embedded and so on and so forth. So that pivot to say that from the growth and from the capacity from the traditional areas to new areas has taken some time. And the fact that we have that capacity now coming online, we have the recruitment engine online, we have significantly strengthened. We've added 52 recruiters in the last quarter. We've significantly strengthened that pipeline of recruitment. We're taking all those things into account. It gives us -- again, there's no guarantees in life, as you know it, but it gives us a lot more confidence of this number because it's also been vetted a little bit to say, okay, what are the risks, what are the opportunities and really rate them in the current manner or the correct manner and then come up with those numbers. So your observation is right. I mean we've had a better [ from this ] in terms of revenue. But in terms of this year, we believe that the issue that made us [ have that] and especially around the supply chain for talent has been addressed. If demand environment remains quite robust still, and therefore, our confidence is higher. Again, I can't say, I'm 100% confident because that's a misnomer, but our confidence is significantly higher. And that's based on -- on some of this -- the factual figure.
Yes. Krishna, just further to that, that means first half is seasonally strong for you and the industry, then we have to do a lot of heavy lifting in our services business, we have to grow by mid to high single digit Q-on-Q. Is it what we are foreseeing, while in giving this guidance.
Sorry, I think the line isn't very clear. Can you repeat that?
No, what I'm saying is generally the first half for the industry is seasonally better and for us also it's seasonally better. So to achieve the services growth guidance of 15.5% to 17.5%, you have to do a heavy lifting with a growth of mid to high single digit Q-on-Q. Are you baking this into our budgets, while giving this guidance for services business?
Yes. Sorry, again, the line is very clear -- isn't very clear. But from what I understood, I mean, the growth will be spread through the year, you're right. I mean, from first Q onwards, we need to see some reasonable growth because obviously back-ended growth is not -- is not the right way to look at it. So yes, I mean, absolutely, I mean we are seeing things shape up quite well even in the first quarter of the year, and that will really lead to the numbers that we're talking about. So I'm sorry, the line wasn't clear, so we can -- we can think of offline. But if that was the question, then yes, we are -- we are quite confident that there is a good runway to it.
And Ajay, just wanted to understand, is there any one-off in the SG&A line, why it has shot up so materially on a Q-on-Q basis? And also depreciation for the last 2 quarters has been trending down. Is it a new normal to factor as a whole?
I think on your question on SG&A, I think if you compare it to quarter 3, yes, there has been one-off. But when you compare to quarter 1 because this is also SG&A and investment. So when you look at them together from Q3 to Q4, yes, there have been some one-offs. But when you look at Q4 to -- the -- our planning next year. So the way it is happening is that we are getting a benefit of about 2% on scale. We do have another investment of about 2%, which is towards the various initiatives to drive growth, [ solutions ] and things like that. So I think from the perspective of Q3 to Q4, yes, there are some one-offs. But if you see in steady state, do you -- do we -- will we continue to make those investments, yes, we'll continue to make those investments. To that extent, I would not say that the SG&A will go down, and this is SG&A plus investment, SG&A and investment.
Yes. And just last question in terms of margin guidance. So you have given 13% to 15% guidance, while the exit rate is at [indiscernible] kind of a margin. So are we saying margin may also have a down case on a Y-o-Y or maybe at a base case or a worst case scenario we may be flattish on a Y-o-Y basis in [ FY '22 versus FY '22 ]. And when are we planning for a wage hike? And what could be the quantum of impact on a Q-on-Q basis?
Not able to hear you clearly, but what I understood was that what would be the impact of that range of growth on margin? Is that the question, Sandeep.
No. what I'm saying is in terms of the full year guidance on margin…
Maybe, we can come back to you, Sandeep. Your line is not clear. Maybe you can dial-in again and we can take the next question meanwhile.
Thank you. [Operator Instructions] The next question is from the line of Mohit Jain from Anand Rathi.
Yes. So sir, one more, I missed on your commentary on the segment for services. So you guys spoke about services being or getting back into this growth trajectory for '23, but on the rail side…
Just Mohit -- Mohit, may I just kindly stop you [ for a minute ]. Moderator, we are not getting the clarity in the voice from the questioner. Can you please help us?
Sure. Mr. Jain, if you can take the phone off speaker, please because your voice was going in and out a bit.
I am not a speaker actually. I could hear the previous participant as well.
Okay.
You mean, there is a problem on our side. I'm sorry for that, Mohit.
Previous participant. Yes. I can hear his questions as well. So I think maybe you guys reconnect…
Maybe you can repeat the question.
Okay. So I…
Maybe you can repeat the question. We can hear you clearly.
My question is related...
Yes, please.
My question is related to services business. And in the commentary, you guys said that aerospace is likely to come back in '23, so that is obviously one segment we are positive on. I missed your remark on rail. So rail had a decline last year. Should we expect that decline to sort of continue next year? Or that is something, which you guys are more hopeful given where your pipeline or order book is?
So great, yes, please.
Yes. Maybe I'll answer that, Mohit, and I hope I understood your question. So aerospace, like we talked about, we have seen a 10% growth in fiscal '22, and we are not seeing that it is fully come back to where it was pre-pandemic. And we expect it to fully recover by fiscal '24. That's what the analyst report indicate. We will continue to see a growth in double digit for aerospace for fiscal '23, and we would still not have reached our peak in fiscal '20. Having said that, in terms of rail, and we talked about some of the consolidation of customers and some of the synergy benefits that need to be drawn out, and we do see that, that the H1 of fiscal '23 could be muted on rail, and we are seeing momentum in the form of rail signaling, embodied systems and digital solutions expanding in H2 of fiscal '23. So we'll see that as a transport segment, we'll definitely see a growth in fiscal '23 and far better than what we have seen in fiscal '22.
So that 15% guidance is essentially coming or we can assume it to be largely coming from communications and portfolio.
Yes. If you look at the non-transport for fiscal '22, that has grown by 15% year-on-year. So we are continuing to build the momentum on the non-transport. If the transport also joins on the growth bandwagon, I think we expect it to be slightly helping us on accelerating the growth, and that's the confidence that we have today.
And second thing is the -- that guidance numbers that you guys are giving are totally organic based on today's situation. Is that correct? That's right.
Yes, absolutely.
And last was on the TCV. Like our TCV is growing at a slower pace, and I'm again referring to only services not to DLM, but relatively, our TCV, while it has improved over the last few quarters and you are talking about large deals, the number is moving a little slowly compared to the industry. So by when do you intend to sort of fix it? And how should we read your TCV on the services side going forward like what if -- is something that you guys are expecting? Or will it still take some time before TCV catches up with the revenue growth explanation?
Yes. I think on TCV [indiscernible], TCV is also a relative thing, right? I mean, all said and done, we have to look at it from the context of how the -- how the contracts in our industry are awarded. And also, I mean, obviously, you can't compare our TCV to [ PCSS ] TCV, for example. So I think where we are, we feel quite confident because just looking at the nature of our business on how contracts are awarded, how work packages are awarded, et cetera, we actually feel quite confident that it is much better than it has ever been. I mean the TCV is higher than it has ever been. So again, it is relative. I would compare it more to [ us ] than to the general industry.
So what I mean to ask is 15 to 20 kind of percent a TCV growth is what you guys think and sort of sustain or do you think like with the last 4 quarters, 8 quarters, you were a little more volatile. So going ahead, should we assume this 15%, 20% kind of a TCV number? Or should we assume some volatility.
Yes. [ Just see ], there will be volatility in TCV, just again that -- based on the industries that we're in and the sites that we're in, there will always be a volatility in TCV. And that's why I say, if you look at it as a sort of a running number rather than a point-in-time number. And from a running number perspective, I think we've had a fairly good in last 8 quarters, like you said, and we feel fairly confident on the backlog, just looking at the backlog, where it stands.
The next question is from the line of Vikas Ahuja from Antique Stock.
Congrats on great expectation. Krishna, on guidance, have you baked in any kind of macro risk, while making the guidance or you try to be a little bit conservative considering second half, there could be some risk.
Yes. It's -- we haven't really taken any major macro issues because I think the quantifying those macro issues is very, very difficult. Now what I'll say is we've taken into account things like the supply market is going to still be quite constrained, therefore, we will have to be aggressive with salary increases. We will have to be a little bit more reasonable in terms of joining side. All those things we have taken into account absolutely and [ rewards ] on the conservative side. I mean even salary increases, et cetera, were budgeted at a number, which we've never done in the past because we're looking at a fairly robust environment or we anticipate to [ Karthik's ] point about rail, we anticipate growth coming back because some of the clients that we've been working with and some of the merger situation, et cetera, are starting to really play out and obviously play out to our advantage. But we're also being conservative to say that it might not happen quarter 2, it might happen quarter 3. Those kind of things we have taken into account. But if you look at the sort of the global macro issues like say, Ukraine crisis and oil crash, those things, honestly, we haven't because unfortunately, with those things still there, you know, you don't know that they're happening.
And lastly, what's leading to this 200 basis point increase in tax guidance.
I think based on -- if you look at the provisions of the special economic zones because our position of lower tax arises out of our operations in 11 units in SEZs. And from 1st April, many of them get into the different levels, you get 100%, then you get 50% and then it becomes 0. So I think there is a secure. Now we are looking at what tax rate makes sense for us? Should we continue with these benefits? Or should we go into the 25% rate that the Indian government allows us. So we will take that call during the period. In this, we have made an assumption that we're looking at India tax rate at 25%. I hope that clarifies the question.
[Operator Instructions] The next question is from the line of Anupam Parnaik from Allianz Global Investors.
Congratulations on great set of numbers. I have 2 questions. One of them is regarding attrition. I mean, it would be helpful if we could just get some guidance, as to what you are expecting for FY '23? And secondly, in relation to high inflation across various markets and also the higher attrition rates that the industry is paying. So I mean, it will be helpful to understand how that has impacted the staff costs for FY '22? And what should we think for FY '23?
Absolutely. So I think from an attrition perspective, our view is the markets have still not cooled down in any manner. So therefore, while the 29% is quite high last quarter, we believe that it will be more of between 20% and 25%. And that number and that assumption is also quite important in terms of how we plan for our staff [ cost ], and therefore, plan for capacity and therefore, plan for budget. So we -- I would be -- while I'm saying 20% to 25%, I would be very surprised if it's at the lower end of that thing. I think even for next year, we have to still plan attrition to be more towards the higher end of that range just because the supply side challenges have not eased yet, and the demand scenario has not eased yet. So again, like I said, we just have to plan for it and hope for our -- sort of plan and be ready for a 25% attrition number, and that's what we will plan our capacity and so on around. In terms of last year, obviously, there was a fairly significant challenge that we faced on the supply side. We've given up at least a couple of points of growth because of the attrition [ in the services]. We did not have the capacity and the staff when we needed them. But again, I think that's the key lesson learned, and that's actually something that we also had a long conversation around the Board meeting earlier today in terms of making sure that we understand there's lessons learned, and we're really able to mitigate and manage against those lessons learned. So it's -- we're not out of the woods yet. And 1 quarter does not make a trend. I'm not saying attrition has come down. We've had a decent quarter, and especially if you look at most of our competition, actually, this is -- this is also a good comparison. Most of our competition is actually showing increased attrition or even significantly increased attrition, whereas our attrition has come down, we take it as a good sign because we've done a lot of hard work. I mean, we've done a lot of things, which are unique both in terms of compensation and also on the software side, and we hope that, that's what's playing out. And I'll say 22%, we're planning for 25%, we're hoping for 20%, but [ when we see ] there the numbers, I guess.
And the second question was regarding sort of another inflation impact on the business. I mean, how should we think about that in terms of the staff costs for FY '23? And also, if you could share some color, as to sort of what sort of inflation you had in for staff costs in FY '22? That would be helpful.
So on the -- obviously, it's a very rough inflationary situation, and we have not seen these inflation numbers in many countries for a long time. So it's going to have a fairly deep impact, sorry -- a fairly significant impact on the staff cost. And that's why we're planning around things, and we will see some good room for improvement in efficiency and operational metrics. But that's why we're still saying margin will be in the 13% to 14% range because salary increase is going to be a major headwind this year. And we've planned on a fairly robust, fairly attractive, hopefully, salary and fees. Sorry, what was the second half of your question, it wasn't very good.
Sorry, what was the inflation that you saw for FY '22 in terms of the salary cost. I mean, rough estimate without getting into any specifics?
It will be in the 10% range in India to be -- typically, we have done 2% range in overseas, it will be maybe 4% this time overseas. So maybe 4%, 10%, 12%, something like [ 4%] overseas, 10% to 12% in India. And again, these are sensor very, very rough numbers because it's going to be all over the place. There are groups, which will be much, much higher than that. But this is just a rough estimate.
If I can just also add what as Krishna said, this is extremely sensitive issue. We have to make sure that we come back to [ 20% to 25% ] as [ default ] rate and then sub 20%. So what we are also doing is, of course, the increases like last year are going to be in 3 phases. And also, I think as this situation is developing, we have kept the flexibility, we'll be able to make sure that we are able to prioritize and do that. So I think [ just see ] that some of these things, what we are paying are sort of [ directional ]. And each country and each skill set is being very carefully planned to make sure that people are taken care of in line with the trends in the market and the skills that are there in the market.
The next question is from the line of Sulabh from Morgan Stanley.
I had a couple of questions. One is on the revenue growth guidance. So going back to the comments made earlier, where we mentioned that the service revenue growth will be spread out through the quarter, but then when we were making the comments on the vertical side, we said that the rail growth will be driven in 2H, while it will be muted in 1H. So just trying to understand that which verticals would be doing the heavy lifting in the first half for you to be able to spread the growth through the year.
Maybe, I'll take the questions. Sulabh, Karthik here. And we expect a strong growth led from communications to medical, mining and semicon and automotive. I think these are going to really lead our growth in the first half. And also aerospace, which continue to build momentum like what we talked about earlier. And rail, utilities and some part of geospatial will start bringing growth in the second half of the financial year.
And then on margins for Ajay, just trying to understand what are the tailwinds that are we expecting in the margin guidance that you're baking in this year? And based on the wage hike numbers that you're planning, what's the additional impact this year versus last year that they are baking in, in the overall margin guidance?
I would say that in terms of the levers that we are going to use, I think they are going to be similar to what we have been doing in the last couple of years. The internal operational efficiency, which we have been driving, we are also looking at a lot of automation. We're also going to look at -- looking at this inflation that we discussed and also the attrition issue. I think we are working on the price increases with the customers because this whole phenomena is not [ benefit ] to us. It also applies to our customers. That's another lever that we are planning for. Scale is definitely something, which will further benefit. These hikes are going to be higher than the last year in terms of the overall impact. At this stage, as I said, while definitely, we have made some provisions in the budget and some of our employees are also our investors and maybe on the call, I don't want just to become a downhaul for the guidance to be employed. So I would say it is definitely going to be as I said, we will do what it takes to retain the people and make sure we take care of them based on the best market valuation. I would say it will be higher than the last year, but we would be able to mitigate it by internal improvements, as well as the pricing. If you look at all these situations that are developing, pricing is one lever that will really work. And with [indiscernible], we will definitely get further improvements that will come on scale. And we'll continue to make the investments, as I already said.
The next question is from the line of Shradha from Asian Markets Securities.
Just one question. There is a -- [indiscernible] talking about some class action suite filed against us. Can you provide more details on this thing?
Excuse me. So there is a -- there is a lawsuit that has come up in the U.S., which is a civil lawsuit, which was brought by one of the states or a set of states, sorry in the U.S. We are -- sorry -- excuse me, we are addressing the issue. We do not see that there is a major risk based on the fact of the case et cetera. But we are addressing the issue, and we will keep you posted if anything changes either in any appreciable manner, as things go ahead.
But what is this regarding, Krishna?
It's alleged on employee hiring. That's what the allegation is around. It -- and it's not a lawsuit on -- it's not a -- sorry, it's a lawsuit on Cyient on employee hiring, but that's what has been alleged in the lawsuit on how -- our hiring practices. And I want to say, this is against a number of companies, it's not just against Cyient, but it's against a number of companies in the ecosystem.
And this salary hike will be [ set on ] which quarter? Will it be just a second quarter or first quarter at least?
Similar to the last [ year ], if I can take that Krishna, it will be over the -- spread out over the 3 quarters. And again, situation, we all discussed the supply side and retention of talent is our first -- first priority in this year. So having said that, we will be flexible on that. But the initial plan is to have it over the 3 quarters like the last year.
And just last question. Sir, why is our depreciation number coming low every quarter for the last 2 quarters?
I think I would say the leasing is also clubbed there, and we have been letting go off from space, which also hits this particular line. That's the reason. So don't -- I think it's just some space optimization. And I would say, as the growth comes back, definitely, we will have to again go back to the space levels. I would say don't read too much into this temporary reduction in depreciation.
The next question is from the line of Amit Chandra from HDFC Securities.
Yes. Sir, my question is related to the aerospace vertical. So as you mentioned in the commentary that we are seeing recovery in the aerospace. So if you could -- if you could break it down, how the recovery is in the top client versus the non-top client? And how the nature of spend in aerospace has been pre-pandemic and post-pandemic?
So I think on aerospace, Amit, what we are seeing is, there is definitely an increase in production capacity. And what has been reduced over the last 2.5 years, I think they are likely to come back and some of them are increasing from 30 aircrafts per month to about 40, 42 during middle of this year, and they will probably come back to pre-COVID levels of 60 by middle of next year. So that's something, which is really driving the growth in terms of productivity, digital, industry 4.0 solution and helping them to manage their quality inspection, and how do you think they can probably have better view on their maintenance. I think they have an opportunity to get it right using digital technologies far efficiently than what they would have done otherwise. And that is an opportunity we're trying to tap into. And the second one is also at the -- number of [ hours ] sort of buy the aircraft and the aircraft engines are increasing. There is an increase in the maintainability MRO-related services, and that's something we call them as aftermarket. And whether it is add-on services, spare parts and trying to assess challenges that are seen by the maintainability and how do you think we can help our customers on those areas. So essentially, it is led by manufacturing, productivity, expansion that we are looking for and as well as the aftermarket side of it, and all of them are led by digital technologies. They feel that they can really bring lot more efficiency into their operations, and that's essentially what is driving the growth in the near term.
Okay, sir. My second question is on the -- on this -- is on the like margin guidance that you've given. So how severe is the onsite wage inflation? And what kind of wage hikes you're actually baking in onsite specifically in our margin guidance. And is it significantly higher than what you've given in the past because onsite inflation is a factor, which can impact the margins much higher than another [ offsite ] inflation.
No. Absolutely, we are factoring in, like I said, a 4% roughly onsite hike. Again, it is higher than what it was previously. But like you said, inflation is at a situation, where it is -- it's not tenable and therefore, these hikes will have to happen. But again, there are like, I articulated in a greater detail, there's a number of opportunities both to make it up from a tailwinds perspective, but also not to read too much as a blanket number, which is -- just a lot that goes in. I mean we need to be competitive. We need to maintain margins. We need to service our clients. So there's a lot that's going on. So when we talked about the outlook, it has all these things baked in and baked in at a -- at a thoughtful level.
Ladies and gentlemen, due to time constraint, we take that as the last question. I now hand the conference over to the management for their closing comments. Over to you, sir.
So thank you very much, everyone. Thanks for taking the time and being here at this meeting or this call this afternoon. Like I said earlier, we feel a lot more confident in terms of what's going on [ based on ] some of the operational initiatives, but also some of the -- many of the actions that we've taken. So once again, thank you for your support, thank you for your feedback. And thank you for the patience, while we run -- did go through a rough time in the last couple of years, but I think the future looks quite good in terms of where we believe the business stands, as we speak. We will also do an Investor Day during the course of the quarter. We haven't quite nailed down the date yet, but we will communicate the date to you. We will obviously showcase a lot more in terms of both capability, but also clients, et cetera, and we look forward to your participation. We will share the dates with you. With that, thank you very much. Have a good evening. And I look forward to speaking again next quarter.
On behalf of Cyient Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.
Thank you.