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Birlasoft Ltd
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Ladies and gentlemen, welcome to the Q2 FY '19 results call for KPIT Technologies hosted by Emkay Global Financial Services. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Rahul Jain of Emkay Global. Thank you and over to you, sir.
Thank you, Chris. Good evening, everyone. On behalf of Emkay Global, I would like to thank KPIT for giving us the opportunity to host this call. And now I would like to hand the conference over to Mr. Sunil Phansalkar, Head of IR and EVP M&A at KPIT, to do the management introduction. Thank you. Over to you, Sunil.
Thanks, Rahul. A very happy Diwali and a prosperous new year ahead. I hope all of you have got our investor update and have been able to go through it to look at the performance of the quarter. On the call today, we have Mr. Kishor Patil, CEO and MD; Sachin Tikekar, President and board member; Vinit Teredesai, CFO; and yours truly from the Investor Relations function. As always, we'll have the opening remarks by Kishor on the performance of the quarter and the balance remainder of the year as we see it today, and then we can have the floor open for questions. So once again, a very warm welcome. And now, I will hand this over to Mr. Kishor Patil.
So good afternoon. I'm very happy to take you through the highlights of Q2. So on the first, the growth, it's at 2.9% in constant currency quarter-on-quarter. On the H2 -- last year H1 to this year H1, the growth is 9.8%. This is mainly driven by PES, which, in this quarter, has shown 7% in constant currency. Engineering, overall, has shown 9.8% in constant currency. DT has shown 5% growth. DT plus PLM, the way we have reorganized, has shown 3% quarter-on-quarter. IES and SAP has shown a de-growth in this quarter, specifically. And in terms of -- auto has shown growth, while manufacturing has shown de-growth during this quarter. Now both, in case of IES and SAP, specifically, we had completed a few large projects, significant projects, very successfully, which were some of the largest projects we had. And there is a little bit of a gap in terms of new projects starting or some of the future parts of the project which has started, which has impacted us during this quarter and will also have an impact next quarter. Otherwise, if we really look at, from the geography perspective, Europe has led the growth, which is very strong growth. Asia has also been doing well. During this quarter, overall, on IT, it has actually grown quite well. Engineering, it has been -- for this quarter, it has been flattish because of high growth in last quarter. And in products and services, there was a de-growth in Asia, while it was compensated by growth in Europe. That's how the overall P&P growth has come up. If you go to the profitability, overall EBITDA margin has improved by 1.5% during this quarter over last quarter. If you look at year-on-year, the EBITDA has increased 62% year-on-year in absolute terms. So it's a very strong growth, and I think we have worked, over the last year, absolutely in terms of operational efficiency, improving the mix of services and it is showing some fruits. As you would have recollected, that all last 6 quarters, every quarter, we have improved our profitability. So it is in continuing that, we have been in a position to do this in this quarter, where we had a wage hike, which had an impact of 2.2% -- a negative impact of 2.2% in this quarter. We were also supported by currency benefits, which were 1.25%. But at the same time, growth as well as mix has shown generous improvement of more than 2% during this quarter. So we are very happy with this, basically, because in spite of a challenging quarter from the profitability perspective, we have been in a position to show growth and continued on our momentum. PAT has grown 37% year-on-year and 6% in this quarter. If you really look at the -- from the guidance perspective, 8% to 10% we have on the guidance in terms of growth. And from this H1 -- H1 on H1, we are already close to 10%. If you really look at profitability guidance, we have given 11.5% to 12.5%. Our operational profit for the H1 is 14% plus, and we will continue to do this for the year. So overall, for the year, we will have 14% plus profit -- operational profit.If you really look at the remainder of the year, we are looking forward to sometime during this quarter when there will be a split in our 2 businesses, which is engineering and IT. Overall, we see, in terms of these businesses, basically, a weak quarter next quarter. However, we believe engineering will continue to show some growth. It may not be as strong but will continue to show growth, while IT will have a soft quarter. We believe IES and SAP, which have a little bit devalued this quarter as well as it may have some impact in the next quarter, will come back to profitable growth in the quarter 4. As you might have all seen, basically, we announced today that BMW has announced -- actually, BMW announced that KPIT is a technology partner for autonomous driving. It's a very proud moment for us because BMW is recognized for its thought leadership and really cutting-edge technology. It is one of the few platforms in autonomous which have been built with a consortium of OEMs led by BMW. We are involved in the development as well as, later on, adaptation and other parts of this going forward. It's at least a 3-year kind of -- a 3-year-plus engagement, but it's a very -- pretty strategic engagement. And typically, it's hard for this kind of people to go beyond Europe for this kind of, as I say, transformational projects, so we are very happy that BMW has recognized us as the leader -- global leader in this technology and chosen us for that. So this naturally will have a positive impact on engineering growth moving forward. In terms of otherwise operational data. DSO, we have 4 days less than what we had last time. 2.5% of this impact is because of the ForEx. So operationally, we have slipped by 1.5 days during this quarter. Overall on the merger, as I mentioned, we expect, by December, we will have NCLT approval, and hence there is a good possibility that the split will happen before the end of this quarter. These are the few highlights, and we'll be very happy to take any further questions.
[Operator Instructions] Our first question is from [indiscernible] of Unified Capital.
Obviously, great traction on the margin front. Congratulations. Could you help us break it up into PES and non-PES? I want to understand which way the margins of the respective entities have moved.
So margins, we'll be in a position to show it only on the top line. We will be a position to give this from the next quarter once the demerger happens. So right now, as I mentioned, PES has grown by 7% in constant currency and engineering by 9.8%, while IT, overall, had 2% of de-growth, mainly because of the ERP costs.
Sure. So -- but I mean could you please help us understand if the margins for the non-PES business grew as well?
Yes. Absolutely. The margins in IT has gone up. So typically, margins are similar right now, if I had to say, at a broad level, but we will be in a position to share it with you next quarter.
Sure. I just wanted to understand your comments a bit better. Did you say the ensuing growth might be softer in Q3 but then pick up in Q4? Is that what you meant?
That's correct. What we mentioned is that, typically, the IT business has a holiday season. So to that extent, it will be soft. However, our engineering growth will continue to be on a better side, though not as robust probably as Q2.
So just in the context of your great deal with BMW and the conversations that you're having with other clients, could you help us understand, in some degree or granularity, what the spending environment obviously is? The last 2 or 3 quarters, you have guided for growth of about 15% to 20%. That's a great number going forward, but some more color on the kind of conversations you're having. And what is it in those conversations that are giving you this kind of visibility, perhaps an order book number or anything else that you can quantify for us?
Yes. So I think, on the engineering front, we -- what -- as you might be knowing, I mean, we have been in this space for last 20 years. We have invested in this year for last 20 years. So for us, it's very strategic and that's why we are actually going forward the demerger for really focusing on this part of the business and making those investments and management during -- to give the management bandwidth for this business. So this has not been a favor -- a season for us so we have been working it on strategically. So we have invested ahead of time in a lot of areas such as autonomous, electrification, connected, diagnostics, in-vehicle networks. So multiple areas we had invested. And fortunately, these are the areas which will account for 90% of the -- 90% of the spend for engineering for most of the OEMs going forward. So what has happened is we have become kind of a port of first call in the global scenario because, till now, the only core technology largely is -- again, in these areas, there are 2, 3 kind of areas. One is the kind of areas for development of this technology, and then there is the testing and validation, and then there is the integration and testing. So what has happened is, in the areas where -- first and third, which is most complex, we have almost become the port of -- most preferred kind of a player in this area globally. So we are seeing a very significant traction in this area, and we see a very strong demand going forward. And specifically, as the companies are looking for autonomous and electrification over the next 5 years. That's the most, I would say, the area for spend for them as well as, right now, as the most of the -- if I was to -- the leaders in the industry are spending. There will be laggards in the industry, which would like to spend few years down the line in different parts of the world. And that time, they would like to really work with somebody who has those kind of IT and experience. So we believe this is a very strong environment currently in this space.
Sure. And given the pending demerger, is it fair to assume that the current management has kind of taken its foot off the pedal in investing in the non-PES space?
No. Actually, to be fair, our investments on both sides, there is the IT side as well as engineering side, are balanced. In IT, we continue to make investments in the digital technology across the industry. So we have not taken our foot off the pedal when it comes to the investments. Kishor just talked about the investments that we've been making on the engineering side, and we continue to make those investments.
Actually, that was the reason why we wanted to do the demerger because I think -- that's what exactly I was mentioning, that it is difficult for us to make the investment in both the sides, which are going through a transformation. But I think as the IT part will merge with the developers, they have enough funds and appetite for making further investments. So I think that will allow this part of the business to grow first.
Sure, sir. But my question was a bit short term in nature. Like for instance, over the next coming quarters, is it safe to assume that there will be some slowdown in the business, given, obviously, the transition from your end, and it might take some time for the luck to really come and start making...
No. That is not -- No, no, no.
It's a pretty shocking question in nature.
No, that is not true. Actually, the whole part of the business, the IT part of the business, we have transformed last year. If you look at the profitability, it has really gone up. We have gone after some very large deals. We have really built on digital capabilities and you can see the growth in the digital areas also. So we have achieved that. I think these are some of the parts which we are facing right now for not that reason. And the other par is, already for the last 8, 9 months, we have already involved the [ less op ] team in order to understand the business in order to get -- familiarize them with our business, people, customers. Most -- the significant part of the leadership is also going in the new company -- in the merger IT company from KPIT. So it will hit running the ground. So that is not -- it won't take a significant time to really, really build on what we have built.
Sure, sir. The last question before I get back in the queue...
And there is just one point I wanted to say. There are certain IT spend scenarios which are coming. And one of the things we are seeing is, from next year onwards, ERP will show a stronger growth. So I think we have what -- some of the world-class capabilities within this. I think we should be in a position to leverage it.
Sure. That's great to hear. And the last question, so obviously, your demerger expenses of INR 17 crores, [ INR 7 crores ], could you help us understand, apart from your regulatory and your legal costs, say, that's a very bulky amount, INR 29 crores. What does it constitute of?
So it does include like investment bankers, et cetera. So those costs are also in.
Okay. Have you completely expensed that out? Or is Q3 and Q4 expected to see some more hit on this?
I think that we have made significantly -- we have covered up most of the expenses. We don't anticipate, in the coming quarter, any material expenses to come after that.
Okay. So the margin guidance going forward, with 14%, whereas, our operating EBITDA this quarter was 15%. So I mean, do we anticipate increasing our SG&A spend? Or are we still building in cushion for the future?
I think we said that, if you look at H1, we were at 14%-plus, and the next quarter is going to be a little bit softer, and Q4 will see growth coming back to us. So right now, what we are saying is, based on what we see today, we are saying a 14%-plus number is what we could -- should look at.
And anyway, these operational expenses are added back for -- this kind of deal expenses are added back to work out 14% number of this.
[Operator Instructions] The next question is from Mohit Jain of Anand Rathi.
The only question I have is on DSO. If you include unbilled, that number has gone up relative compared to 4Q and in the first half, like in the last 6 months. Does there -- attain [indiscernible] receivable pattern for us from an FY '19 perspective?
So [indiscernible] The DSO is always calculated based on the billed revenue because that's when we even go to the customer and demand for any payment. So we don't look at unbilled revenue. Unbilled revenue is pretty much in line with what has been there for the last couple of quarters. So I wouldn't take the unbilled revenue in the calculation. As Kishor already said, before this calculation, 2.5 days is the effect -- ForEx effect. And the days now, given our revenue base is on the higher side, we continue to maintain our cash collections on a stronger mode.
So do you have this number, like 23%, 24% up unbilled on a 6-month basis?
Sorry. Say that again.
Do you have this number on unbilled, which it shows, like, 23%, 24% up in the last 6 months? I mean, it is not part of your receivable days calculation but...
Yes. We don't look at it from the numbers, but I don't think it is abnormally any higher. It's not absolutely -- it is in line with the industry, absolutely in the line with the industry. There is absolutely 0 any abnormal increase in that number. So actually, the way we do it is, it is completely based on a specific project. So if any project is hitting a milestone, it can go up a little bit. In other cases, it can go down, so it is based on that. But I don't think at all, our overall business, it is any better.
And just second, I missed your initial remark. Is there an impact in third quarter? Did you mention something like that in the initial remarks?
So what we have said is third quarter is seasonally -- it is a quarter where you have less number of billing days. So obviously, we'll have some impact of it on the revenues for the next quarter. IT will be impacted more than engineering, so IT will be soft and engineering will show some growth. Obviously, it won't be as high as this quarter, but we'll be able to show some growth there.
But nothing apart from the usual seasonality, which you have witnessed in the last 2 years...
Nothing. Nothing. Nothing.
[Operator Instructions] Our next question is from Abhishek from Equirus Capital.
You made an interesting comment about acceleration in ERP next year. Could you elaborate what you're seeing on the ground and leading to this comment?
I just mentioned that this is what analysts have come up -- or what IT analysts have come up in terms of how they see the IT spend next year. And you might have seen those reports. So relatively, if you can look at it, there is a -- ERP spend will -- is relatively stronger. And specifically, different kind of ERPs including Oracle, SAP as well as the other products which are there, specifically cloud-driven, basically are significant -- they are not significant. They see a stronger adoption of that. I had to also say that, last month, we did also spent some time with some of these people. Very interestingly, they are seeing also the growth on on-premise as well as the cloud and specifically in Asia Pacific. So there are -- both these opportunities are seeing. Now this is what is the market as well as what we see from our partners, alliance partners like Oracle, SAP.
That's helpful. And secondly, on this quarter, manufacturing was a little short. So any color on that? That would be helpful.
Well, I mentioned in the original comments that there were 2, 3 projects, which -- large projects, the significant projects came to closure. So there's always a little bit of a gap in starting new projects at this time of the year and always some of the -- even the maintenance support and maintenance contracts to start. So that's what were impacting us for this year and -- for this quarter and a little bit of the next quarter.
The next question is from Soumitra Chatterjee of Spark Capital.
You mentioned that the margins are similar for both the segments. Can I get capital employed also for both the segments separately, that is the IT and the PES business?
Not right now. I think when we will have the demerge conference, I think we will share some of those.
Okay. And my next question is on the BMW partnership. What is the typical size, if you can give us something -- some indication on how big the engagement can get over the 3-year period, 3- to 5-year period?
So we won't put any numbers right now. But it is -- I can only say it is a significant opportunity, and it has -- it is for at least the next 3 years, if not 5 years. And the way it will work is there's an opportunity to work in 2, 3 areas. One area is basically, actually, we are working -- started working on platform, which is the main thing. The second thing is when this platform gets adopted by the other partners of the BMW, there is a significant part of the work which we need to do on their part as well as the integration part. I think that opportunity is there. And the [ trans-developed ] third part is when it starts operating, which is there will be a maintenance opportunity. So all these 3 are opportunities are there.
[Operator Instructions] Our next question is from Manish Shah from Revelation Portfolio.
Sir, can you throw some light on the shareholding pattern in the promoter holding post the demerger of both the companies?
So, as we have said in the filings made to the exchange, currently, if you look at the promoter holding in KPIT, it is just under 19%. And the merger will happen. As a consideration for the merger, equity will be issued to the developer promoter. That would be in the range of about 28%. And after the demerger of engineering business happens and the listing is done, over a period of time, the IT shareholding of KPIT promoters will be sold to Birlasoft promoters and engineering shareholding of Birlasoft promoters will be bought by the KPIT promoters. So once these transactions are over, then it could roughly be a 40% shareholding for KPIT promoters in engineering and a similar shareholding for Birlasoft promoters in the IT company.
Right. So you said, sir, between 40% and 50%?
It will be around 40%, more closer to 40%.
Okay. So that transaction will happen over a period of time. That means is it planned? Or it is -- it will happen the way the price is at that point of time?
No, it's a part of the agreement.
It's part of -- is it made public?
No, no. No, no. I think -- I know this agreement won't get public, but I think it's...
The next question is from Nitin Padmanabhan of Investec.
There've been a couple of, let's say, automakers and off-road equipment providers, manufacturing companies who have been suggesting that they have a potential hit on earnings for the year because of these trade wars. I think one in point, case in point being Ford, Caterpillar and so on and so forth. So just wanted to get your thoughts in terms of what you are seeing on the ground and anything that you see from an impact perspective? Or we are sort of insulated considering the area of spends that we play on -- play with.
So you are very correct, I think. But it is not only for trade wars, there are other reasons why there will be, if I could say, some strain on profitability for OEMs and naturally, then, Tier 1s. We work largely with OEMs and there are a few Tier 1s. That's how we work with. It is basically because of not as much as on the trade wars right now, I mean, it's absolutely -- it's a possible impact because of the taxes they may levy. But the more impact is on technology spend because they have to really move very quickly in terms of their commitment to the regulators moving from the -- protecting their market shares, once the electric car comes in, more and more adoption happens, autonomous and other areas. So I think it will be more and more from that perspective. So this will happen, but as this is very important from their perspective to make this change -- make this technology come into the new production program in next 3 to 4 years. This is an area, which will not get compromised. But naturally, we have to be productive. We have to be efficient. But this is not an area which will get compromised. Not only that, they will require a partner who has a relevant understanding as well as competency so that it does not fail, so both are very important points.
Sure. So what do you think is -- they will not -- it's sort of a spend, it's a must-do spend so it will continue, and it's a sort of multiyear kind of thing.
Yes. Largely for European emissions...
Correct. Sir, do you think, that considering the situation, let's say, the financial situation these companies are in, do you think that there will be a pressure on pricing or things like that?
There will be pressure on globalization model. Actually, basically -- for example, it is very important for us to -- and we have made those investments into global centers. At the same time, there is a very clear importance to really leverage it in India. Some of these technologies are pretty complex. The programs are really pretty complex. So I think it will be at a cost of some of the high-price vendors.
Sure. So just to understand the broader competitive landscape, if you look at the costs of an automotive client on the R&D side of things, how many players do you see who can sort of -- in the technologies where there's a lot of demand, who you think would be able to scale or sort of basically provide the similar cost to serve as you would? And not the names of these people, but at least, if you could quantify the number of people at least?
Yes. So there are 2, 3 players in this. Number one is all the OEMs know that this is a significant investment for 1 company to do, so that's why they are forming consortiums. So typically, 2, 3 people for 3, 4 companies are coming together to make these claims. Now, which one? So basically, from -- for the obvious reasons, so that they can share costs, they can share infrastructure -- standardization and infrastructure costs, which are outside the path, all those kind of things. So there are 3, 4 consortiums which are coming, so that's 1 trend. And if you look at globally, there will be -- naturally, in every market, there are a few, but I won't see there are more than 5 players globally who have this competency what I'm talking about, and not many of them are global players.
Next question is from Ashish Kacholia of Lucky Investment.
My question pertains to the business strength in the U.S. market for the automotive services. So could you comment a little bit? Obviously, we are doing very well in Europe. Can you shed some light on how well we are positioned in the U.S. market?
Yes. So you know, Ashish, we are very cognizant about which customers we will work with, while -- by what we are doing right now. And there, we are very selective because, number one, while we have good expertise writing, we know that, ultimately, there's a finite capacity in which we have to work and how much we can build every year. The second thing is, also we have to ensure that, during these pressures in automotive world, there are companies who will survive and thrive and they can manage themselves well and continue with this spend in the programs. So I think the reality is, U.S., there are 3 OEMs. And there are one of -- naturally, I'm taking out Tesla for now but -- because Tesla does most of the work inside, so there are 3 companies and a few startups, which are there, as against a double-digit number in Europe and Asia. So that is 1 part. There are some other ecosystems in the U.S, which is also in the commercial area, which is our target as well, but it's our target which we are building on that. And they will be a little slow in adaptation, but we believe they will be stronger also in some areas. So that's the segment we will pursue a little down the line, it's hard to say. So from that perspective, Europe will continue to be the strongest and then Asia and then followed by U.S. The second part is also the adaptation of certain technologies like electrification, where the fuel prices are very cheap in U.S. as compared to particularly 3 or 4x in Europe as well as Asia. So some of these technologies become more cost-effective in this part of the world.
Can you explain this last electricity cost bit, Kishor?
No. So fuel prices, right, U.S. -- the gallon prices for -- per liter in U.S. are the cheapest, and they are multiple times in Europe as well as in Asia. And that makes electrification viable in this market, as compared to U.S. In U.S., that's why in spite of all whatever -- I mean in U.S., people are driving it only from the government regulation and there are some of the emission controls point of view. But largely in the -- in this part of the market, it becomes a little more affordable as well as there are certain specific governmental, again, demanding certain compliances. As compared in the U.S., if you look at last year, still their -- one of the hottest selling vehicle is the trucks, which are for individual mobility. So people care less for fuel efficiency as compared to the Europe.
And any thoughts on Asia and China?
Absolutely. Asia will be a big market. There are many OEMs there, other OEMs that are also emerging. China is an important market. We believe that, in this little bit of a, if I have to say, face-off -- one -- first is that China, in a way, is the largest market. Second, it is also ahead in the shared mobility market and electrification. Also in this certain dynamics which are working now within different countries, I think China will become important. And we are working with some leading Chinese players.
You don't see any intellectual property problems with [ Japan ] and the other players out of [ Korea ].
Not much. I mean, I think, ultimately, we need help, actually, to go to the other markets as well.
Okay. And our position is with Japanese and Korean OEMs, Kishor.
Ashish, our position with the Japanese is very well. Japan sees some of the key OEMs there. They think that they're slightly behind the Europeans, and they want to play the catch-up game, and they realize that the Tier 1 system in Japan is not helping them to get their capacity rate. So they're depending more and more on companies like us to do more of their AD, ADAS or electrification work. So we see a really good opportunity for growth in Japan.
And Korea?
Korea is just one to speak of. We've had a relationship with them in the past. We are trying to see how we can transform that relationship. There are a couple of areas that we have identified under discussion. So essentially, it's AD, ADAS work. ADAS for developing countries, AD work for developed countries. And they also want to look at some of our stacks like the auto side that is going through transformation.
So that would be opportunity...
As Kishor was saying -- as Kishor mentioned earlier on, we really want to work with a handful of OEs across the globe and make sure that the relationships are deep and wide, and we are in a really good position to service them well. So we'll have to pick and choose our backers.
As of now, is it fair to say that you pretty much have all the relationships that you want in place and you look to kind of do more work with the existing relations because we are not happy with the -- or there is still some work to be done in getting the additional relationships on board.
So Ashish, as you know, on the commercial...
Kishor, that's about the passenger cars. And passenger cars, we work mostly with the OEs. I think, over there, 80% of the relationships are in place, right? I think there are 2, 3 that we are actually considering at this point in time. But we feel good about passenger car segment. The Tier 1s also, I think we have really good relationships for passenger car, and we actually have to make choices there, right? Because we can't work with all of that. So we feel very good about our relationships with the passenger car segment. I think the area -- there are 2 areas where we need to get some more solid relationships in place. One is the commercial vehicles part, where there are a couple of relationships that are very strong and these are leader in those fields, but we would like to have 1 or 2 more. And the whole new mobility space. We have a couple of relationships now. We would like to build some more going forward.
That's the shared mobility.
That's the shared mobility space. So those are the areas where we would want to have more relationships but only a handful of them, not too many.
What is the meaning of shared mobility when you say something like this? Does it mean the equivalent of [ REVOLO ] equivalent or what?
Absolutely. That's the shared mobility today. Tomorrow, some of the OEs are making investments in such companies. So in some sense, the OEs will also become shared mobilities over a period of time, but you are right. That's the shared mobility.
The next question is from Apurva Prasad of HDFC Securities.
So my question, again, is on the engineering piece. If you can sort of give indicative in terms of where the margins can potentially head over the medium to long term? As well as, can you think the recent growth rates can be replicated again over that term?
So I think we have mentioned that any growth in excess of 20% is absolutely maintainable in the engineering part. We see a very good traction, as I mentioned. We have to be very selective in our -- basically, we have to see what -- how quality we can build in, in terms of what we deliver and how we scale it up. Now last year, we grew by 30%. This year, we'll grow something between 25% and 30%. So we have got a good number, but I think I would -- at a high level, I would say we can grow in excess of 20% for sure. So that's what I would say in terms of numbers. In terms of margin, as I mentioned, the current margins are similar. Initially, there are margins -- we used to get impacted. We do still get impacted because of certain investments we've made in the products. We changed our strategy to make it only a software-only. And we are repositioning or we are rearchitecting that part of the business so that we -- our go-to-market is only software. So during this time -- but over the period, we believe any margin around -- in a couple of years, will be anywhere between -- around 18%.
Okay. That's great. And also if you can just share the subcontracting expense number.
For the quarter, it was about INR 103 crores.
The next question is from Neerav Dalal of Maybank.
A couple of questions. One is, have you faced any supply-side issues in the U.S., like we've heard a couple of companies facing that? So wanted your take on that?
I think it's getting more and more difficult. The last couple of years, we've seen headwinds due to restrictions that different countries are putting in. So that's 1 part of the issue, but we've been dealing with it for the last couple of years, and we believe that's going to be our challenge going forward as well. I think the challenge is going to be bigger on the engineering side, and that's why we have to be very selective about the work that we do, the quality that we put in. And we need to figure out ways of doing more with less. So supply side continues to be a challenge but nothing different than what we have faced over the last couple of years.
So I think, specifically in the new technology, we have to build our own talent. There is no other company. We are one of the largest in this. So there is no other company we can go to, to hire. And we have built, in the last few years, technology centers in Europe, U.S.A., Asia. So Munich is one of our largest centers. Then we have building in Detroit area, then we have in China, we have in Bangkok, Thailand. So we're building multiple centers to build this technology -- build the skills. So we have our own strategy in place, but the kind of programs we are servicing it -- they are very critical. So it takes a bit of time to build the skills.
And the other question was, if you could give a split -- a geographical split for product engineering and IT services, a broad geographical mix for the 2?
Well, any split of revenues, any split of assets, we will share once the demerger happens post next quarter. But at a high level, I would say that engineering is very evenly spread -- largely, much more evenly spread across all the 3 geographies.
Our next question is from [ Laxmi Nireeshma ] of [indiscernible] Capital.
Please correct me if I'm wrong. My understanding has always been that the engineering segment has had higher margins as compared to your business IT. But earlier in the call, you had mentioned that both of them are almost at similar margin levels. So can you deduce that the engineering part of your business has higher employee cost as compared to your business IT services?
No, I think it is not true. But I think, as we discussed -- so first, what -- your observation is correct, where I said margins are similar. But on the engineering side, there are 2 things which are very important. We are working in a very new technology area. So we are making significant investments in technology. All of the people who have been following the company know over the last many years. So we still continue to make some investments, and I think that's the one part. The second is, this globalization, setting up centers outside the [indiscernible] piece, has also increased some stock. So the kind of programs which we are working on really needed that. And also the third part was some of the product which we made the investment into, it can also impact our profitability. There, I mentioned that we have made a clear cut decision to move to software-only products and really move into different business models. So I would say, over a period, all these factors will even out. But in the initial period, as we are growing fast and we have to be a leader for some more things, these expenses will be there.
Sir, my final question would be, sir, your R&D, if you look at it as a percent of sales, has been around 1% over the last 2 or 3 years now. So once the merger, demerger happens, the auto business, now, would it have a higher proportion of R&D spend? Or how is this R&D that would get split between the 2 companies?
As I mentioned, I won't give any split expenses. But naturally, most of us -- and R&D is only 1 part of it. I think there is a lot of investments which we make beyond that specific item, which goes only to us. It's hard to say. We have a technology -- we have a secure organization which not many companies have, but last part of this do belong to engineering.
The next question is a follow-up question from Abhishek at Equirus Capital.
Sir, could you just comment about the tax rates for the H2 and '20 if possible? And the second part is, share of profit from associate, that number is increasing. Could you elaborate how should we look at it going ahead?
So that our effective tax rates are in the range of around 20%, 22%, 23%. And we anticipate that will continue to remain at this. And as far as the investment from the associate companies, as [indiscernible], we have spoken about our strategy, most of that investment is in that category. We are eventually working on a plan to sort of exit the hardware portion of that business, and we won't see any significant amount of any pressure or anything coming from that moving forward.
Gentlemen, we have a question from Manish Shah of Revelation Portfolio.
Sir, can you throw some light on the hedging strategy and the alternating as of today?
So as a strategy, we hedge for 75% of our net exposure on a 2-quarter rolling basis.
Percent of the revenue?
75% of the net exposure of cash flows.
Cash flows. Okay.
And we hedge them on a 2-quarter rolling cases. We use only plain forward contracts for hedging. The total outstanding hedges that were at the end of the quarter were USD 49 million, and the average rate for that was about INR 70.4 per dollar.
Our next question is from Rahul Jain.
If you could give any update on the electric vehicle side. What are the areas of development in terms of different relationships and opportunity we have in this space?
So we are working with -- so there are 2 sets of opportunity we deal with. One is we work with many of the leading companies, whoever our own customers are, most of them, in terms of electrification, in terms of system integration, in terms of development of certain engineering things, battery management systems, inverters, motors. So there are multiple areas in which we work. And that's a significant kind of good, fast-growing business for us. Now in certain parts, specifically in Asia, including India, there are commercial vehicles where they also want a full product, which is where we try and use our proprietary technology like REVOLO and that we use in terms of servicing those customers to give them localistic solutions.
Right. So my question is more in terms of what other developments, from example, from an India perspective, as we've been mostly doing it through government, state government and municipal corporations, so given the upcoming election, are you seeing that there is a kind of a lower traction on this kind of thing? Or are you finding new opportunities in some other industries?
We are finding -- no, I think it's just slow as compared to what you see, but there is certainly a forward-looking or, I think I must say, it's improving every month. So there are more and more people adopting it in a certain way. It's not on a very large scale yet. But naturally, there are many people, Indian as well as international, interested in coming to India. We are working with them in multiple ways. And we look at Southeast Asia as a very interesting market again. Which again, where there is a similar kind of thing which is happening. We are working with some of the players in that.
So Southeast Asia is for 2-wheelers or even for passenger vehicles?
Southeast Asia, mostly for the commercial vehicles, buses -- electrification of buses in Southeast Asia in some of the countries.
Okay. But overall, you would not call the revenue opportunity meaningful at this point of time, potentially it is.
I think we have to take -- we have taken a long-term bet on this. Most of the states and countries will get there. But regulations, that obviously takes time, and we have to be patient.
Thank you very much. Ladies and gentlemen, there are no further questions. I will now hand the conference back to the management team for some closing comments.
So I thank everybody for being on the call and I hope we have been able to answer your questions. If you feel you need to have -- or if you have further questions, please feel free to write to me. Thank you very much.
Thank you very much, sir. Ladies and gentlemen, on behalf of Emkay Global Financial Services , that concludes this conference call. Thank you for joining us, and you may now disconnect your line.