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KPIT Technologies Ltd
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Ladies and gentlemen, good day, and welcome to the KPIT Technologies Q1 FY '22 Earnings Conference Call, hosted by Dolat Capital. [Operator Instructions]Please note that this conference is being recorded. I now hand the conference over to Mr. Rahul Jain. Thank you, and over to you, sir.
Yes. Thank you, Bilal. Good evening, everyone. On behalf of Dolat Capital, trust all of you are keeping safe. I would like to thank KPIT Technologies for giving us opportunity to host this earnings call. And now I would like to hand the conference over to Mr. Sunil Phansalkar, who is AVP and Head IR at KPIT to do the management introductions. Over to you, Sunil.
Thank you, Rahul. Good afternoon, and a warm welcome to the FY '22 earnings call of KPIT Technologies Limited. I sincerely hope all of you have completed your due vaccinations. If not, we would urge you to get it done as soon as possible. On the call today, we have Mr. Kishor Patil, CEO and MD; Mr. Sachin Tikekar, President and Executive Director; Priya Hardikar, CFO; and yours truly from Investor Relations. As we always do, we will have the call with initial comments about the quarter performance and the way we look the year ahead by Mr. Kishor Patil. And then we will have it open for your questions. Once again, a very warm welcome to all of you. And I will hand this over to Mr. Kishor Patil.
Good afternoon. I'm very happy to welcome you to the results of the first quarter for this current financial year. We achieved -- after the demerger and having 130 million around revenue, we achieved a special milestone during this quarter of achieving $1 billion market cap in 2.5 years. So it's a special milestone we achieved during this year -- during this quarter. It is also a very good start for the new year. And I'm sure we will build the business momentum based on this good quarter. During the quarter, we -- our revenues year-on-year increased from $65.25 million to $77.2 million. It is a yearly growth of 18.3%. And on a quarter-on-quarter basis, the growth is 4.3%. Generally, the growth has come across geographies. Generally -- more specifically, the wins I'm talking about. The new wins during this period have been more in the area of autonomous and diagnostics. There are 2 age new (sic) [ new-age ] OEMs we added in China, which is also important and interesting as we had mentioned in the past that while we focus on T25 strategies, we look at disruptors who are coming in the market. In terms of EBITDA, we have increased the EBITDA a bit share more than the last quarter to 17.3%. Year-on-year, as you know, a year back, our EBITDA was 13.5%. So I think we have achieved a good number in EBITDA. Profit. From the INR 60 crores this quarter, we are at INR 60 crores from INR 47 crores from the last year -- from the last quarter, which is a 30% quarter-on-quarter growth. I don't want to -- I mean quarter -- year-on-year, that looks a very significant number, but last year, we were very soft in that quarter. So I think -- but 30% over quarter-on-quarter is a good growth for all the operational profits which we have achieved. The -- mainly the difference why the profit has gone up, while the EBITDA is relatively constant, has been mainly because of 2, 3 reasons. One is of course the growth. The second is the depreciation has reduced. Third is due to good cash accruals, overall the higher interest income. And we were also supported by the currency other income during this quarter. Overall, if you look at last 10 quarters, we have shown consistently a very high cash generation and cash conversion from profit. During this quarter also, we have 98% conversion. Our DSO is probably the best in the industry at 50 days. So I think in line with the profit growth and the, of course, revenue growth, the cash generation has been very good. In terms of people, if you look at the attrition, as we have mentioned, the attrition will be higher in H1. It is about 20%. But we are pretty confident that in the H2, it will come to a normalized level. And there are a few things which we are doing. Of course, there is a consistent focus on the growth of people, both in terms of their technical skills as well as leadership skills. Our motto is best place to grow. And last few years, we have really intensified this effort. As we know that we are probably the largest employer in the new-age skills, we have a tremendous focus on building these skills. So we continue to invest in that and looking at growth of people internally to manage the growth. We -- our increments are due in this quarter, so in Q2, basically. And the increments, I think our team has done very well in the last year. In spite of the difficulties, they really worked hard. So we are giving one of the leading most increment in the industry. And apart from that, we are also giving medium-term incentives for the key team members -- more key team members. We already have that scheme. This will have certain impact on the EBITDA, about 3.75%. That is the overall impact on the EBITDA. But we will make it up by other factors, both quality of revenues, growth and the other parts I talked about. So overall, we believe that the impact, even after such a high increment, will be less than 1%. So that will be the impact in the Q2 part. We continue to focus on the zero defect delivery, which is very important, in line with our strategy of T25 and focusing few clients, also in, if I would say -- in, I would say, critical projects. And during this quarter, we won the NASSCOM award for service delivery excellence. I may say that we only nominated 2 projects, both projects won the award.In terms of future outlook, I would like to talk about first is the client discussions. The overall growth environment is pretty strong. The -- as we have been maintaining, the client discussions are about long-term investments, increasing investments into electrification, followed by autonomous. And we know that it will get another connected part and technologies will also get more impetus in the next year or so. And the key for enabling all this, the key discussion is about new architecture, changes in the new designs. And those are basically the critical program for 2024 and '25. And this is where we have been focusing on. And this is where we have been talking about large deals being staged. And we are in active discussions with most of our clients on these kind of opportunities. And in some of them, we have started with, I would say, initial engagement. But this is where we believe the growth part will frutify in quarters to come. We believe in 6 to 9 months, some of this -- we'll frutify some of these large deals. We have -- based on these parameters, we have increased our profitability guidance, lower one. First, we talked about 16% to 17%. Now we are talking about 16.5% to 17% and mid-teens growth. And as we -- as you can appreciate, as some of these deals come through, we will have a better visibility beyond that. We have good cash on balance sheet, and we intend to utilize it specifically for 2 reasons. One is accelerate our growth and also key resources, which are required for some of these large complex deals, which needs experts. So during the -- for that purpose, as it is required, we will do that. Also, we want to expand some part of our offerings, which we believe will have higher potential going forward. So we do look forward to inorganic growth. We will be very, very, I would say, conscious about the size of the deal, the type of companies and how quickly we can scale those acquisitions. As you know, that we had a good track record of doing that. Needless to add, none of this will be any dilutive on the margins or on return on capital employed. Thank you.
We can now have it open for questions.
[Operator Instructions] We have a first question from the line of Vimal from Union AMC.
Congratulations on a very strong quarter. Sir, my first question was on the revenue growth and the guidance. Talking about 2.3% revenue growth and let's assume that you're talking of 15% sort of growth in FY '22, that implies a [ CAGR ] of about 1.5% over the next 3 quarters. Are we -- which seems to be slightly conservative given the demand environment that we are talking about? Should we -- is there any -- are we building in some delays in execution of deal wins that we've had in the past? Or is there any conservatism that has been built in into our guidance is my question? And I just wanted to clarify this. When you say mid-teens, this is your organic growth, right? It does not include partners which we have acquired? That is question number one. Sir, the second question is the growth in this particular quarter, if you see geography growth, this has been driven largely by the APAC segment. And if you see the -- even in this particular quarter, the powertrain segment declined on a quarter-on-quarter basis. I do understand that the deal wins that we have had over the last few quarters have been pretty broad based. So in line with that, should we expect our revenue growth to be much more broad-based going forward so that we can assume that it will be more sustainable in nature? And lastly, your growth outside -- it is very heartening to see your growth outside strategic clients coming in. Should we expect this trend to accentuate going forward because you're talking of adding new clients as well over there? So if you can just comment on that as well. So these are my 3 questions.
So thank you for the question. See, the first thing is, what we have done is in terms of, now our whole focus is on some of these large opportunities because most of these decisions will happen in the next 12 months to 18 months. So the whole focus, the whole articulation and it is on these areas. So initial engagements can be small, can be big, depending upon how it happens in some of these areas. So right now, we have gone based on our visibility now. So naturally, as I said, if the deal wins, as actually -- the conversion happens, we have a very strong pipeline, that will naturally give a better outlook. So I may just leave it here for this time. The second thing I would say that the growth is across the geographies. And powertrain, even though during this period has been, if I have to say, for -- one of the exceptional quarter when it has gone down, our pipeline is one of the strongest on the electrification. Not only that, some of these our large programs we are talking about, they are also on electrification. So we are not worried about it. And if you remember, some quarter back, people had some concern whether autonomous growth is going down. And we had mentioned that it is not so. And now you see it coming back. So we are not worried, and it will be more broad-based.The third thing you talked about -- I think I have to remember all the questions. So it becomes very difficult.
Yes. So it was growth in outside your strategic 25 clients.
Yes. Yes.
Over there, the growth has been very strong. It's very heartening to see that. So should we -- I mean, your focus obviously remains the 25 clients, but should we really expect this trend of growth outside these 25 clients will also sort of increase because you're seeing good opportunities there as well?
So the point we have is, as we have said that in order to have T25 accounts, we work with some clients, which we call -- which are potential T25 going forward and also some new generation companies who could be disruptors. So we continue to work with them. And these are in commercial vehicles, in new -- some of these disruptors and these. So they are part of our overall clients. And it is a part of our strategy, but our focus, the basic strategy of having more than 85% revenue from T25 remains.
I will just -- this is Sachin Tikekar. I'll just add to what Mr. Patil just said. We have to look at both. Our -- we believe that by having a sharp focus on T25, we are able to create tremendous value for them, and we are able to build long-term relationships. So that part remains important to us as well as to our clients. And as Mr. Patil said, more than 85% of the business comes from there. Having said that, there are disruptors, and we always have to keep -- given the changes that happen in the environment, there are mergers, acquisitions and so forth, we have to keep our ears to the ground. There are disruptors that are coming into play. We really need to understand their strategy and how we can create value for them. So at any point in time, there are always 3 or 4 that we are looking at to add to our list of clients. but it's a balance that we want to maintain going forward.
Sir, would it be fair to say that these 25 strategic clients that you're talking about, over a period of the -- over the period of last maybe 2, 3 years, you have gained significant amount of wallet share of their spending and that you're looking to increase that wallet share significantly going forward? What would be the potential? Have you already reached that potential? Or is there some more scope of increasing your wallet share in the strategic 25 accounts?
No, I think you make a good point. If you take a last 3-year, 4-year view, most of our growth has come from these T25, bulk of the growth. And over a period of time, across different practices, our wallet share has actually increased. As Mr. Patil said, in some of the areas, there are new programs that keep coming up, whether it's autonomous driving or electrification or electric -- e-Cockpit. As the programs come, we have an opportunity to increase our business and also the wallet share. So we don't see the ceiling in most of these T25 clients in the foreseeable future. And that's why we are saying that more than 85% of the business will continue to come from T25.
[Operator Instructions] The next question is from the line of Karan Uppal from PhillipCapital.
Congratulations, sir, on a good set of numbers.
Thank you.
Yes. Sir, first question is on autonomous, autonomous driving. So it had a good quarter in Q1, but it has been volatile in the past. And if I compare it with other practices, all the other practices are at or above the pre-COVID levels. So when can we expect autonomous to reach that level? Second question is on the large deals. So one of our competitors recently announced 2 large deals in the EV space, amounting to around $25 million from OEMs and Tier 1s. So you spoke about the pipeline being very good in the EV space. So are you seeing similar size of deals or maybe higher than that? Any qualitative color would be very helpful.
Yes. So the first thing is on autonomous. And if you remember, we -- I had explained this in a quarter before that the first couple of assignments which -- large deals we got in autonomous were on-site basically because of the way they were getting delivered, the software methodology it had. Also the client was very keen to do that being a very critical part. So that's why it was like that. But over the period, we have moved most of the work to offshore. And that's why in terms of volume, it is much higher than the pre-COVID level. And that's why you'll see some of the areas like profitability going up, et cetera, so -- from that perspective. And I mean, naturally, now you know that overall, as a company, we are higher than the pre-COVID levels. So I think -- but in terms of volume, we are much higher than the pre-COVID level. And that is what gets reflected into the financial performance.
The second question, I believe, was about some long-term engagements. From KPIT perspective, again, our effort is to work on long-term programs, and that's what we've been working on. As our clients were getting a grip on their business post-COVID, we are in constant discussions with them about their future programs in a couple of areas. One, Mr. Patil talked about basic changes in the software architecture itself, that the conventional players have to change over a period of time in order to remain relevant. And secondly, specific domains, domains like autonomous, electrification or e-Cockpit and diagnostics and vehicle engineering and so forth. So -- if you look at -- given all of these, the conversations are ongoing, and most of these engagements are long term. The architecture-related investments -- engagements would be that of 4 years or so. And most of the other production programs are at least 2 to 4 years. Given all of that, we believe that the size of such engagements is increasing for KPIT at a level that we have not seen before, but they will also be stretched over a period of time. And from our company perspective as well as from our client perspective, that's a good thing. I think we have a longer-term visibility, there is consistency and so forth. I think we feel more comfortable with that model.
And just to size, I think you have seen that last year, we announced...
$50 million plus.
$50 million plus 3 deals. So I think you can say for the new architecture program, depending upon the number of years that Mr. Tikekar mentioned, I think the size will be much higher. Yes.
Okay. Really appreciate the color. Just lastly, on -- a clarification on the guidance. So the mid-teens growth guidance, it's the organic part, right? You're not including the PathPartner Tech into this, right?
Yes, mid-teens does not include acquisitions.
The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.
This is Shyam from Sundaram. Many congratulations on the good operational performance.
Thank you.
Question is -- sir, my question is broadly related to the prior question. If I see the commercial vehicle segment vis-a-vis the car segment, commercial vehicle seems to be doing much better sequentially than the car segment. Does this tie up? Is there any means that that's with the slowdown seen in the powertrain division? That is the first question. Any customer-specific issues on the car side that is pulling down some amount of the growth there? That is point number one. Secondly, sir, Asia as a geography has been doing much better per se, whereas your U.S. and Europe have grown slightly below the company average. You also spoke about, even in the last quarter also, you highlighted some of the deal wins in Asia geography. So what is happening in that -- in Asia, India? If you can give some perspective on what's happening there? That is the other question, sir.
So let me take one question at a time. The first question was the commercial vehicles and passenger cars. As you know, more than 70% of our business is from passenger cars and comparatively, commercial vehicle business is smaller. We don't see any issues with passenger cars, especially in electrification. What happens with electrification is, many programs got over for the launch of FY '22 models. Multiple models got launched and the programs got over. Now we are actually engaging with our T25 clients to talk about programs that are meant for 2025. And so growth will come back in the powertrain. And we don't see any slowdown in the passenger car business. Having said that, given the base, which is smaller, for commercial vehicles, we are seeing very good traction coming. Number one, all of our existing clients, they are a few years behind in terms of technology of -- as compared to the passenger cars. They are also embracing autonomous driving and alternate powertrains. So I think their spend is going up as far as our existing clients are concerned. And we have also started working with 3 or 4 new clients. So the growth is higher on that side based on these 2 factors. One is the growth that we are seeing in our existing clients, which is higher than normal due to new technologies that they're trying to embrace. And secondly, our client base was smaller in commercial vehicles. And now the world is going around and more and more clients want to work with us. So I hope that answers first part of your question. Second part was about growth. Yes. I hope it answers the question?
Yes, sir. Yes, sir.
Okay. Thank you. The second was about the distribution of revenues in Asia and how it compares. I think it's very tricky to look at growth in any particular quarter. What we think is going to happen this year is we're going to have a very balanced growth across the 3 geographies. Asia may have slightly higher growth because, again, it's the smallest in terms of base. But we'll see robust growth coming from Europe as well as from the Americas. As we sort of get into the year, you'll see growth coming from U.S. in coming quarters. And we believe that in H2, Europe will contribute to a higher degree. So if you take a yearly view, I think it's going to be fairly balanced, which is a good thing for the company as well as for our clients. Speaking of some of the clients that we signed up in Asia, the growth has come from Japan. We also -- Mr. Patil talked about signing up a couple of new clients, especially from the new-age clients in China. So there is some growth that is coming from China. As far as India is concerned, we work with some of the tech centers for their global programs. And so I think it's spread across. And then there was one particular OEM from Southeast Asia, where we've seen tremendous amount of growth. But in nutshell, as we get into this year, you'll see a growth that is fairly balanced across the 3 geographies.
Understood, sir. Understood. Understood. Sir, just one other question. So if you look at the deal pipeline now, Kishor sir spoke about very strong pipeline. Compared to 3 months ago, do you see the pipeline is much better now and therefore, the second quarter also the translation from the prior wins maybe, you referred in the fourth quarter last year, should lead to a much stronger growth in the second quarter onwards? And was there any supply challenges during the quarter, sir? So any constraints because of the COVID-related supply challenges?
Yes. So I spoke about the pipeline. And I can only say that our pipeline has increased. As I mentioned, our focus is on large deals, so pipeline increase is there. As I said in the past that the large deals also take a little bit of a time to frutify. And that's why we have given guidance based on how we see today. The pipeline is very strong. I mean it has increased reasonably from the last time -- last quarter when we spoke. So that is the first point. So the second point?
Second point was about the supply chain and the disruption. Obviously, it's not just the automotive and mobility industry that is impacted in the supply chain. I think the whole world is struggling with getting their supply chain right. In automotive and commercial vehicles area, it's the chipsets that has caused some havoc. Most of our clients are making adjustments and reprioritizing where the chips go. They are obviously putting the chips more in more profitable vehicles and so forth. So they're learning to sort of roll with the punches and make sure that they're able to meet their revenue and profitability targets. As far as the impact of all of that, obviously, it's impacting our clients, but that impact is not getting passed on to KPIT. Our programs are long-term programs in software. And this is something that is essential for them to stay abreast of the competition and technology. So we ourselves have not seen any negative sort of impact on us, and we are not likely to see that. On the other hand, we believe that there could be specific opportunities, where as our clients learn to roll with the punches and make some changes in the production program, maybe we'll participate in some of the programs that we have not participated in before. So that's what we have to say when it comes to the disruption in the supply chain.
Sure, sir. I was more asking from a COVID-related, our employee-related any constraints that's put on the -- were there any constraints from KPIT, by employee side, which sort of constrained our growth in this quarter because some other peers did call out some challenges due to the COVID impacting some of their employees. I was just trying to get that flavor from you, sir.
It was obviously one of the most challenging quarters ever from people perspective, right? No 2 ways about it. All of us spent many sleepless nights, making sure that all our employees and their families are healthy, we did all of that. Somehow, I think -- and there were a lot of illnesses in the families, and we were very concerned. I have to give it to our employees for going way beyond their call of duty, a, to help out their colleagues; and, b, to sort of uphold the commitments to our clients. So I would say the impact, if any, was bare minimal in spite of the onslaught of the second wave of COVID. And now that many of us are vaccinated and we know the disease slightly better, hopefully, the worst is behind us. We are not done with the pandemic, but I think our ability to deal with it is slightly -- is much better.
So globally now, we have -- globally, we have around 75%, 80% people vaccinated. And by September end to October, we will get most of the people vaccinated. And probably we'll start having more presence in the office post that. And by the end of the year -- calendar year, we will work out our strategy for the long term.
[Operator Instructions] The next question is from the line of Nitin Padmanabhan from Investec.
Congratulations on the quarter.
Thank you, Nitin.
Sir, a couple of questions. The first is, I think you said 2 things. One is the new architecture-based deals are typically larger in size than the $50 million-plus kind of deals that we saw in the past year. Did I get that correct?
Yes. That's correct.
However, the tenures could be slightly longer. But that said, the overall size will be larger for us?
Yes.
Right. Now I just wanted your thoughts on, we have a very strong pipeline at this point. And going forward, maybe in 6 to 9 months, these sort of deals start getting converted. Sir, just wanted your thoughts on, in the interim, do you think the existing sort of flow of business from existing clients itself is likely to be strong and whatever happens with those large deals should actually accelerate growth from there on as we move further? Is that the sort of longer-term trend that one should sort of expect?
Yes. I mean the current growth will be in the normal course of business, that will continue. That is not going to get impacted. But these large deals will help us to accelerate our growth further.
Sure. And obviously, in terms of our headcount additions, that also one should sort of expect that to sort of increase as we move through the year?
Absolutely. I think we -- what we have done is dual strategy. One is, of course, we go to campus. But we have created a much better pipeline for hiring every quarter. Different ways of doing it. And already all our campus recruits have been absorbed by -- for this year. And we will continue to hire as it goes. So I think we are getting ready for any such deals. And we had to work it out on 2 ways. One is the overall number, which is hands and legs you can take. And the second is the experts you need for some of these deals. So these are the 2 different ways in which we are building the pipe.
Sure. Sir, lastly, on the -- if I look at our space in terms of our ability to get potential price increases over time, considering the supply constraint environment, would you characterize it in a way that our ability to garner price increases should be better than a typical IT services firm?
Certainly, I think, see the -- when we work with our critical programs, I think that should -- that won't be the issue. So when we get in some of these deals we are talking about, which are more into new architecture and complex program, I think we will be in a position to get higher rates.
Sure. Sir, last -- one last question from my end. The 2 clients that you said you have added in China...
Just I need to add, of course, our costs will be also a little higher than what we...
They're going to be complex projects. So the cost will also be -- our investments and costs would also be higher.
Yes.
So one should expect an initial sort of drop in margins as we execute those?
No, no. No drop in margins. No, we don't expect drop in margin.
Okay. Okay. And the last one was on the 2 China-based clients that you said you have sort of been able to capture. Are those -- do you think that's a part of the T25 that you had aspired for? Or...
No, as I mentioned, there are T25 and then we always keep our ears to the ground to see who are the potential disruptors. In China, it's very clear that there are 4 players who are likely to disrupt the NIOs and potentially the Lucids and the Teslas of the world. So we wanted to engage with at least 2 of them in a meaningful manner, and that's something that we have done. It will be a while before they actually become T25. We are just tasting the water with them at this point in time.
The next question is from the line of Mohit Jain from Anand Rathi.
First is on this on-site, offshore. You spoke about shift of work to offshore during your opening remarks. So where are we in that journey? And can that be a lever for FY '23, so to say?
Mohit, I think we mentioned that. We don't like to report like that because of multiple reasons. Because the stages that it goes through, any new programs I spoke about, you will require first experts that will be there, then it will move. Again, at the integration systems, they will be on site. So we don't report that from that perspective. But I just mentioned that specifically for autonomous, specifically the whole projects were on site, 100% of the people were committed to be on site for the initial few years. And that moved offshore, and that's why there was a significant change in the revenue for that practice. That's why only I mentioned. Otherwise, as you know, we don't report on that.
Right. But in terms of runway, like do you think there is still scope? Or do you think some of this will reverse as the year progresses from a company level on-site, offshore perspective?
I think we are at a good level. I think we can maintain here and maybe improve a little bit.
Okay. Sir, second was on the U.S. outlook and large deals. Like if I understand it correctly, what you're saying is that in the next -- I mean, the new large deals, the new set of large deals that KPIT would sign would probably happen in 6 to 9 months from now. And then in the interim, we will focus on mining the existing customers? Is that what you're telling us? Is my interpretation correct there?
One slight correction. We didn't talk just about -- the software architectural deals that we are talking about are not just limited to the U.S. There are conversations with the OEMs in Europe and some conversations in Asia as well. But the rest of the thing, I think you are interpreting...
No, no. And all these deals are for T25.
They're all for T25.
Okay. Sir, third one was on this carve-out of hydrogen fuel-related product. So if you could help us understand what kind of investment or what kind of royalty will KPIT get? And how much involvement will it have from your side?
It will have 0 involvement. Actually, we have stopped being involved a few years back actually. There is no investment from KPIT side. We just made it in the interest of just making -- giving a clarity. But there is no involvement of any employee or executive directors in any of the activity. And the reason we did it because our investors also wanted us to do it. If you remember, that every -- no hardware activities, no product activities. We wanted to focus on software integration partners. We want to be the best and the largest software integration partner. That's why the hardware business and the product business we had divested, closed and taken on.
So from a promoter bandwidth perspective, you're saying it will not involve -- or it will not involve you guys then.
Now 0 involvement. I won't even say partial or 1%, 0.
Okay. And sir, last one is on inorganic. So PathPartner, of course, is one which will get integrated during the year. But what all -- like should we expect more M&A on similar lines? Or are you looking for slightly bigger? Any time line or guideline in terms of size that you can offer?
No, I think we will look for good acquisitions. And see, we believe that the market size is high. But I have always said that we want to really focus on a good quality business with good quality clients. So -- but the scale for engagement could be very high. So from that perspective, both from regional presence, the number of experts it can bring and, of course, some of the access they can give to the new offerings, we will look for acquisitions. But we'll be very careful. I mean we are not going to do anything what we cannot digest or which is not in line with our strategy. And we will give you the full disclosure whenever it is. Maybe at some point of time, we may also share acquisition strategy when we are ready for it.
So sir, is it fair to assume given that we already have strategic 25 clients and then you have other clients also which are sort of growing, that the acquisition will not be from a client access perspective, given that industry is also fairly concentrated and so it will be more tech-driven?
Yes. I mean, largely, KPIT, we believe we are confident that any new clients we want to acquire, if we focus 6 months to 9 months, we will be in a position to get access to the clients. But at the same time, if you find any new technology area or back-end that gives you a better access to clients where we are not at that level, that helps. But to your point, it will not be client access -- for client access. It will be for certain expertise and opportunity.
Understood. And sir, any hiring target for FY '22? Any quantification to that, which you can share?
Hiring?
Hiring.
Hiring target for FY '22?
There's no target because I think we have a very strong and robust system for 2 quarters ongoing, planning and visibility. So basically -- but right now, we will be around 1,000 plus/minus. That is how we have done right now, but we will keep on adding every quarter. So right now, the offers and the current visibility is 1,000 plus. We will keep on adding.
So net basis 1,000 is the addition that you're broadly looking at for the year?
Yes. Yes.
The next question is from the line of Arvind Kothari from Niveshaay.
Sir, congratulations on great set of numbers. If you could please help me understand, is there a part of software business, which is dependent on volumes of what the end client makes?
No, I think that is not related with any sale of software -- sale of cars. It is not dependent on that. Not only that, while there is a possibility, we keep away from that to a large extent. If at all, we keep a very small portion, which is dependent on that. So our business model is not to link with that, for sure.
Okay. And I mean is adding more clients in a way on our platform, does it make it for the clients cheaper in the sense to get connected with our services? I mean from the scale perspective, if we get more scale, is it making us more competitive and hence, going forward, the number of client wins we can make increases with the number of ways increasing?
See, our philosophy is basically with T25, they have a huge spend. So as long as we even get to that spend, I think we could easily double the -- double or triple the size of the company. So I think that is how we are looking at it. So that's why we are more focused.
Okay. And last one was on 2-wheeler side. Is there anything on the connected vehicle or maybe an offering, like Ola is increasing its, you can say, capacity substantially in India also. So is there an offering over there, which you find is getting more traction and that is growing at a very high rate or something, which might be a small portion of our revenue right now?
As you know, we looked into connected -- 2-wheeler connected vehicles. We had a product. We decided to let go off that product because we wanted to be out of the product business. However, there is a platform that we have available with us. And it's in the production program with one large OEM. And we believe that there could be some other takers for that. However, our primary focus, given what's happening in the market, the disruption that is happening in passenger cars and commercial vehicles, our focus -- primary focus remains on passenger cars and commercial vehicles.
The next question is from the line of Nilesh Jethani from Envision Capital.
Sir, 2 clarifications. One was on the employee expenses. So we are assuming 3.4% decline in the EBITDA margin owing to the hike in the employee expenses. Are we also incorporating this 1,000 incremental employees you're planning to add for FY '22?
I think if we look at, what we said is the wage hikes will be effective in the next quarter. The gross impact of the wage hikes would be about 375 bps, but the net impact would be around under -- just under about 100 bps. So that is what we said. And this impact is for Q2 that will happen because the wage hikes will be effective in the second quarter. If you look at the additions that we talked about and the wage hikes overall, I think for the whole year, we have said that our EBITDA margins would be between 16.5% to 17%. So that is the range that we are currently looking at for the annual EBITDA margins.
Understood. Understood. Sir, second, a clarification I wanted on the other segment. What we have seen is other segment is growing at a pretty higher pace now. I wanted to understand what is this other segment comprised of? Can you talk about practice-wise revenue breakup?
So there are -- we also do a good amount of work in vehicle engineering and design and also on the body side. And given the changes that are happening in the vehicles due to electrification and autonomous vehicles, we are seeing growth coming from vehicle engineering design and body, both these practices. But they are largely impacted because of -- in a positive way because of the changes in the vehicles due to electrification and autonomous.
Understood. And sir, my last question was on the -- a little bit on your thoughts on the powertrain segment. So KPIT as a firm works with most of the top 10, top 15 OEMs across the world. Largely, these OEMs would be having at least 1 or 2 launches in the electric vehicle segment. So when you think about powertrain as a segment, so largely, the R&D spends would be behind us as far as the powertrain is concerned. It could be more to do with autonomous or connectivity going forward. So how should we look at the powertrain segment? So revenues, of course, the T21 clients for us, will there be some muted growth as far as powertrain segment is concerned from the T21 clients? Or how to look at the segment going forward?
Actually, on the other hand, we see the largest growth area potential in powertrain. It is not a onetime kind of a thing. Actually, it is all evolving. Everything is changing. People are coming with new designs, both for the actual e-powertrain, also outside infrastructure or structures like charging, et cetera. So many things are changing. Also, it is becoming more interior and more connected, even the powertrain, I am saying. So I think there are a lot of things which are happening there. And the new architecture which will happen will also drive many changes in that. So actually, I feel that in the next 3 years, the largest spend on our engineering is going through this segment.
Understood. And sir, the 3 deals which we have won, USD 60 million in the last year, are we seeing the revenue recognition from those in the current quarter?
Yes, yes. I mean it's a part of normal business. So it is happening.
The next question is from the line of Alok, an individual investor.
So I had 3. And, of course, before that, good quarter. But I had 3 questions, if I may. So I was thinking a little bit more outer to 3 to 4 years. So from a 3- to 4-year perspective, I just wanted to understand what is the pool of opportunities that exist from within the R&D budget of the OEMs? I mean clearly, the OEMs spend well above 100 billion put together, I guess. And not all of that is available to KPIT or that kind of a business. So I just wanted to understand what is the pool that we have? And how the conversion rates from the pipeline or the pool have actually been, let's say, over the past couple of years? So that was question one, and then I'll follow up with the other 2, if that's okay.
At a high level, the software spend in R&D in the areas in which we're in is going to grow by 10% is the prediction for the -- on the high basis for next many years. So that is basically overall industry consensus on -- so that is the one. And in the areas in which we work, right, our pool, if you look at T25 or that, I think our win ratio is pretty good. I think it is more than 50% when in -- winning ratio is more than 50%.
And it's not just the R&D. So we are -- some of our business comes from R&D. There is a lot of spend that goes in engineering. And that is also our bread and butter, which is ongoing.
Okay. Okay. I mean so would something like a 5 billion or a 10 billion sort of opportunity pool be a sensible number? Or is that quite large? Just trying to get some broad strokes.
I think at this point of time, we'll not -- but we have said that -- I mean, people have asked us in the past how big this business can happen. It can happen as big as it can be. I mean I can only say that -- and I said it some time back that we can become 3x of the size by just doing what we do.
Okay. Okay. Okay. Fair enough. And second question is from a business model perspective. Once we get in on a particular platform on the ER&D side, so the engineering and the R&D side, does our role stop once the product is commercialized and it's in serial production? Or is there some sort of recurring opportunities or work that we do as well? And does this change versus, let's say, 2, 3, 5 years ago, given the rising software content? So I was just thinking from that perspective that if the software content is rising, then somebody has to pickup the upgrades and maintenance and midcycle stuff that goes on. So just wondered a little bit about that.
There are 2 aspects to it. Once a production program gets over, the program gets over. But there is an ongoing maintenance and support that continues. Secondly, once a production program gets over within the following 2 or 3 years, most of the OEMs start to work on the next generation of production program. Usually, the involvement starts 4 years prior to the launch, 4 to 5 years prior to the launch. So it's an ongoing thing for most of the car and commercial vehicle OEMs, if that answers your question?
And -- then typically, in the IT services business traditionally, what was -- what's typically regarded is once you hit a $1 billion sort of a revenue mark, it's almost like you get a seat at the table, in a manner of speaking. So I just wanted to understand what is the -- is there anything of that sort that happens in our specific domain that we are in? And where -- if that is the case, then where do we stand versus the inflection point? I mean, I'm just trying to understand, are there any contracts or programs which perhaps would go to, let's say, something like an Accenture or some of the larger companies just because they are large? That's the only thing that I'm trying to understand.
The first thing I would say that we are larger than some of the companies you are talking in the areas in which we operate. So we are not talking about the general. I think here, the people are more interested in who understand the architecture of the client vehicles, who have worked on their production program, who understand domain better and who understand the integration better and who is connected in the overall ecosystem. I think that is basically fundamental way. And as you understand, as Mr. Tikekar mentioned, if you understand the architecture, you understand the domain, your ability to win the next program is high as it is. And as he mentioned that typically, now when it becomes more a software-driven vehicle, it is more about bringing new features, bringing new versions of the same platform. So it is not maintenance, it's pure maintenance. It is adding to the features, et cetera. So it continues over the life of the vehicle. Typically, in some of the programs we have announced earlier 7 to 8 years, we get some of those contracts.
You spoke about getting a seat at the table. Looking at software being the center for most of the OEMs, and this is something that is new for them, and KPIT brings in expertise. So we actually -- given our size, we punch way above our weight because what we do for them is very critical. In terms of volumes, it may not be billions of dollars, but what we do is important for their future. So from that perspective, we do get a seat at the table at the highest level with all the OEMs that we deal with, if that's what you meant by a seat at the table.
The next question is from the line of Vimal from Union AMC.
Sir, my question was on your employee pyramid. I do understand you might not want to give out details on this, but how much of room is left in order to sort of improve your employee pyramid at the bottom? Because if you look at the wage hike impact that you're talking of in the next quarter, and if you talk about the net impact, it's quite low. So how much of it would be coming in from, let's say, pyramid normalization or pyramid broadening at the bottom? How much of it would be coming from utilization? And I'm assuming the growth would also be very good because operating leverage will also play its part. If you could just correct me in my analysis here, if I'm going wrong somewhere?
I think it's a mix of everything. It is not only on account of pyramid. There's a small upside, but we will not be in a potion to give specific numbers. But it is a mixture of everything. Everything brings something to the table.
There is growth. There is operational efficiency. All of that, plus the use of our platforms too is an accelerator. That also increases profitability and so forth. So it's a bunch of things.
Do you see more upside on 2 of our important metrics, which is utilization, and I'm talking of utilization offshore, including trainees, and your pyramid? Do you see some more upside of improvement in these 2 metrics?
We look at it only as operational efficiency, we don't look at a specific area. I think we look at it more from the revenue per person, contribution per person because it's a mix of multiple things, and we leave it to the business leaders to manage it.
The next question is from the line of Ankit Agrawal from Yellowstone Equity.
First of all, congrats on a strong quarter.
Thank you, Ankit.
My first question is around the PathPartner acquisition. Just wanted to get some insights into what drove this acquisition. It seems it's more technology focused, but are we getting access to new clients as well? And then the second question is, it seems like the proportion of fixed price projects has increased. Is there any noteworthy trend here? Is there anything qualitative that is driving this?
So 2 things. One is the acquisition. Acquisition is mainly for, as we have said that, to strengthen our positioning as software integrator at a lower level, which is basically semiconductor level. We believe semiconductor companies will play a higher role and are critical in this new program. So in order to get some access to some of these technologies and expertise, that is the main reason for that acquisition. And I think that will help us to scale and also improve our expertise in that area. So client access is, as I mentioned, I think it is not a key point. But of course, they have better relationships with semiconductor companies, which we will be in a position to leverage for our clients.
Okay. And will this be integrated? Or will this be operated independently?
No, I think we all work as one business. It is -- everything is integrated as soon as possible.
Okay. Got it. Got it. And so this is more around embedded engineering, right? Like...
Yes.
All right. Okay. Okay. And then on the fixed projects side?
So if you look at fixed price projects, I mean for the last 3, 4 quarters, you'll see that, that percentage is going up. We believe that it will marginally move up but more or less in the same range that we have currently.
Okay. But is there anything qualitatively that is driving it like...
Yes, yes. Qualitatively, the point is, we prefer going for a fixed price project. It gives us flexibility. It gives us ability to use the assets which we have. We are much more competitive than the, if I have to say, [ hand send ] like companies. So that allows us to really be more competitive, but more importantly, add value to the client in terms of delivering ahead of time, et cetera. So we prefer that. And I think now the clients also want to -- they're also getting more comfortable with that model.
Right, right. And is it fair to say that the more complex the project, it tends to be fixed price?
Yes and no. I mean it really depends upon the maturity of the client and how you want to do it. But largely, it is true if it can be carved out, some parts of it. But there has to be a maturity of the OEM as well as the clarity in his mind. Then only we will go for it. Otherwise, we prefer going for the -- while we take the ownership, the financial model may be time and material. So to answer your question, in otherwise more and more projects -- basically, in almost every project, we take the full -- apart from a few, most of the ownership. And it is in our favor and even for clients favor to move towards fixed price.
And in general, do fixed price projects tend to be more margin accretive in your case?
Yes.
The next question is from the line of Nitin Padmanabhan from Investec.
Just 2 quick ones. One is, last year, all the large deals that we have done was in Europe. Is there anything -- are there opportunities that we are -- we think we'll be able to close in the U.S. geography that will stand out this year? That was the first question. And the second one is on, during COVID last year, correct me if I'm wrong, if there were any pricing discounts given to the clients during that period, are those sort of coming back at this point in time or they've already come back? Those are my 2 questions.
As far as long-term engagements, large engagements are concerned, yes, there were a couple from Europe. In U.S., we have seen growth actually across all of our clients.
Acquisition...
So you're asking newer large deals?
Yes, yes.
So yes, we are actually working on long-term engagements with some of our clients in the U.S. And we are also seeing good amount of growth. That's the same case with Asia. As far as the COVID discounts were concerned, they were -- since our clients were in a difficult position, we extended certain discounts or we extended the credit period. All of that has come back to normal.
But we had given it a fixed price -- fixed time.
We have given it for a fixed period of time, and I think the time is all over. So I think things are back to normal from that perspective.
So fair enough. So it's not that it's coming back next quarter or anything, it's all done?
Yes. I think it's all done.
Thank you very much. As there are no further questions from the participants, I would now like to hand the conference over to the management for closing comments.
Thank you very much for your participation. And if you have any further questions, I'm always available. So stay healthy, and bye-bye.
Thank you.
Thank you very much. Participants, on behalf of Dolat Capital, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.