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Birlasoft Ltd
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Ladies and gentlemen, good day, and welcome to the KPIT Technologies Q1 FY '19 Earnings Conference Call hosted by Emkay Global Financial Services. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Rahul Jain from Emkay Global. Thank you and over to you, sir.
Good evening, everyone. I would like to welcome the KPIT management and thank them for giving us this opportunity. I would now hand over the call to Mr. Sunil Phansalkar for opening remarks. Over to you, sir.
Thanks, Rahul. A very warm welcome to everybody on this first quarter FY '19 Earnings Call of KPIT Technologies. Today on the call, we have Mr. Kishor Patil, the CEO and MD; Mr. Sachin Tikekar, President & Board Member; Mr. Vinit Teredesai, the CFO; and Sunil from the Investor Relations function. As always, we'll have the call starting by opening remarks by Kishor Patil on the performance during the quarter and how we look at the remainder of the year, and then we'll have the floor open for your questions. So once again, a very warm welcome to all of you, and I'll now hand this over to Kishor Patil.
Good afternoon. Overall, this quarter has been in line with our expectation and what we mentioned to you last quarter. If you look at last 6 quarters, our margin has gone up overall for some quarter. So from 9.1% from quarter 1, we are at 13.2% over last 5 quarters. Actually, while we have made this improvement, it is post some of the excess expenses we have been incurring: one was in the Copart legal expenses, the second is the product investments which we are making. We have started 3 local centers during this time. In U.S., Germany, large centers, Rolle. So all these centers are there. And also considering the fact that our growth has been more than double digit, so in spite of this, I think they have been important to increase our profitability in 5 quarters from 9.1% to 13.2%. This is reflected in cash. In spite of incentive payments during the quarter, our cash balance has increased during the quarter. If you come to the growth, this is -- first is this quarter crosses INR 1,000 crores revenue in the quarter, which is a milestone. But again, as I mentioned, last 6 quarter if you look at it, there has been a growth quarter-over-quarter. So we moved from INR 123 million in the quarter to INR 150 million. And if you look at the yearly growth, it is 12% year-on-year in terms of dollar term or 17% in rupee term. I want to go little bit more in terms of growth because on prima facie, it looks marginal growth, but the quality of the growth is very important. So first is year-on-year growth is more than 12% in the dollar term. The PES, which is the products engineering or automotive embedded systems group, which we have, has grown 6.9% quarter-on-quarter. I just want to bring out the consistency of growth in this sector. Last year, we grew more than 30% in this deck. And even in the first quarter, we have grown 6.9%. So we continue to see a tremendous traction as well as growth in this. We mainly work in some of the most exciting areas in automotive sector, which are in terms of autonomous vehicle, electrification, connected cars and mini standards, which are coming up. So I think this growth has been completely based on the new offerings which we have, which are going to change the automotive industry for many years to come.Overall, in the services, we grew by 3.5% in constant currency. The EBIT has grown by 3.3%, IES has grown 2.6%. So in our key growth drivers, we have made a significant growth. There are 2 areas where we have a degrowth: one is SAP and the products. In SAP, we have made some organizational changes in order to really change the momentum. We also had changed certain strategy in terms of focusing only on the larger deals in the, again, more on the digital side of SAP. We are confident that we will turn this around in a quarter also. In the Product side, we have a tremendous pipeline. However, this standards on AIS-140 were moved by government from -- which was to give compensatory to -- by a year, they may probably start earlier, but right now, as of now, they are moving by year. That's why, in spite of the orders, we are not training a person to really book the revenues. However, in the products, we are coming out with the different packages, where we want to move in a direction where we want to bring in, in terms of focusing on software part of the products and the integration with the hardware and bringing the hardware partner, which will allow us to really focus on our strength and bring us a partner, which is stronger on the other side, which will also allow us to really have a stronger growth -- go-to-the-market and improve overall profitability and reduce some of this fluctuations we have in the product.We believe this transition we can do in the next 2 to 3 quarters. Overall, in this growth, another very important qualitative factor is P4P accounts. And in this P4P accounts, we have grown more than 5.5% in constant currency in this quarter. As I mentioned to you, we are very, very focused only on 2 factors: one is the P4P accounts, which has consistently shown the growth as we have grown as a company. The second is the focus on focused offerings, which are largely digital or the futuristic offering, which are to say, for the customer, which are going to be relevant for many years to come. And I think both these strategies are really giving us a good result.Overall, in terms of geography, USA has led the growth. We -- Europe and, say, particularly Germany has been a great growth driver for last many quarters. So it's a -- more flattish this year again. Some parts of the business have grown, and some have not. But overall, we see a tremendous strong pipeline in the Europe. And the same thing is in products in the Asia. Overall, the services business has grown, but the products [ side of ]business has degrown. So that's why it shows degrowth in the Asia. But overall, we see that across the geographies, we see a good traction for our services and underlying strong growth for our P4P accounts. If we -- so overall, for this year, we are on track both for revenue and the profit. We are very, very focused on profitability as much we are focused on the quality of growth. So we are confident that we are on track for both.In terms of transaction updates, we've had a CCI approval we mentioned. We also have applied for NCLT. NCLT has given a direction in terms of holding a shareholding -- shareholders meeting soon. I would really -- would like to request all of you who are the shareholders to really vote favorably. As you know that this has been -- the last few -- the last year or so, we have seen a good value creation for the investors' basis on the performance of the company, but we believe that the focus on both IT and engineering, specifically to the strong management bandwidth, they will drive this value creation more. So that's what I had to say today. We'll be open for the questions.
[Operator Instructions] The first question is from the line of Mohit Jain from Anand Rathi.
Wondering on your utilization. Last time when we spoke, you were looking at increasing it by 6, 7 percentage points. But this time, it has dropped. So any specific number that you are looking for by Q4 FY '19, where this could be?
So actually, we had an increase in the headcount as compared to what would be in line with the revenues exactly. But I think -- one thing I wanted to say, that the services revenue has grown. So the products revenue had degrown. So from that perspective, there is still a growth, but more importantly, I think, from the next quarter, in anticipation of the growth we look at and also some -- to the factor that this is the time we start hiring the freshers. I think from that perspective, this headcount has come.
So we are at 71% for offshore this quarter. Do you still see a scoop of this going towards 75%, 76%? Or this is -- like last 4 quarters, I think, we are in this range 70%, 71%.
There is -- certainly, we can increase this, but at the time, specifically in the engineering area, the kind of growth we have, it is also - and it's in the new technology area so getting the people and meeting gets very -- it takes a bit more time than the normal packages. So naturally, there is a scope for efficiency. As soon as we bring in, I think, this utilization can go up by 2%, 3%, at least if not 4%.
Okay. And, sir, second is on the margin outlook for the year. Now given that depreciation benefits have come in, and then we're looking to exit at a very high margin, so is there any thought on improving the margin outlook? Or you would prefer to invest more in there and what should we build in for the new -- in the new currency term?
See, as you know, we are very well in position to exceed the numbers we have mentioned, but the way it is, is -- it is basically mainly on account of multiple factors. So we would wait always, and we would -- as a company, we revise guidance only in the quarter 3. So we will take that path, and we'll look at what happens in between. And also on the currency side, I have to say that we have a very strong business in Europe, and that's a growth market for us -- very strong growth. So there are also currency headwinds in the European currency. So we will wait and take a view after a few quarters.
There are no incremental expenses planned versus what to be discussed at the end of last year. No incremental expenses planned?
No, no. There is nothing yet.
You lastly said this income from associates, this last number coming in from minority and income from associates. So what should we expect in that length?
So we -- as I mentioned to you, specifically these are areas in the Product side where we would take certain view. We are moving -- we're changing the model and during this process, there will be some expenses which we may incur, but I think by the end of this year, we expect this to be neutral if not positive.
Sir, this INR 4 crores, if this is the investments, like in which area which work? Can you elaborate a little bit on this, INR 4 crore quarterly number that we are looking at?
So there are -- I cannot go into product-wise details on some of this, but these are numbers as of now, right, and sometimes in the subsidiary area, sometimes the expense is happening [ on ] main company, sometimes in the subsidiary company. So at a point of time, I would look at this -- you can take this for the rest of the year.
This quarterly run rate is what will stay for the rest of the year.
Yes.
The next question is from the line of Nitin Padmanabhan from Investec.
Just wanted your thoughts on the IES business. Seems to have done well for the past couple of quarters. And do you think this run rate will be stable and grow from here? Or do we expect some volatility there? So that was the first one. And the second one was from the SAP perspective, if you can give some sense whether current rates can continue or there is a downside to that?
So I think in both this business -- the business is stable, more or less. I mean, we don't see any downside, so in our -- any IP business, we are looking at growth, specifically driven by digital in all these areas, whether it is ERPs or non-ERPs. We are looking at improving the margins in these areas as well. So I would just say this is how we see it. You're working at 50 right now, it is a degrowth. We're not looking at any downside beyond it. We look forward to increasing the revenue. As I said, maybe it may take one more quarter, but we'll see some growth, of course.
Sure. Fair enough. And just finally, for both these businesses, if you compare the same time last year, are we -- is the pipeline and the deals that we have in the back, any sense that you could give how it looks? Was it same time last year?
[ No ], it's quite comparable. It is not significantly higher or anything right now, but I think we have a very strong pipeline on the digital part of the business, specifically non-ERP digital part business is pretty strong. On the ERP, I think we have a similar pipeline as we had last year.
[Operator Instructions] The next question is from the line of Abhishek Shindadkar from Equirus Securities.
We have heard from the larger peers about ERP modernization cycle. We have a large portfolio there. Anything you see on the ground which makes you believe or you have any comments related to the same?
Yes. We see -- in our P4P accounts, we do see those opportunities, and we are absolutely pursuing these opportunities. So as I said, ERP is no more an area where we see any softness in demand. So most of this is driven by modernization as well as digital part of the ERP transformation.
Okay, that's helpful. And second, I wanted to understand, we see a good 400+ addition on a quarter-on-quarter basis and almost closer to 90, 100 on-site. So if you can help us understand where are we adding these people, and which are the type of services where we are seeing demand? That can be helpful.
So as we mentioned that we have started the local centers, development centers, both in Germany and in U.S. So the most of the addition you are seeing is in our centers. So that is to service our customers in the local market and globally. Offshore is naturally for overall business. Now in both these cases, I think we see most of the demand driven by PES as well as digital. I think these are the 2 SBUs, which are driving the demand. On-site demand is also driven to some extent by IES and PLM -- ePLM.
[Operator Instructions] The next question is from the line of Neerav Dalal from Maybank.
I had few questions. One, I wanted your subcontracting cost for the quarter.
It was around INR 938 million.
INR 938 million, okay. And regarding wage hikes, whether the wage hike cycle was taken this quarter, or when are you expecting to take the wage hike?
So we have our wage hike next quarter. We had a good performance for the last year. So we are expecting a little higher than industry wage hikes next year -- next quarter -- effective next quarter, but we will be also in a position to neutralize it to some extent due to growth and improving the profitability.
Correct. And all the on-site addition would be happening in your centers. That's just to confirm.
Oh, sorry.
Most of the on-site hiring would be happening for your centers in U.S. and Germany, right?
Yes, that's right.
Correct. And lastly, there is this others item, which has shown a large decline in this quarter in terms of the industry. So just wanted to know what the decline is, and what would be the general run rate for that side of the business?
So basically in terms of industry verticals...
Correct, correct and others.
You see, as we have been saying, the focus on, obviously, are the 3 verticals, which is manufacturing -- automotive, manufacturing and EMU. So the business in others is where we do not have the strategic customers and the whole focus for us is on these 3 verticals. So that business will keep on moving. Right now, the main focus that we had is on the 3 focused verticals and the top 40 strategic accounts that we have.
Got it, got it. So what -- was there something specific to this quarter that led to this big decline? Or -- so from here on, would you see this INR 8 million revenues per quarter or...
No. I mean, if you really look at it, the quantum is so small that even a small -- a couple of small projects getting over looks big in terms of percentage number. So that is what I said. It will keep happening that way...
Okay, okay. And just finally, in terms of the Products and Platforms, some outlook on how would the quarterly revenues look like this year, vis-à-vis last year? Is there any seasonality that we would see?
On Product side, actually, there has been -- as Kishor Patil mentioned, there has been a big setback in terms of government regulation that has been pushed out by year. So that is going to upset our pipeline and our revenues for the rest of the year. And it affected in the first quarter, so the effect will continue till the rest of the year. So we will not see much of growth coming from products for the rest of the year. And as and when the regulation comes into effect, I think we have all the orders in the pipeline. We have a tremendous pipeline dominating the market share. As and when it comes by, I think we'll be able to capitalize on it.
Right. So if I were to just see the run rate, would we be at this $5 million, $6 million a quarter run rate from here on to the end of the year?
Yes. I think the run rate will continue, but -- so yes, the current run rate will continue for the rest of the year. Correct.
The next question is from the line of [ Ayush Rana ] from [ Borgia ] Capital.
Just wanted to get some clarity on the total outstanding hedges for the quarter ended and for the next quarter. Could you give some guidance on the same?
So if you look at the hedging policy that we have, we have got a 2-quarter rolling basis. We hedge 75% of our net exposure on a 2-quarter rolling basis. So at the end of the quarter, if you look, the total outstanding hedges are about $45.8 million, and the average rate for these hedges is INR 67.
And 75% of the hedges are covered through forward contacts for the next 2 quarters?
What I'm saying is, we cover 75% of our net exposure on a 2-quarter rolling basis. And all of the exposure is covered through simple forward [ contracts ].
Okay. And majority of the hedges are in USDT or GBP or euro?
It's a combination of all the 3, but majority of them will be in USD.
[Operator Instructions] The next question is from the line of Vinesh Vala from Dolat Capital.
Just last quarter, we had given a revenue guidance of 8% to 10% and margin of around guided of 11.5% to 12.5% on EBITDA front. So post the wage hike in Q2, do we stick to the guidance?
I mean, as we said in the opening comments, we have actually a good profitability improvement over the last 5 quarters. We believe we'll continue doing that. So we currently are saying, we will stick -- definitely stick to the guidance, and we'll have a look at it in the third quarter, but right now, yes, the guidance will...
Okay. And another one on, sir, on the tax rate, ETR, which is normalized during this quarter. So can we assume that same to be for the full year?
Yes. Another 22%, 23% is the level for the effective tax rate.
Okay, sir. Now the top client, Cummins, during this quarter, how much were the contributions from the top client?
Well, right now, I think it is better to look at the contribution from the top 20 and the top 40 strategic customers because that is our focus, and that is what we have been looking at. So I think we should look at those 2 numbers where top 20 customers have contributed for about 62.5% of the revenues and top 40 have contributed about 65% of the revenues.
[Operator Instructions] The next question is from the line of Shashi Bhusan from Axis Capital.
Generally, we have observed that on-site hiring is led by demand. However, due to restrictive visa policy, most of our peers have to strengthen their on-site hiring. Now in our increase in staff at the on-site, basically in Germany and U.S., is it demand-led or improving? Is any visibility or is it because of the protectionist measure?
It's a combination of both. We have seen -- in Germany, it's clearly demand-led where we see a lot of growth coming in. And in the U.S., it's a mix of that. There is some increase in demand. At the same time, we're just making sure that we have the right balance of -- between the visa and the citizen, right? So that is -- if there is any issue later on, we are in a good position to manage everything.
The next question is from the line of Apurva Prasad with HDFC Securities.
So I'm referring to -- so my question pertains the digital revenue, the 31%, which you have stated that's the IES, SAP and DT. If you can talk about how that's grown in the last few quarters, and what sort of growth rates or targets do you have within that?
If you really look at the trend over the last 5, 6 quarters, and if you actually started to monitor growth very clearly, you will see quarter-on-quarter growth. In some quarters, it has been higher than the other. But the trend is generally growth consistently across the last five, six quarters, and we believe that trend will continue for the rest of the year.
So are you confident of a 20% plus growth in that segment? I mean, that has been the run rate so far?
Yes. I think it's been in that ballpark.
Okay. And what about the PES business? What's your growth outlook in that?
PES, as you know, we had more than 30% growth year-on-year. And this quarter also, we had [ really good ] growth. And I think we're on the same path as of last year. If everything goes well, we should be able to repeat the performance of last year.
Right. And lastly, on the ETR, how much should I model going forward?
22% to 23%.
[Operator Instructions] The next question is from the line of Ashish Chopra with Motilal Oswal Securities.
I just wanted a clarification on the margins guidance, if you could. So there is an impact of around 100 basis points or slightly less than that between -- I mean, after factoring the merger -- the merger transaction expenses. So the guidance that we currently have, is it including the -- this line item, or are we talking about the operational EBITDA guidance?
For the guidance that we have given was for the operational EBITDA guidance.
Okay. So against the operational, we are actually tracking at 13.2 at the moment?
That is true. That is correct.
Okay, okay. And Sunil, what would be the -- so given that the rate hikes this quarter would be maybe slightly above the industry, so what would be the impact on the margins as a consequence?
So the block impact, we anticipated to be around 220 bps to 230 bps, but as we said in opening remarks, we should be able to look at recouping that with the help of growth and operational efficiencies to a large extent.
So you're talking about recouping it like instantly or gradually through the course of the year? And also, would the rate hikes all come in entirely in 2Q?
Yes. The rate hikes will come entirely in Q2.
Okay. Okay. And just one more question. So should we expect any more impact from the transaction expenses of the merger, or those would largely be behind?
So I think 2 things I just want to confirm. One is the [ rate ] hikes. We have been approaching to neutralize maybe a percent, 1% or maybe more during the quarter. And over the course of the year, we will act quickly, more than quickly. That is point # 1. The transaction expenses will continue as much the transaction timing. So right now, most of the expenses will happen by quarter 3, and 1 in quarter 4, there could be some expenses. So I mean, there's some part of the expenses will continue as -- throughout the year.
[Operator Instructions] The next question is from the line of Rahul Jain from Emkay Global Financial Services.
My question is pertaining to the engineering services. As you know, we have seen relatively acceleration there, meeting our historical growth. So can we attribute it to any specific factor, or we have seen that the spend in the area has increased significantly, or the area where we have invested are now defined much better than what has been the case in the past? So any flavor on that front would help.
I think you covered both the assets. One is, this has been an area that we have been passionate about for the last several years. We've been making proactive investments. We knew the electrification was going to be commencing. We knew our [indiscernible] was going to come into effect. I think more and more OEM, the positive growth that's sending more money and making more investments in these areas, and we are one of the leaders, globally, in these 3 areas that Sunil talked about earlier on, whether it's Alternate Powertrain, autonomous vehicle or a connected vehicles plan. So that is a perfect storm brewing from both sides. So we believe that it's a good time to be in this business, and we do have the capabilities to meet the expectations of our customers we are aiming.
I think -- that's why I think 2 things. We believe we have established a very strong presence with the leading automakers in Europe. We're always at the front of the technology and options. We ourselves have invested significantly in this year. So absolutely, we will say we are one of the best in the industry on these new technologies. Also, the fact that we are working with some of the best company in the Europe is really helping us working with either both customers in the U.S.A. and in Asia, [ are ] looking to really adopt and accelerate that option in the new areas.
So I mean, our client relationship has been very old, and we've been working with most of the full year for a very long period of time. So would you attribute this sudden affiliation to incremental outsourcing part of it, incremental reliance on the third-party or focusing engineering partners? Or you would say this is just that the state itself is taking off now versus in past?
There are 2 or 3 factors in this. There is one significant partner we are working in some of these [ specific ] area is -- opened a spot in the new technology areas which many people are behind. They know that they don't adopt along this technology or spend these areas, they will not -- they will be left behind. And there are not many companies who have a core expertise in some of these areas, and we are fortunately, as I said, we are one of the leaders in these areas. That's why we are getting like new -- these are more strategic long-term relationships which are not only to get existing customers, but we are seeing that significantly more, also, new customers are approaching us on -- out of this. We are actually very selective in terms of the companies we work with and operate with. So that is really the main part. In some of the other areas, yes, in some other areas, we have naturally deferred some elements in terms of testing, validation, some of the other services area where there are a few other companies are also having some passions, and naturally we also have an advantage if we are working in the main development area in that front.
Okay. So have we identified a size which is directly relevant to people like -- to vendor like us? And is there any significant growth uptick in this number? Second, we are seeing this uptake of growth across this category irrespective of the other sector. So is it that, given our early mover advantage in this space and existing client relationship, we would continue to deliver much higher growth rate than what the relatively newer sector people are delivering?
So I could not hear your first question clearly. If you could repeat [ that ]?
So the first question was that have we tried and identified the spend value of the area that we cover under this service line, and has that number gone up recently?
It's a significant growth. I'm sure you're tracking the auto industry. I think there are -- there is significant investment in autonomous electrical and connected parts. All the companies want for next 4 to 5 years have been getting a significant option on their vehicle programming, this area. And so it's a pretty significant number. So we feel it's a reasonable growth. It's hard to say, going forward. I think the real -- the challenges is really you need -- these are very critical to automotive companies, and it's a very deep domain, the area in which we work. So we are admitted to really develop talent, build talent, not only in India but globally, and ability to execute would be the really key factors in delivering the growth. But the market demand is strong, and we are in a very good position.
So let me ask my second part of the question in a different way. NASSCOM expect this segment to grow at 15%, and given our differentiated positioning in the space, do we see that number as a right benchmark, and we should do -- we should aspire to do better than this number on an ongoing basis?
Well, we expect to do better than that number, but I'm really focusing on the automotive industry. We are not working in other industries.
And what we also understand is auto -- within that would be faster than the rest of the piece.
I don't know that. I'm saying we are seeing the growth, which is higher than 15%.
Right. Right. Just one more, if I may. The question is to the -- for the product and platform business. We have couple of product out there, and we have seen a good acceptance for many of them in last couple of quarters. However, if you look at the annualized run rate or maybe the continuity of a size in the business, we have not scaled up significantly. If you could share in terms of where we are on different product, what are the next level of revenue that we can expect in this business? And any thought that you can share on that.
So really, we are moving most of our business to software platforms. Our traditional sales business, if you think, it also has an IT platform, and it's driven by this inter services, so actually even this, as we call right now, P&P business, that's what I mentioned -- opening remarks. Also, we are trying to move it to the same way, where we will have on the software -- we own the software platform, we own the hardware integration. And we bring in the hardware partner to do that. So I think, overall, we have seen a good traction for -- the PES business has grown also because we have products in almost all the service areas. First is a platform for IP in all these areas, and that has really helped us, and that's exactly what we want lined up. So all our business will be driven by Products and Platforms, layered services. And that's where we're going in '19, so by end of the year, we would change even the P&P model to the same thing. So we would have, basically, all the business which is driven by software platform-based services.
[Operator Instructions] The next question is from the line of [ Edgar Lobo ] from Kotak Investment.
I just wanted to understand the initiatives taken by the company in elementing its sales and presales infrastructure both in Germany and U.S. Can you just throw some light on that?
So absolutely clear, we're building the -- inside the global company. We -- as I mentioned to you in this area, we do believe that we are one of the leading -- global leading players in automotive industry, without a doubt. There are areas where we have clear leadership, in some other areas, we are getting there. So we cannot be the only in there that's -- company, and that's where exactly we're investing and leading our capabilities. So against a pure approach of just having some people on-site which will work at prime site or to deliver the project, we are building the full infrastructure as we did globally. So there are many practices who are headquartered out of Germany. Actually, some of the key new practices are driven -- the leadership team sits in Germany. There are a few in which it sits in U.S.A., and there are a few which sits in India. So overall, our approach is to really build a global [ leaders ] center because many of these new ideas, we cannot really find people in India in terms of leadership as well as the technology and the core competence. So our goal is to really build the best way we can and delivered globally. So that's what our focus is.
So how many people you'll be having in sales and presales in these geographies, just to get an idea?
So it's similar to what we have. It is not that we are increasing it. As I said, it is only that they will be set up somewhere else sometimes. So like in -- so it's not a very different percentage than what it is today.
[Operator Instructions] As there are no further questions. I'll now hand the conference over to the management for their closing comments.
So thank you. Thank you for attending the call. And I hope we were able to answer all your questions. If you still have anything, or if there is a question later, please feel free to write to me. Thanks once again, and have a great evening. Bye.
Thank you. Ladies and gentlemen, on behalf of Emkay Global Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.