KPIT Technologies Ltd

NSE:KPITTECH

Earnings Call Analysis

Earnings Call Transcript 2025-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to KPIT Technologies Q1 FY '24 (sic) [ '25 ] 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 from Dolat Capital. Thank you, and over to you, sir.

[Rahul Jain, analyst]

Thank you, Aditya. Good evening, everyone. On behalf of Dolat Capital, I would like to thank KPIT Technologies for giving us the opportunity to host this earnings call. And now I would like to hand the conference over to Sunil Phansalkar, who is VP, [ CF ] and Head of IR at KPIT, to do the management introductions. Over to you Sunil.

[Sunil Phansalkar, executive]

Thank you, Rahul. A very warm welcome to all on the Q1 FY '25 Earnings Call of KPIT Technologies Limited. On the call today, we have Mr. Kishor Patil, Co-Founder, CEO and MD; Mr. Sachin Tikekar, President and joint MD; Anup Sable, CTO and Board member; Priyamvada Hardikar, CFO; and myself from Investor Relations.

So as we always do, we will have the opening comments by Mr. Kishor Patil, and then we'll open up the floor for questions. So once again, a very warm welcome to you, and I will hand it over to Mr. Patil.

[Kishor Patil, executive]

So good evening, everyone. Very happy to take you through Quarter 1 FY '25 highlights. So as we -- as our business statement is really reimagining mobility for cleaner, smarter, safer world, we have launched during the quarter formally ECOVOYAGE 2030, which basically KPIT's journey towards sustainability.

We have been very mindful on this plan and have been working on this for many years, but this is a formal launch of our ECOVOYAGE journey. As you know, the transportation accounts for more than 16% of carbon footprint globally, so this is a very, very important for us as well as our plan.

The way we are looking at is we have anchored science-based targets for three things. One is what we can do with our clients, how we can help them to reduce their carbon footprint. The second is how we can reduce our footprint on our infrastructure and operations. And the third is basically and very important and unique, I may say, is all our 13,000 people, how they can really embrace sustainability beyond work in their personal lives also.

So that's the holistic approach we have taken. And we have made a commitment of net zero by 2030 with clear annual targets. So we are very excited about this journey, and it is in line with our vision statement.

As I mentioned, this is a very key focus area for our clients also. And we actually continue to really work in this area. We are looking at -- our clients' priority during -- continues to be bringing sustainable products in the market. The key priority for them is faster release of features in vehicles in the market.

Then, secondly, is substantial cost savings and reduction of time and better leverage of their investments. And third, in order to enable that move towards the central compute architecture that is reliable. So we continue to work with our clients in these areas. Our growth, overall, is by -- driven by T25 clients as well, we mentioned. And what we have done is, our growth has been largely driven by top, maybe, [ 15 ] clients, in T25. So now we also see many other clients, which are committing themselves for the technology investments and meaningful engagement with us, which is very important for us. And that's why we see continued traction in our T25 clients.

The second part is we also are looking at the adjacency, which is into truck and off-highway, which is a very important step for us in order to broaden our growth engine. But we believe that many of the areas in which we are working, specifically into bringing new technologies to passenger cars, while the offerings will be fine-tuned for these markets, these are also very important technologies.

And specifically, like trucks, et cetera, very -- we believe that many of these clients will go for Autonomous and Connected soon. And we have started some of this conversation -- early conversation in this area. We do believe that off-highway continues to be a good market, and they also have similar investments at technology, driven by cost efficiency, again, competition with Chinese players et cetera. So we believe we can bring those offerings to them as well.

Overall, Asia has been -- has driven the growth very strongly, with Europe giving a -- continuing with the growth momentum, what we had. The U.S.A. has -- we believe that the U.S.A. momentum will come in some time, where we have started engaging some of the -- as I mentioned about the long list of T25 in the other part of the -- some of the plants which had not committed, so those clients in U.S.A.

Apart from that, many global OEMs are looking at U.S. as a market. And that's where their spend would increase, and we would have a role to play, and the U.S.A. market will grow in that direction. So overall -- also, the adjacencies we talk about, there are many U.S. clients are there, dominant U.S. clients are there, so we believe that the USA growth will, in due course, come back.

Apart from that, we continue to -- Chinese operation, which -- continue to bring focus on China's operations. We are looking at a few areas in China. One is what we can do for Chinese OEMs and how we can do it for them.

We have -- we do have a small presence in China for many years, but now we are strengthening that presence. And we are bringing certain products and technologies to these OEMs, which are unique and for them required for their next phase of journey. So that is the offering we are bringing out.

And we are also trying to bring out offerings for them, what they would require for being global companies. Naturally, we are also helping our global [ clients ] to scale in China. So all these three offerings, we would like to bring the more focus on China. We are making investments in China. I would like to come to people part, where our accretion continues to be one of the lowest in the industry, in the single digits. We have invested quite a bit in terms of developing the -- leadership development for our broader set of people, so that we can focus on multiple initiatives at the same time. And that's what we will continue to do, and we have launched a formal management development program for next 12 to 18 months.

During this quarter, we had salary increments. And as we have done in the last many years, we continued with our salary increments, some of the best in the industry. And we have gone ahead with our increments from 1st July. These are on a high single-digit number.

Last but not the least is we have also launched our ESOP program, I think one of the very few companies who have a broader-base ESOP program for key people. That also we have launched a few months back. So that's on people side.

On the tech side, I talked about the offerings, I mean, in order to reduce our -- in order to reduce the time to market as well as the [ cost ] for the OEMs and help them compete with the China part, we have we have introduced many offerings, which will help them to do it. And that's what we have been in a position to bring back offerings, which are significant. And we have launched them at different stages with OEMs. We believe in the next few years, this will amount to a significant opportunity for us.

Apart from that, we continue to grow in our normal areas such as Autonomous, Electrical, Connected, et cetera. In the electrification area, while many companies had a clear focus on the [ ABMV2 ], we believe that EVs will continue to grow in due course because of the reduce in terms of reduction in the cost. And it actually helps OEMs to reduce their cost for the EVs.

There are other areas such as hybrid, et cetera, which are also gaining the new programs in this area apart from the traditional conventional powertrain, which some clients -- some in passenger cars and some, naturally, in commercial cars continue to launch, and we would help them in those areas.

On the AI side, we have taken very concrete steps, and they are looking at AI in multiple ways. One is in terms of improving the productivity as a organization. The second is in terms of production -- improving the productivity in software development life cycle. And the third part is in terms of how we can create a differentiated offering for our clients and make it -- really bring efficiency to the clients offering and help our clients to be more efficient.

So these are the areas which we have taken concrete steps in terms of technology, and we continue to invest into technology more and more.

Lastly, coming to the -- our performance during the quarter, our revenue grew 4.7% quarter-on-quarter. And in the year-on-year, we grew by 23.1%, growth led by -- as I mentioned about certain geographies like Asia in middleware and powertrain. Our net profits have grown year-on-year 52.4% year-on-year. It includes INR 396 million of onetime gain.

And that has happened because of two things. First is, we have transferred certain IPs to QORIX last quarter. At that time, QORIX was our fully owned subsidiary. And now that it is a joint venture, so according to -- we got the credit in some way in the books of 50% of the value of the IP. So that is one part, which is really a very natural transaction in due course of business.

And the second is, as buying the -- QORIX was our fully owned subsidiaries, all the expenses we were incurring were written off in the books of accounts. But as it became a joint venture, these expenses -- I mean, that much assets and liabilities -- liabilities mainly and the expenses got allocated to the joint venture partner, and that is the second benefit we have got. So net of tax, basically, it is INR 396 million, which is part of INR 2 billion-plus profit during the quarter.

As we move forward in this year, we would like to reiterate our guidance, which we have given at the beginning of the year. We would like to also mention that next quarter, basically, we would have the increment impact as well as the soft impact, which will be for the full quarter. Last quarter, it was only for 2 months. So overall, the impact will be 2.8% during the quarter. But as I said, we reiterate our guidance for the year.

Thank you, and we are open for the questions.

[Operator]

[Operator Instructions] Our first question is from the line of Chandramouli from Goldman Sachs.

[Chandramouli Muthiah, analyst]

And congratulations on the completion of the JV with ZF in QORIX. My first question is just around the JV, I think you mentioned that most regulatory approvals are now through -- JV has also -- ZF has also contributed their share of investment.

So just trying to understand, where we are in the process of building some of the middleware offerings? Are we working with any clients as we speak? And also, approximately when we think we will launch some of these offerings to some of our critical clients? Is there any sort of interest that the key clients have exhibited here? Any color around that would be super useful.

[Kishor Patil, executive]

Absolutely. So thank you for this question. I think we are very excited about the QORIX proposition to the industry. See, during the quarter, actually, we have become the part of the [ Eclipse Foundation ], which is a very important foundation for the industry. So basically, QORIX becomes a part of this foundation.

And we have also agreed to open source some part of the software, which is very important for OEMs because you would recollect that many OEMs wanted to develop their software and operating system on their own in order to have a better control on the software. So this gives a lot of comfort to the OEMs.

We have -- the way we had planned that maybe next -- less than less than 12 months now because we have been developing the software. We would have our product ready. And it would go through, I would say, the whole testing and integration for the OEM by the end of the next year. We already are engaged with a couple of OEMs and working with their production programs for the end of the next year. So we are already engaged with a couple of clients in our core client.

[Chandramouli Muthiah, analyst]

Got it. That's useful. My second question is specific to how you've been performing in Asia. I think when you look at the disclosures by the various Japanese OEMs, it seems that companies like Toyota and Honda have committed to 30%-plus electric vehicle R&D growth over the next couple of years annualized.

So I'm just trying to understand some of this performance in Asia. Is it largely ramp-up of existing work with Honda? Or could you give us more color on if you're working with a broader range of OEMs across the region beyond some of the Chinese efforts that you mentioned?

[Sachin Tikekar, executive]

Chandra, obviously, we had tremendous growth on the back of Honda over the last several quarters, and it will continue. On top of that, if you look at Asia as a market, we -- there is business in Korea, there is a business in India, and there is business in China.

So these are the ones, countries that are driving our business. And we believe that the Asia growth, going forward, would be broader and more broad-based across these 4 countries.

And we are also seeing that besides pure manufacturing of vehicles in Thailand, the OEMs also want to do some design and engineering work in Thailand from a hedging perspective. And we believe that, that work with our global OEMs will be able to do in Thailand. So we look at growth coming from 5 countries across our T25 clients.

And to your question about specific focus on Japan and its investment, obviously, we are working with 2 OEMs at this point, and I think there is interest from the third one as well. So we believe that the growth in Asia has been high, and it will continue to be on the higher side in the foreseeable future.

[Chandramouli Muthiah, analyst]

Got it. That's helpful. And my last question is just specific to the margin performance this quarter. I think when we had guided -- at the start of the year, we had guided to 20.5%-plus EBITDA margin versus the previous year 20.3% and the previous quarter at 20.7%. We have done 21.1% this quarter in spite of a couple of months of ESOP headwind.

So I just want to understand if you were to piece out the headwind just from the ESOP scheme, how many basis points would you say it was this quarter, just sort of similar to the 2.8% impact you mentioned for 2Q? Just trying to understand if you were to adjust out for just ESOP impact, what the underlying margin of the business would have been in 1Q?

[Kishor Patil, executive]

So if we would have taken out the margin impact, so it would be about 1% more, maybe, that would have been the -- our EBITDA margin. But as I said, next quarter, we have also increments. We have our 3 months of ESOP part. And so these are two main [ props ] we have. But I mean, we will, for sure, go by about the guidance we have given on [ profitability ].

[Chandramouli Muthiah, analyst]

Got it. So just -- I think lastly, just to clarify on this. This quarter it would have been 100 bps on ESOP, next quarter should be 150 bps. And the remaining 130 bps should basically be from increments on your...

[Kishor Patil, executive]

So last quarter, it would have been 0.7%. This quarter -- the next quarter would be 1%. So this -- coming quarter will be 1%, last quarter was 0.7%.

[Operator]

Our next question is from the line of Nitin from Investec.

[Nitin Padmanabhan, analyst]

Congrats on another very strong quarter. Just wanted your thoughts on a couple of things. So first is you did allude to the U.S. geography. We are seeing very strong growth across the others.

Just wanted your thoughts on what's sort of holding back the trends there, considering that the targets for the initial norms continue to be strict even there? So broadly, how should we think about the U.S. geography? You did mention that it should pick up soon. But just trying to understand the underlying dynamics of what's holding that.

[Sachin Tikekar, executive]

So Nitin, thanks for your question. Let me answer that question in two ways. What's sort of holding back? Couple of things that happened in the U.S. One is a couple of truck makers and 1 OEM, their headquarters had, over the last couple of years, has moved out of U.S. So the revenues also get -- the balance also shift. So that's one reason.

And that's why there are very few U.S.-based OEMs in pass cars that we can work with. And we have taken a call that in terms of the new OEMs, there are only select OEMs that we'll work with, and that too just to try it out there, not really part of our T25, correct? So that's one part of the -- so this is the reason why you are not seeing the same level of growth.

More importantly, what is it that we are doing in order to bring that growth back? So there are three things. One, on the passenger car side, we believe that the existing OEM clients that we have, will have more growth there. And I think it would be visible in the next 2 or 3 quarters. That's what we believe.

Second part is our -- U.S. is becoming more and more important from our global client perspective. Given there is a 100% tariff on Chinese vehicles in the U.S., it's sort of a secured market for Japanese OEMs and some of the European OEMs. So our engagement with our global OEMs with U.S. is also increasing. So that's the second part that gives us the confidence that the growth will come back.

And last but not the least, as we make investments in off-highway segment, there are 3 or 4 key players. Some of the largest players are actually based out of U.S. So we believe that accelerating on these three levers will help us to sort of create more traction as we go forward.

[Kishor Patil, executive]

And just to add, simultaneously, they are also adding -- making investments in the front end to access this opportunity.

[Nitin Padmanabhan, analyst]

Sure. That's very helpful. There's two other things. One is the -- would the QORIX, which has now moved to the JV, would that have had a benefit on margin this quarter, considering the costs have moved out? And is it fully baked in for the quarter? Or is it partially likely to aid in the next quarter? Or is it meaningful? I just want to understand that.

[Kishor Patil, executive]

So there won't be any significant impact on the margins because anyway, the costs I mentioned had about it that recently, once we had the agreement, then we had not -- they have acclimated those costs. So I think that would not have any impact on the current quarter.

I think the impact that we will see from both revenues as well as margin down the line end of the next calendar year kind of a thing, then actually the revenue starts coming into the JV, we would gain certain profit from that.

Actually, during the other past period till that time, the operating expenses still to our share will actually impact our -- will come naturally below EBITDA, but as a share of our expenses. And of course, naturally, we have factored that when we had given our estimate for the year.

So the margin as well as the integration revenue will grow by the end of the next calender year -- around the next [ calender year ].

[Nitin Padmanabhan, analyst]

Got it. And lastly, so for the next quarter, we are calling out around 250-odd basis points from salary increases and 100 bps from [ ease ] of costs. That 100 bps is incremental?

[Kishor Patil, executive]

Incremental is only 0.3.

[Nitin Padmanabhan, analyst]

It's only 0.3, correct. So historically, at least for KPIT, we have been able to always offset the wages high to a certain level. Do you think that remains unchanged, broadly, from a thought process perspective?

[Kishor Patil, executive]

We may not be in a position to fully offset, but yes, I mean, a reasonable part [ we will ].

[Nitin Padmanabhan, analyst]

Got it. And just lastly, just your thoughts on the deal pipeline and how that's panning out? And anything on large deals that you will see within that pipeline will be helpful.

[Sachin Tikekar, executive]

So what we can -- you can see that there are -- we called out 5 specific -- large sort of engagement, totaling to about 120, 130, on an average, about 25 million, 30 million. And so the -- so it's been a good quarter from that perspective. And we really think that we can build on it as we get into the next quarter, Nitin.

The breakup of that is two of them are from the U.S., two are from Europe, and one is from Asia, and one also happens to be from the truck business. So that's sort of the breakup of the 5 large engagements that we were able to close last quarter.

From this quarter perspective, as I mentioned earlier on, we believe that -- I'll talk about next 1 or 2 quarters, actually. There are 2 in the U.S., and then there are 2 in Europe, where we think that, that will help us to create a bigger pipeline for us as we get into the second half of the year. And again, most of them are passenger car vehicles, but you'll also see some trucks coming along as we get into the third quarter and fourth quarter of the financial year.

[Operator]

Our next question is from the line of CA Garvit Goyal from Nvest Advisers LLP.

[CA Garvit Goyal, analyst]

My first question is on the headwind -- industry headwind side. So do you see any near to medium-term headwind, particularly towards Europe side, so if Europe is getting slowing down? So do you see any headwinds in the industry, which our product offerings cater to? Or do you see any execution delays of the existing deals in the rest of the year, compared to what we were anticipating at the beginning of the year, sir?

[Kishor Patil, executive]

So naturally, there are headwinds for the mobility, which I'm sure you seeing in the news. But it is different headings for different people. So for Chinese OEMs like [indiscernible] their market is quite saturated, and there is -- they have to go on into different markets to [ cater ] growth.

European markets have to compete with the Chinese people on the past -- in China market, which was very significant market. And that is really impacting their sales. Also, they have to compete in [indiscernible], Chinese in their own market. So they are focusing on -- also for overall automotive, [ especially ] pass cars, the overall sales of vehicles are going to be flattish or go down a bit.

So that really makes pressure on their margins. So that is -- and U.S. actually is also -- for the electrification area, they had to take more steps, basically -- specifically because many of these OEMs have been focused more on electrification. And now to -- in order to really -- both for Chinese and otherwise the market. But at the same time to comply with their commitment, I think they are going to other, for hybrid and other technologies.

So there are cost increases, there's competition pressure. And that is there. And in some ways, that creates an opportunity for us. And the only thing is you need a different kind of offering for this to capture these opportunities. And that's what I had mentioned at the beginning of the -- my comments.

[CA Garvit Goyal, analyst]

So we are not seeing any kind of delays in execution happening, right?

[Kishor Patil, executive]

So if you see delays in a normal business, but as I said, that's what we are going to -- we have -- we are trying to offset with the new offerings and -- which are bigger in the long term.

[CA Garvit Goyal, analyst]

And sir, like KPIT has always emphasized leveraging global delivery and building scale through automation and productivity improvement. So can you share more details on the steps being taken to enhance the global delivery capabilities? And how the automation is expected to impact the overall productivity and operational efficiency?

[Sachin Tikekar, executive]

So productivity improvement is a continuous pursuit. In the past, it has been through having [indiscernible] having the training -- effective training, competency building. But the new thing that is happening is the usage of AI. So we will start seeing the impact of that in terms of what the technology offers to us.

So in multiple buckets. One is individual developer productivity. The second one would be in terms of efficiency at the group level, the functional level. And third is also enhancing offerings, which means the competitiveness of the offerings by using of the technology. So there is work happening on all these three areas. So for us, productivity is a continuous pursuit, technologies, just new technology coming to help us now.

I would also add to what [ Anup ] just said, we also talked about global delivery. So we have present wherever there is a auto and truck OEM footprint. And the model that we have is for Asia, we have centers. Obviously, we have centers here in India. We have a center in Bangkok as well. And pretty soon, we'll have something substantial in China. And from Europe perspective, we have a large center in [ Tunisia ] as well as our footprint in Germany, Netherlands and the U.K. And for the U.S., we have -- or for Americas, we have a center in Brazil and then in Novi, Michigan.

So the nature of our business is that of global model. And we are trying to make sure, depending on every client, we are trying to figure out the best cost country to sort of, a, increase our productivity, decrease the time to market for our clients.

[CA Garvit Goyal, analyst]

And sir, one last question. Like this quarter, we reported Y-on-Y growth of 24% in our top line. But we are still maintaining the guidance of 18% to 20%. So does that mean in upcoming quarters, are you seeing any [ neutral ] kind of numbers as compared to this quarter? Or what is the situation is likely to be?

[Kishor Patil, executive]

We'll stick to the yearly guidance. I think very few companies are giving the guidance the way we give. I think when we see a better visibility and we are sure about the external margin, we will [ revisit it ].

[Operator]

Our next question is from the line of Karan from PhillipCapital India.

[Karan Uppal, analyst]

Congratulations on a strong set of numbers. First question is on the Commercial Vehicles segment. So CV segment has been volatile since last 4 to 5 quarters. You spoke about some of the deals in the pipeline. So are you expecting this to -- CV segment to rebound anytime soon? And what sort of projects are you engaging with clients? Is it related to any transition, infotainment, move to hydrogen, if you can elaborate that as well?

[Sachin Tikekar, executive]

So that's a good question. And Karan, CV, we look at it in two ways, truck and off-highway. And truck is where we have had engagements in the past. And now, I think we are putting a lot more rigor to make sure that it's not just 2 or 3 OEMs that we work with, but there are 6 or 7 OEMs.

The nature of the engagement with them is very similar to that of passenger car. It's just that their KPIs are different. So there is -- obviously, they have interest in software-defined trucks. That's one area.

Second is within that, I think the Level 4 autonomy in controlled environment is -- may likely to be more prevalent in truck business than anything else. Then also the after-sales part is of interest to them. So over their update, diagnostics and after-sales part, that's another area of interest to them.

And of course, from the propulsion perspective, there are fuel cells and other technologies that are relevant to them. And everybody has a pilot program in this, and we'll wait for it to sort of productionize it over a period of time.

So we do see these areas of growth. And I have to say this is on the back of all the work that we do in the truck and the vehicle engineering and design side, right? There is scope for innovation there as well. So that's on the truck side.

On the off-highway side, this is new to us. And as we discussed earlier on, we are putting our strategy together. We have been working on it for the last 6 months. Now it's time to execute.

Having said that, I have to just say that these are midterm bets that we are taking at this point in time. So the fruition and the actual impact will be realized gradually. But we'll see it will become a significant part of our business over the next 2 to 3 years.

[Karan Uppal, analyst]

Okay, sir. That's helpful. Second question is slightly a strategic one. So in the global market, we have seen Volkswagen investing 5 billion in JV with Rivian to share the EV architecture and software development.

So what can be the implications of this sort of a JV? Can Volkswagen reduce the outsourcing work to players like us? Or you think that such development may see a positive impact, given that it will lead to faster time to market for their respective product lines? So your thoughts on this.

[Sachin Tikekar, executive]

So first of all, Volkswagen Group is an ocean. And there are a lot of people, their budgets are very high, and there is a lot of catching up to do. So Volkswagen Group, we look at it in 3 buckets. So one is the Audi [ CARIAD ] part. Second is Porsche, and third is the Volkswagen brand. This is how we look at the account because it's one of the largest OEMs in the world.

Their spend is tremendous. And as Mr. Patil mentioned, we have a lot of catching up to do, a, in order to be competitive in China and then secondly, retain their market share or increase it, not only in Europe but beyond Europe.

We think that using the Rivian platform or they made investment also in [ Exxon ] in China, there is a twofold strategy. So [ Exxon ] will use it for China; Rivian, they may use it for outside of China. That's really their strategy.

And we believe that there is an important role for KPIT to play. All of this calls for substantial validation and integration work. And for us, it's actually good news because they'll actually go down that path and some of these programs will get launched. So we are looking forward to this.

[Karan Uppal, analyst]

Last is on the cash balance. Cash generation has been healthy, and now the company is sitting on a INR 1,000 crores cash. So any plans to do any M&A this year? And also if you can highlight which are the service lines in your portfolio which are like white spaces, which you would like to target?

[Sachin Tikekar, executive]

Our growth strategy hinges upon three things: buy, build and partner. And we've been building many offerings over the years. We have also bought company -- acquired companies in order to enhance our current offerings and so forth. So it's a continuous effort, and we keep looking for complementary things.

As Mr. Patil talked about building offerings for future that are more relevant for them, I think some of them, they are building on our own. And for some, when we find the right kind of effect, obviously, we will go all out for it.

So that's really the strategy. It's an ongoing strategy, and we'll continue to look at that. And I cannot -- we cannot ignore the partnering in part as well. We can't do everything on our own. So in certain areas, we'll have alliances and partnerships as well.

[Operator]

Our next question is from the line of Abhishek Kumar from JM Financial.

[Abhishek Kumar, analyst]

My first question is on your business units. The architecture and middleware consulting has really been leading our growth for many quarters now. Just wanted to understand, is this a lead indicator for the growth in other areas, in a strategy of going in with our middleware proposition and then taking up some of the [ surround ] services work? So how should we look at middleware [ consulting ] growth [indiscernible]?

[Anup Sable, executive]

I think -- prior to middleware, there is architecture, which comes before that. And if you look at pass car, some of them have crossed the generation 1, and there will be generation 2 coming up very soon. Some of the preactivities for gen 2 has started. So these are continuous efforts that happen on the OEM side. We are well placed to actually contribute in those particular areas.

Then Mr. Tikekar actually spoke about trucks, we see that even the trucks will go through the central architecture around the same time frame as the second phase of the car architecture renewal happens, right? So we are on top of that. We have focused activities happening around all these activities. So we believe that network as well as middleware will be our entry points to anything that happens at the OEM side.

[Abhishek Kumar, analyst]

Sure. And next question is on competition. A lot of the IT services -- you also have spoken about on softness. There is cost pressure. Even the European pure-play R&D players are ramping up their delivery in India, et cetera. So how do you see competition? Is it intensifying? Do you have a niche? And also on the deals that we win, are these RFP deals or these are like [ sole ] sourced deals? Any color around competition?

[Kishor Patil, executive]

Yes. So competition is certainly intensifying and largely from Chinese players for China market and some of the new [ parts ]. I think that's what really the competition we are working for. We have to be careful. And we still have the integration opportunities in all these areas. That's how we could stay.

I mean naturally, all the players, this has been area of -- where there is a brighter spot than the normal IT. So many companies are trying to access to this. But I may just say that you can look at the growth numbers of many of the European and other OEMS. So naturally, definitely in the conventional areas, which have -- but to your fact naturally, it will attract more competition.

It will attract more -- the competition will be intensified. We believe that we are in a good position in terms of both sides. We are arguably the largest. Also, we are very focused, and we have made a lot of investment ahead of time.

[Abhishek Kumar, analyst]

Maybe just last point on RFP versus sole-source deal. Just wanted to understand maybe pricing behavior of the competition there?

[Sachin Tikekar, executive]

So from our perspective, an interesting metric to track. I would say -- I don't have the exact data, but I'll give you an approximate figure. I think there is a huge shift in our total revenue, where many of the large engagements are actually initiated by us, they're structured by us, and there is no RFP. In some of our diamond accounts -- most of our diamond account, that is absolutely the case.

In some of the diamond accounts where it cannot be single sourced, we end up writing or influencing the RFP. So that part of business continues to grow and the percentage of the overall business. Naturally, when it comes to some of the new clients and in some aspects, there are RFPs that we respond to. But that has gone down substantially as part of our total business. Majority of our business comes through long-term engagements and through proactive proposals that we make to the client.

And they also emerged from thought leadership. Some of the problems that our clients are likely to foresee, we anticipate early, and then we go back to them with the solution. So that's been really the effort. And that's why Mr. Patil talked about adding new offerings that are more relevant from a future perspective. I think these are the investments that are essential for us to...

[Kishor Patil, executive]

Some part of the world, I think the OEMs do work in the RFP part. But I think our clear focus is to become a [ Tier ] 1, [ technically ] independent. When we -- we have an advantage in multiple base both in terms of price and billings. So that's what could be played because that's what our play is, technology.

[Operator]

Next question is from the line of Mohit Jain from Anand Rathi.

[Mohit Jain, analyst]

Sir, three questions. First is on TCV. Now should we see the numbers -- 2025 from a Y-o-Y standpoint, should we see this number accelerate as we move ahead? Or do you think this is enough for us to generate 22%, 24% wherever we end up in terms of growth? So that was one.

Second, CapEx. CapEx seems to be on the higher side for us, you spoke about various centers being opened. So how should we see this number for FY '25? And the last is on the [ daily ] QORIX. Now, is the investment complete? Or should we anticipate some more investment or [indiscernible] from KPIT or from ZF into the JV?

[Sachin Tikekar, executive]

Okay. No, let me take up the TCV part. Given the TCV that we have and what we believe, we are likely to close in the next quarter. From a guidance perspective, I think there is sufficiency, is what we think at this point in time. So I think we are in a pretty good position.

[Mohit Jain, analyst]

And on a slightly longer-term basis, like should we expect to pick up, say, Q2, Q3? Or do you think this around 200 number is good enough?

[Sachin Tikekar, executive]

No, I think it's too early to say any of that. I think if there are any changes, we will -- as always, in Q3, we come back.

[Kishor Patil, executive]

Stick to as our yearly guidance. Only when we are very clear, we would revise it in the end of Q3. I think we have been following it religiously because there are too many changes in the world. So we would like to be cautious on that.

[Priyamvada Hardikar, executive]

On the second question on the CapEx, this CapEx is in the routine course of business. The quarterly mix can be -- may not be linear. So this quarter also, we did some procurement in terms of our business for licenses or otherwise. It's a routine course of business, and the quarterly changes are cyclical, and there should not be looked as [ linear ]. There's no -- nothing onetime or nothing exceptional in it.

[Mohit Jain, analyst]

So FY '24 is a good benchmark?

[Priyamvada Hardikar, executive]

On the CapEx, yes.

[Mohit Jain, analyst]

Last on JV.

[Kishor Patil, executive]

Can you repeat that question?

[Mohit Jain, analyst]

So ZF also invested and KPIT also contributed to some IPs. Now that is -- and I think you have spoken about EUR [ 15 ] million being contributed by the them. So is the investment complete? Or should we expect more money going into the JV from KPIT standpoint?

[Kishor Patil, executive]

Money or IP? And second thing was?

[Mohit Jain, analyst]

Will we be consolidating this line by line? Or do you think this will get [ impacted ] from our accounts?

[Kishor Patil, executive]

So the first part is from the KPI. So I think we have more steel completed our part of the investment. If at all, it is required at -- after 12 to 18 months, we may contribute EUR 5 million or so. But it really depends upon the -- at that point time what the requirements of the JV would be.

[Mohit Jain, analyst]

EUR 5 million?

[Kishor Patil, executive]

Yes, right. And overall, I think this will be actually a joint venture. And as we have mentioned many times in the past, we may look at the third partner. And so this will come as a one line in terms of...

[Priyamvada Hardikar, executive]

Will not be consolidated line by line. We will have an equity pickup and therefore, share of our profit or loss will come as a one-line item below [indiscernible]

[Operator]

Our next question is from the line of Sandeep Shah from Equirus Securities.

[Sandeep Shah, analyst]

Just wanted to understand, you have given a color about the deal pipeline and the deal wins in this quarter. But on the mega deals, any commentary would help. I do agree those are cyclical and [indiscernible] rather than recurring, but any commentary in the pipeline in the mega deals shaping up?

[Sachin Tikekar, executive]

Sandeep, I don't know what constitutes a mega deal. But from our perspective, the whole concept of T25 is to build long-term engagements with them. I think with majority of them, we have built long-term relationships. And we believe that just the nature of the relationship that we have, we'll continue to have growth in each one of them. And of course, there are a few others that we need to tap. So overall, more -- I think where in the past, I think there are 3 or 4 large announcements that we made of so-called mega deal. Many such engagements get closed.

It's just that not everyone is comfortable talking about them. And so they don't come up or they are not bunched up like that. But most of the things that we do are all long-term large engagements in nature with at least 50% of the T25 OEMs. Yes. So that's the nature of our business in general or our at least retail model.

[Sandeep Shah, analyst]

Okay. Fair enough. Second question is, we have touch base in terms of the market headwinds, which we also read in the newspapers. But do you believe these market headwinds, especially in the mobility is impacting our addressable market in the R&D budgets of the OEMs?

[Sunil Phansalkar, executive]

I think I addressed that the challenges have changed and what their challenges are also addressed in different parts of the world. And I mentioned that it does impact some of the current offering, but there are -- there is a less for new offerings, which we have built. So I think I mentioned that overall, our market opportunity does not change. it's not increased in due course.

[Sandeep Shah, analyst]

Okay. Fair enough. And last question on the QORIX. As you said, the commercialization may happen by end of CY '25. But until that time, you might have to do some expenses for building the products. So any guidance in terms of how the JV loss line will look like in FY '25 and '26 through QORIX JV, which we can model?

[Sunil Phansalkar, executive]

No, I think it is -- we would not be in a position to give that. I think all our guidance and et cetera, take care of what we commit on that. It will pan out as the JV requires the investments.

[Operator]

Our next question is from the line of Manik from Axis Capital.

[Manik Taneja, analyst]

So while you already answered my question with regards to the performance in America. You also made some remarks that over the -- while we focus on the T25 customer base, a significant part of our growth since we have been led by 15 customers. So given that we now trying to essentially broad base this growth? Do you think in the interim growth of consolidation and slower growth compared to what we have witnessed over the last few years? That's question number one.

The second question was with regards to simply getting your comments around the competitive intensity in the space as we've seen IT services companies make acquisitions in this space? How do you think that changes the competitive intensity for you in the segment?

[Kishor Patil, executive]

I think I answered both the questions in the past. I think I did say that there is an intensity, but I do believe that we are in the best position to -- we have -- in a prime position to win the business, which we have planned for.

[Manik Taneja, analyst]

The first one was in T25, you're saying that some of them we already have long-term relationships does that mean that the growth within those will slow down?

[Kishor Patil, executive]

So we will go by the guidance we give. I think we have given the guidance, and we continue to give our commentary over the medium term. I don't think there is [indiscernible]

[Manik Taneja, analyst]

And the second question was -- I have a follow-up question with regards to the fact that you are seeing some weakness in terms of new volume. While in the current context, it may not be impacting R&D budgets on new product developments, et cetera, et cetera. But do you think at some point of time, this starts to essentially impact future or new model R&D retail spend as well?

[Sunil Phansalkar, executive]

I think we see the spend -- multiple market reports start there, and we have been talking about a reasonable drivers for R&D to continue beyond 2030. So nobody knows after 5, 6 years, but I think this is a good enough visibility in terms of a mega trend [indiscernible]

[Operator]

Our next question is from the line of Rohit Singh from [ Investment ] Advisers LLP.

[Unknown Analyst]

Congrats on good set of numbers. I have 2 questions. One is on this QORIX joint venture, right? So see, we understand that it's a middleware business and stuff, right? So if you can take a step back and then you can explain us what could be the size of this type of services and currently and how it can build up over the next 3 to 5 years, not from KPIT perspective, but as a service industry as such. So if you can spend some time giving that color?

[Kishor Patil, executive]

QORIX is actually a product that goes in between the application and the -- in the real -- literal sense the operating system. So many people call operating system that includes the middleware. But the difference between an operating system and middleware is the operating system usually deals with making the capabilities of the hardware available to the application, whereas a middleware handled many functionalities that the application needs or multiple application or a siting needs to make it work efficiently. So QORIX is a company that will focus on the product of middleware.

And it will actually not do anything from a service perspective. Most of the integration activities related to the QORIX will be done by KPIT.

[Unknown Analyst]

Okay. Got it. And what could be the space of that business if you can -- I'm sure that it's still at [indiscernible] stages maybe, but how big it can become?

[Kishor Patil, executive]

No, I think that typically a license revenue [indiscernible] product company, we expect it to be reasonably successful in the market with what we have done. Typically, it is 1:3, 1:4 ratio as normal, and there is a license revenue, the integration revenue [indiscernible]

[Unknown Analyst]

Okay. Okay. Got it. And secondly, on your hydrogen fuel technology. Is there any updates? Are you going to monetize, your technology if so, are you near that opportunity or still you are at some way, distance from that? Any thoughts with the government? Any follow-up that you can provide?

[Kishor Patil, executive]

No, I think our [indiscernible] to work with OEMs. We continue to work with OEMs. We are engaged with few OEMs. And is at early stage of their technology and a lot of POCs, et cetera, we are helping our OEMs to realize this technology. The production program will come in due course.

[Operator]

Next question is from the line of Deepak Rao from Cuban Asset Adviser.

[Deepak Rao, analyst]

Some of the questions I have on Qorix has been answered in the earlier question. Now I just want know, you're saying that 1:3 would be the revenue. So this architecture middleware consulting is now 20% of the operating revenue, maybe half of that would be consumed as the middleware product revenue?

[Kishor Patil, executive]

Currently, what we do does not include any product revenue because, as I mentioned, the products will get ready by the end of the next [indiscernible]

[Deepak Rao, analyst]

Got it. Got it. And this from a respective of opportunity size, would ZF be originating business, especially from...

[Kishor Patil, executive]

So it's an independent company. So it has its own business development team.

[Deepak Rao, analyst]

So it's not likely that the customers might be from non KPIT customer base?

[Kishor Patil, executive]

Yes, yes. So it has independent clients, and they will go in the market. See the products, basically the nature of product business is, it goes to multiple clients. And it will go through. Actually, they will leverage KPIT as well as their ZF eco ecosystem. So -- but it will have its independent presence. And if you look at the opportunities in its own way. But that will create a percentage both for ZF and KPIT in their revenues.

[Operator]

Ladies and gentlemen, that was the last question for the day. I now the hand the conference back to management for closing comments.

[Kishor Patil, executive]

So thank you, everyone, for your participation. We appreciate that, and all of you have a great evening. Thank you, and bye.

[Sunil Phansalkar, executive]

Thank you, everyone. Thank you.