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KPIT Technologies Ltd
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Thank you, Margie. Good evening, everyone. On behalf of Dolat Capital, trust all of you are keeping safe, and wish all of you a very happy and prosperous Diwali. I would like to thank KPIT Technologies Limited for giving us the 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 very warm welcome to all on the Q2 FY '22 Earnings Conference Call of KPIT Technologies Limited. I take this opportunity to wish all of you a very happy healthy safe Diwali and a prosperous new year ahead. On the call today, we have Kishor Patil, CEO and MD; Sachin Tikekar, President and Board member; and Priya Hardikar, CFO.As we do always, we will have the opening remarks by Mr. Kishor Patil on the performance of the company during the quarter and the way forward. And then we'll have the floor open for questions. So once again, a very warm welcome to all of you, and I'll hand this over to Mr. Patil now.
Good afternoon, everyone. I'm very happy to take you through the results of this quarter and overall performance. So as you may have read, the revenue has grown 23% year-on-year from $65.3 million last year to $80.4 million this year this quarter. Generally, the growth has come across the geography, across the verticals, and most of the practices have grown during this period. The growth continued to come from T25, where there is almost 20% growth year-on-year. Commercial vehicles have grown faster. And overall, passenger car has grown about 18% year-on-year.In terms of profitability, we continue to have the fifth consecutive growth in the EBITDA margin. We have been in a position to expand this over the last 5 consecutive quarters. Our EBITDA margins have expanded from 14.3% last year this quarter to 17.6% this quarter. This has reflected into cash conversion, which has been extremely strong from INR 528 crores last year to INR 933 crores this year is the cash balance. So good liquidity looking at about 6 months of expenses for the company.Overall, the cash conversion has been 145% of the operational profit. And if you take out dividend and our acquisition expenses, it's 85% conversion to the operating profit. This profitability has been post a significant increase into our employee costs, which are on account of higher increments during this period, which we had given apart from special incentives, we have given medium-term incentives we have given to our employees.So with this -- with more than 1.5% increase in our overall wage costs as compared to sales from 66.2% to 67.5%, we have been in a position to expand the margins during this period. This has been possible mainly because of the realization improvement, per-person improvement, the mix of revenues, higher realizations and, of course, operational efficiency. So this has helped us to do that.There are 2 major announcement during this time, and I would like to talk about both. First is a strategic engagement with one of the European OEMs. We have signed a $52 million engagement over next 5 years. It is in electrification area. And we take the full ownership of this program and then actually subsequently, the maintenance of it. Electrification continues to be a very strong area for growth and area of spend for our clients as they are trying to ensure that they are in a position to really increase their number of models as well as the number of vehicles in electrification. So that is -- continues to be a big area for growth for us. Apart from that, connected area is also a area which -- where the clients are spending.So while we continue to focus on the case, which is both on -- I mean, area which is electrification, autonomous, connected, where we have significantly good capabilities and expertise and the scale, we believe that this will continue to grow. And over a period, you will see all the practices growing. And this continues to be the area of spend. But to increase our offerings in our targeted clients in the areas where they're spending, we are expanding the scope of our services. And during that, basically, one of the key area for services spending, as you have -- as you must have seen, is the software-defined vehicle, which is basically in terms of architecture consulting, middleware, operating system, et cetera.In this regard, we have announced a joint development of middleware platform along with ZF, and it's a significant one because most of the clients will spend in this area. The common investment will help us in 2 ways. One is it will allow us to go to all our clients and help them in building their own systems more effectively because we would have certain platforms, components, accelerators, which will reduce their time as well as reduce their cost, and we will be in a position to offer different business models. And the second is, of course, we will be in a better position to have -- do testing as well as do performance management of our systems because of the infrastructure, which will be available with -- from ZF as well as their understanding of the hardware and lower level operating system.So this is what -- this will help us to go to and almost we will be in a position to go to almost all our clients. So this is very important. And as I mentioned to you as we have been focusing on cash, this allows us to really expand our offerings in targeted clients.The -- we are also trying to expand our areas, which is -- third area, which I would say is into -- in terms of cloud and -- cloud as well as shared mobility or I would say, connected services over cloud. We will look for expanding our areas as I mentioned to you. During this quarter, we have done one acquisition, which is a partial acquisition, I would say, of FMS, where we have acquired 25% of the stake. This allows us to really get into one of the key clients in Europe, and apart from that, expand our scope of services in both connected as well as autonomous area in a different domain -- in a different service offering. We will continue to look at inorganic options for us, but largely to expand the service offerings so that we can expand our scope of offerings to our existing and our targeted clients.As we go into -- on the people side, as you know, the demand is -- overall environment is challenging, and it is -- demand is more than the supply for the people. I think we have experienced a higher attrition as compared to the last quarter by a couple of percentage. And -- however, we are doing 2 things. One is we are trying to manage the attrition without any -- without minimal disruption to the client servicing, which -- where we have increased the capacity to fulfill significantly. We have more than doubled our capacity to make offers for -- in a week. We are also creating multiple smaller centers and really attracting people from wherever they are available. So we are doing all those kind of a thing with really minimal or may I say, no CSAT impact on the -- of clients. Actually, during this time, our CSAT ratings have gone up, but we are very conscious of the fact that this may not be tenable if the attrition keeps at a high level.So we have taken a couple of very strong steps. The first step is very -- I mean relatively very high increments as well as incentives to employees, which are -- which accrue to them over medium term. The second thing, as we have been -- as you know that we are a net talent creator, we have been investing into creating a competency in this domain -- specific domain, creating that expertise. I think we will -- we continue to do that. And that will accelerate -- that gives our people opportunity to learn new skills as well as take different roles and make it an exciting technology career with us. So we will continue to do that.And last but not the least is basically development of people through rotations and giving them different type of opportunity within the company. So we are doing all this, and we are very confident that in next 4 to 5 months, we will be -- we'll get the acquisition under control. And of course, we'll continue to improve our performance both in terms of delivery as well as engagement with clients. While we had done a good job during this quarter, we are taking some of these steps proactively.So overall, if I look at in the future, we see a very positive demand environment. We have shared in the past that many of the consulting companies have said that they look at 8- to 10-year cycle of 10% growth in engineering. We also see that in spite of challenges, which has been there on the chip shortage, et cetera, which are more to do with manufacturing, the companies have been investing and increasing their spend actually. And you might have seen those announcements in the software -- specifically into software-defined vehicle and the new architecture as well as the domains -- case domains, as I spoke about. So we believe that this trend will continue. And so we see a very positive demand environment over the period.In view of this and in view of the strong pipeline we have, we have increased our -- we have improved our outlook for the year between 18% to 20% revenue growth; and profitability, EBITDA growth of 17.5% from 16% to 17% range we had given in the -- at the beginning of the year. So this is what I wanted to cover about this quarter.
Thank you. We can now have the questions, please?
[Operator Instructions] The first question is from the line of Vimal Gohil from Union AMC.
Congratulations on a good quarter. Sir, my question was regarding your growth rate in this particular quarter, while the growth rate is well appreciated. If I were to look at your revenue growth rates across practices, there are a couple of practices which have actually declined. And if I were to look at slightly longer-term trends, most of the practices like powertrain, et cetera, they've been volatile on a quarter-on-quarter basis. How should we sort of understand these trends on an overall basis? You -- in your comments, you just mentioned that going forward, you are looking at broad-based growth, right?
Yes.
So going forward, should we assume that all your segments like powertrain, ADAS, connected vehicles and the other segment will grow in tandem? And if you could just specify what was the reason behind the ADAS and connected vehicle segment declining? Post which I just have one more question on the balance sheet.
Yes. So let me give you a broader answer to this question. So as I said, first is there is really a trend, which is in terms of spending in this area by all the OEMs. Now individual OEM prioritize and also the individual projects come in a quarter or later, may not be there -- some new projects may not come up in a quarter. But if you really look at certainly in the next few years, next at least 3 years or so, I see electrification as the strongest area in terms of domain which is being spent.As you probably know that, while -- I mean there has been many companies which are -- they have been catching up in terms of electrification, which is -- right, if Tesla's about 0.5 million vehicles. I think there are now 2, 3 OEMs who have crossed 350,000, 400,000 vehicles in a year. So there is a real investment in this area to increase the presence and bring them into market. They are growing at a much faster rate.So the second part, of course, connected. Again, spend is happening in this area, specifically because the OEMs want to really earn revenues from these services, which they want to come -- which they want to provide to the passengers in a vehicle. So there is a spend both in terms of cloud connected services in that area that is increasing.Now in ADAS, in my -- what we have seen is if you look at a few years back, there was a high growth. Currently, I think many of the OEMs have prioritized Level 4 and 5 of AD towards electrification. But we see a good pipeline of ADAS. Not only that, there are new offerings which we're bringing, and I talked about FMS in some of this, which are a different type of offerings which will probably improve our also long-term engagements.So we see -- the third area where we are now seeing growth is also body domain which are -- again, with the new architecture, body domain is also becoming very important for the experience of a client when he is traveling. So with all this, I think we see growth across the domains. In a particular quarter, something may come up, something may go down. But I think that -- I mean we cannot explain. Year-on-year, if you look at it, most of the services have growth.
Right. Sir, just to sort of give you some trends. So if I were to look at ADAS as a service line, I think in FY '20, if I were to look at the average run rate, you were at $17 million approximately, where you had 2 very strong quarters where you had almost $20 million. Today, we are at about $14 million, $14.5 million. And I mean, my sense would be that this has been an area where customers have spent or the spend has increased, if not -- or at least has remained stable, if not declined. So what would explain our sort of -- our decline in this particular practice over -- FY '20 over the past few years?
So there are 2 parts. One is, I would say that, as I mentioned to you, there are some larger clients who did prioritize to electrification over last 1.5 years, which I have mentioned in our earlier calls. But more importantly, in our case, it has not really reduced to that extent as it appears. Actually, we have moved a significant part of on-site to offshore during this area.And because the budgets -- and of course, I have also explained that initially, we build these practices and expertise on site. And we were in a position to, of course, charge at much higher rates. And over the period, I think in this situation, we were in a position to move a lot of work offshore. And that is the reason the volume has not really significantly changed, but certainly, the revenues have gone down.I do not see that as a big challenge because most of the clients are going towards L3 kind of a situation. And we see a reasonable pipeline in this area. But I may say that high growth in this area will come after about 18 months -- 12 to 18 months. Not only that, the new architecture which I'm talking about or the middleware, that is very, very much connected with -- that is very much connected with autonomous. The performance of the system has to really match in case of autonomous systems. So over the medium term, I don't see any challenge in that.
Okay. So probably in the shorter run, you might see some underperformance vis-à-vis the company average in these 2 areas. Would that be a fair assessment to make?And the second question, if I may, on the balance sheet. So what I noticed is you have a fairly chunky sort of a liability number. So in other current liabilities, you have this INR 234 crore number, which is almost like 10%, 10.5% of sales. If you could just explain -- what I believe is these are probably advances from customers, and you can correct me if I'm wrong. Will this sort of sustain? Because at this level, you will have almost a negative sort of a working capital cycle, which is unheard of in the IT space as such. So how should we look at that area?
So if you look at our current liabilities, they consist of trade payables and lease liabilities. And these are normal course of business here. The trade payables include employee liabilities, the normal creditors there. These...
Ma'am, actually, I was referring to the other current liability number, which is INR 234 crores in H1 of '22 and INR 210 crores in March '21.
So other current liabilities will include not only the advanced revenue, it will also include some bit of security deposits for the lease premises or statutory remittances or some other transactions. So it is not only a combination of only one portion of the revenues here.
Ma'am, how much would be your advance received from customers in this overall INR 234 crores?
It is not a significant portion is what I can say right now. Our revenue recognition policy is also published there. And we do account for the unearned revenue part basis the policy.
So is it fair to say that given the fact that you have such a large liability portion, your overall working capital, I mean including these liabilities, will probably stay in the negative area or...
I think it is difficult to say that whether it will stay. Obviously, it will change a bit as we move ahead and as these come down. So to maintain it at the current level -- to say it will be the current level is not a good thing. But of course, the liabilities will go down a bit as we go ahead, and the working capital changes will be seen.
But we'll remain focused on cash realization as compared to the operating profit. I think that is the basic area of concern.
Right. Anything -- I mean, obviously, you are at negative. I mean anything over and around 10% is fine. I mean that would be in line with what the industry does. So I'm not saying that we are -- even if we increase to that level, we are fine, but I'm just sort of -- is there any positive surprise that would come up from here is what I was looking at?
No. No, no.
Fair enough. Fair enough, sir.
So just one thing, one of my -- I mean my colleague thought that you mentioned that in these 3 areas, growth will be dampened. Is that what you made a statement? I thought it was...
No. So what I've read from your comments is probably ADAS will -- the growth in ADAS in the short run should be lower than the company average, whereas powertrain, wherein your electric vehicle practice is situated, that will see a robust growth going forward.
Absolutely. That is fine. That is fine.
So the growth will be offset?
Yes.
So overall numbers would be thereabout, I mean, as per our expectations?
Yes.
But sir, sorry, one last question on other expenses. There has been a sequential decline of 6%. What explains that?
The other expenses will include a lot of expenses in terms of facility-related expenses or some bit of expenses we must have incurred on vaccination drive. So there may be some changes relatively lower from quarter-on-quarter.
[Operator Instructions] The next question is from the line of Karan Uppal from PhillipCapital.
Congratulations on a very strong set of numbers. Sir, 2 questions from my side. First is on the macro part. So we are hearing lots of new stores on the chip shortages, which is discussing the global supply chain of the auto industry. So are you seeing any impact of it on the R&D spending and the budget OEMs spend the Tier 1s are committing for, let's say, next 3 years or next 5 years? That is one.Secondly, great to see a large deal of $50 million in the EV space. So is the overall revenue recognized equally in the 5 years or is it front loaded?
Okay. This is Sachin Tikekar. On the chip shortage, we all know that chip shortage across the industry, not just in the automotive and mobility has been a problem. That's because of the demand-supply mismatch and different countries closing down at different times. Most of the OEMs have prioritized their vehicles so -- because they are not getting enough chips.The good thing is the demand is there from the consumers for the vehicles. And we are probably peaking out in terms of the shortages. I think OEMs are figuring out different ways of making the chips available. However, the problem will continue through 2022, and it will slowly normalize. Having said that -- and at some point, we'll see the sales go up as the chip shortage goes down because the pent-up demand needs to be met. That's the macro picture.Now what does that mean to a company like KPIT? What we have seen is throughout these ups and downs, all the OEMs and the ecosystem players are committed to making investments in software-defined vehicles. That's the future. Everybody is trying to play a catch-up game. So all of them have reduced their expenses on the other side and have made a long-term commitment to make investments in software-defined vehicles. In fact, we have seen increase in inquiries and demand overall through the chip shortages. And we believe that for the areas that we specialize in around autonomous, connected and electric that based on the software-defined vehicles, including the whole software architecture and so forth, we think that the demand will continue to be robust at least for the 3- to 5-year horizon.So net-net, of course, the macroeconomic impact is there, and there will be some ups and downs over the next few quarters. But what it means to KPIT is a continued demand for the services that we offer. Does that answer your question?
Yes. Yes. So just to conclude, no impact as there are no deferrals from the OEMs and Tier 1s on the project time lines and anything?
So we are saying that we are seeing more and more interest.
Right. Right. Cool. And next question was on the large deal in the EV space. So the revenue will be recognized equally in 5 years? Or is it front loaded?
Somewhat, I think it's in equal installments over the next 5 years.
It's a milestone-based. I think it will depend upon how and when the milestone come.
Okay. Okay, sir. And last question is on the commentary you had mentioned on the new deals which you are seeing in the -- primary in the new software architecture domain. So any progress on that front?
So we have already started working with few of the programs already. And these are the initial stages. This can scale in future. So I talked about our focus on increasing our presence in this area.
[Operator Instructions] The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.
This is Shyam from Sundaram Mutual. Broadly, from a slightly medium-term perspective, this ZF partnership per se, does it fill in any gap on our offerings per se? You did talk about new middleware solution. Is it something that we don't have at this point? And how does it expand our addressable market opportunity? Just trying to understand a little bit more from a, say, a 2- or 3-year perspective per se. Also, is there any investment to be made by KPIT towards this other than the manpower costs that will be incurred in the R&D? And the other part of the question on the FMS acquisition, sir. Is it more of a customer acquisition? Or are we also acquiring new capabilities along with this? If you can please share your thoughts on that per se. The -- just an added question here is this new large deal, what we...
Can you please keep it to 1 or 2 so that I can answer?
Yes. Yes. Sure, sure, sure, sir. Yes.
So on the middleware perspective, I think we basically have already been investing. As you know, long back, we started with AUTOSAR, and this is much beyond AUTOSAR. Then there is a different thing called Adaptive AUTOSAR, and there are multiple other elements which creates overall middleware, which basically integrates different parts. And it goes across the application as a pipe.So this is an area where we had some presence. I think along with ZF, basically, we will be in a portion to increase our speed in developing this as well as developing our expertise and capabilities because they will bring their own capabilities on the system side. So that is what we are looking for. And we see this as a quite a growing area in next few years. As we discussed, 2024-'25 is going to be a big growth area -- is a time frame where most of the OEMs wants to bring this kind of architecture in their new vehicles. So this is very critical for their delivery. So in -- maybe it could take another 12 months or so. But I think beyond that, you will see significant opportunities and the business going up in this area. So that is on that part.On the FMS side, I think it is certainly one -- it gives access to one client, certainly in Europe, one OEM. But I think the -- as much important is also it gives us certain capabilities in autonomous with which we can build a few different offerings, which will be more long-term kind of revenue streams for us. So that's why FMS brings both these things to us.
Understood, sir. Understood, understood. Sir, and just one clarification. The new large deal that we have signed, is this an existing client or customer? Or is this with a new OEM per se?
Our focus is on T25 largely. And most of the large deals, we are putting in these T25 clients.
Understood, sir. One question on the cost side. You have called out subcontracting costs came down this quarter, and we have been structurally trying to reduce subcontracting costs per se. So just if you can help us understand, how much would have been subcontracting costs this quarter and last quarter? Absolute number or percentage sales would help. So just to understand our -- all our efforts we are putting in to keep the costs under check per se.
So it is not a major cost. If you look at as a total percentage, it would be roughly around INR 25 crores to INR 30 crores -- INR 25-odd crores a quarter.
Okay. Okay. And has this come down, sir? Because that we have called out as one...
Yes. It has come down over the years. We are having more -- and as work is also moved offshore over the last 1 year, I think that has come down.
Okay. Understood, sir. Sir, one question, if I may ask, sir, on the passenger vehicle side, if we see, generally, our revenues has been largely flattish compared to pre-COVID. You did explain in depth about how we have shifted a lot of AD/ADAS to offshore, and that has in turn led to a slightly -- I mean, lower realization, and therefore, not the volume impact. So is this the same that is to be read for the passenger vehicle revenues as well, which has remained, say, $58.3 million in Q4 F '20 to $59.7 million now? So I mean this on-site offshore shift in AD/ADAS, that would have been one major factor for the revenues remaining just about -- slightly above the pre-COVID level?
I would suggest you to keep to a certain guidelines. We are giving a year-on-year number. I think it is good to look at it because otherwise, quarter-to-quarter, things change, and I will not be in a position to answer and analyze. We keep on track year-on-year, and we keep an internal track month to month.So I think I would say that passenger cars, most of these areas will be pronounced spending in the passenger cars. And we also believe the commercial cars will follow very quickly. Actually, in some areas like autonomous, commercial cars -- commercial vehicles will come very strongly soon.So overall, it is -- that is the trend we are seeing. I think it can change from -- I mean, one way to look at it, how the commercial vehicles have grown faster; second way is to you think it [indiscernible] passenger commercial -- passenger vehicles [ grew small ]. So I think I would just request you to keep it to year-on-year.
The next question is from the line of Kshitij Saraf from Tusk Investments.
Congratulations on the performance. My question is with regards to the client concentration of KPIT. Given that we plan to focus on the top 25 clients, what would be the incremental sort of scope of work going forward because KPIT is focusing on these clients? Just wanted some sort of an idea of the size of the market that KPIT is trying to address as we go forward.
Yes. I mean I have -- let me give you 2 parts. One is, I talked about how we are expanding our offerings to existing clients to increase the addressable market. And we are firmly taking where the priority of the client is and where they are trying to transform themselves. We are adding a couple of offerings or services in this area.So naturally, within these focus areas, we would like to expand our offerings. But to give your question, I think we can -- any -- I mean most of the OEMs are typically around, say, $100 billion revenue, the larger ones. And then the -- most of them are spending -- even the smaller one are spending significant amount on technology.So every client has a reasonable potential of OEMs becoming $50 million, plus a reasonable size OEM has a potential to become that. And the Tier 1s are going through transformation now in that there are semiconductor companies who have been added. So it's quite a reasonable and significant marketplace. And we have -- I have no doubt we can grow 3x with the same focus.
The next question is from the line of Mohit Jain from Anand Rathi.
Just 2 questions. One is any visibility that you can share on FY '23 from the current backlog? Or now that you have signed a large deal, what kind of visibility can you share? That's one. And second, on this deal ramp-up. So what kind of pipeline do we have currently for large deals? We initially had 2 -- I think 1 or 2 -- 2 or 3 we signed last year. And then there was this gap of 2, 3 quarters, and now we have started signing again. So what should we expect on that front?
So there are 2 points I may want to talk about is I mentioned to you that all these T25 clients, we are trying to really put the deals which are the large ones. So I -- let me put it like this. Sometimes you may not put it as a part of one engagement, which will be like a $50 million-plus, but the program will deliver those kind of revenues once we are in. And that is the focus we have, very deliberate.I think while I may not have exact number, but at least 2/3 of our revenues come from these kind of engagements. So in some cases, we get a full engagement ownership, and we are in a position to say it is a large deal of $50 million. In some other cases, we are not in a position to say while the revenues will be in the similar range over a period. So I think to your point, I think we are very comfortable on that front. And most of our engagements are moving in that direction. So to answer your second question, I talked about medium-term outlook for the company, although let me put it to market environment. We see it very positive, market environment. Our pipeline is very high. And I may say that there are so many discussions happening, which specifically in these areas I talked about, which will get concluded in the next 4 to 5 months to some extent, some of them, which will further improve our pipeline.So overall, I see a very positive demand. And we give any specific guidance only at the end of the quarter 4. So we'll continue with the practice. But I think we have been saying it, that we see a very positive demand environment.
Sir, just a follow-up on the 2/3 remark. So can we broadly assume 65%, 66% of our revenues are sort of recurring in nature?
I mean you can assume yourself. But I...
From an understanding point of view while...
The way I look at it is that is how -- our repeat business, if you look at it, is more than 85%, right? So -- and actually, maybe a little more because 85% is largely from the T25. So if you look at it, it may be 90% of our business will be a repeat business. So a large part of this, as I said, engagements or continuing engagements on the same programs.
The next question is from the line of [ Anita Mittal ] from [ Emress Research ].
My first question is, why there is no growth in profits from America while profits from rest of the world is increasing? So can you give me some reasons for the decline? As revenue from America is increasing, there is degrowth in profits. So can you explain?
So I would not encourage you to look at any revenue or profit according to the GOs because many of our clients are global. Our engagements goes -- span across different, if I have to say, different regions and actually now also across practices. So I would like you to look at only consolidated profit.
Okay, sir. My next question is, when are you expecting the commercialization of strategic engagement with the European car manufacturing electrification segment? Can you tell me the time period for revenue generation from this?
I didn't understand your question, please.
The question is the large deal that we have announced, when does the revenue start coming in?
Oh, that should start during the quarter, I think, in next month or 2.
Sir, my last question is regarding Future Mobility Solution acquisition. Can you probably give the revenue share that you are expecting from the acquisition from -- for next 2 quarters or for next year?
See, currently, we have acquired only 25% of the company, and we expect that we will acquire the rest in the next 18 months. And it is based on milestones. That's why we had moved in that direction. Otherwise, we would generally acquire majority immediately or otherwise.So while we have that right, there are certain milestones which have been there, and they are not pure financials. It is based on certain financial plus qualitative based. So I cannot give you a clear answer to your question, how much it will create in the next year or 2. But roughly, any engagement we take -- anything less than $20 million, $25 million over 2, 3 years is not worthwhile for us to pursue.
The next question is from the line of Nitin Padmanabhan from Investec.
Congrats on a great quarter. Just a question on -- the demand, obviously, is pretty strong and -- in terms of visibility, and overall thought process over medium to long term is pretty resilient. Completely understand that part of things. Where I wanted your help is in terms of trying to understand, by when do you think we'll see growth to be pretty broad-based?And the reason I ask this is despite demand being so strong, it appears that if I just split either passenger vehicles or the top 25, it looks like growth relative to the overall business on the top 25 is lower than the overall company and for connected. One of these always seems to be a headwind. So by when do you think -- is there anything in client behavior that you're seeing within our base that is sort of softer? Or do you think that this is just transient and things that you'll actually see starting broad-based as we go going forward?
See, there are technological cycles also. As I mentioned to you, autonomous people were [indiscernible] higher spend initially than people how they spend in Level 4 and Level 5 for the infrastructure is [indiscernible] so quickly. So for example, our -- if you look at any other areas, connectivity, there is a shift in the demand from conventional infotainment systems towards e-cockpit. So there are technical cycles, there are prioritization which happens based on client behavior.So there are multiple angles to it. But to your point, from our perspective, we see an opportunity in each of these domains significant. That's the only reason we do it because it doesn't -- unless we see any area which could grow in a medium term up to $100 million, that doesn't really allow us to make investments and build separate practices. So from that perspective, all of these areas are very relevant from that perspective.
[Operator Instructions] The next question is from the line of Karan Uppal from PhillipCapital.
Sir, one is on the capital allocation. So we have seen very robust cash generation in last 3 quarters. So what are your plans in terms of deploying it? Are you preserving it for M&As or looking to pay out through buybacks or dividends?And the 2 clarification. One is on guidance. So guidance is excluding the partner contribution. And secondly, what's your hiring target? Yes, these are the 3 questions.
Yes. So I will go -- so the guidance is overall, but we have not integrated partner yet. So it will have a very minimal impact on that, if I may say, during this year. The second...
Capital allocation.
Capital allocation, we looked at multiple things. One is, of course, dividend. We have revised our policy just last year. And in our opinion, whatever is the -- comparable companies, we have increased our dividend policy to that extent. We will get there as we have -- with the improved performance sooner than later, we will pay the -- within that policy, we will follow the guidelines.On any other part, we felt that currently looking at a higher demand, it makes sense for us to really allocate the money more towards acquisition of talent and acquisition of expertise rather than anything else. So we would allocate more resources for the acquisition side. We are not going to go for any major acquisitions, but we want really niche skills to come in, in the organization, a very front-ended expertise to come in, in certain areas as well as basically talent and expertise in certain areas so that we can expand the new areas, which we can offer to our existing clients. So in that way, increasing our landscape with our clients. So that is how we have thought about capital allocation.
Third question was on hiring targets.
I didn't hear it.
Yes. Last was on hiring targets for FY '22?
Yes. So we don't give our headcounts and hiring targets, but let me tell you that we have increased our capacity to hire by about 2x what it was 6 months back, naturally, both for addressing the attrition as well as looking at the growth. But we have very significant in the last 2, 3 years, if I look at it, this is the largest hiring we are doing both from campus and off campus.
[Operator Instructions] The next question is from the line of Vimal Gohil from Union AMC.
So my question was on the employee cost. The 6-odd percent sequential growth that you've seen, does that include the subcontracting cost or the subcontracting cost goes in the other expenses for us?
It goes in other expenses.
Other expenses, yes.
Okay. And you highlighted that the subcontracting cost has come down, right?
Yes.
Okay. Okay. Fair enough. And would it be fair to say that -- I mean I'm not asking for any guidance for hiring. But whatever incremental hiring that the company does, a large portion of it would be freshers in order to sort of broaden the pyramid and improve profitability?
There are 2 areas. One is, certainly, we hire people from freshers, not only in India but even outside India. That is the point number one. And point number two, we are adding to our high-end architectural capabilities, though few in numbers, but very important from our growth as well as consulting-led engagement with the clients.
Right. Sir, whatever you have to backfill for your attrition, is that coming at fairly -- the replacements are they coming at a fairly high cost right now?
Well, replacement largely comes through pushing the pyramid, replacement, of course, other than only key areas like architectures.
Right. Okay. Fair enough. So you're not finding it challenging to replace people at but -- and they are coming at a higher cost. So that is not a challenge that you're currently facing?
It is not -- as we talked about, we are a net talent creator. So we have an internal way of building the talent because there are very few companies from where we can hire in these numbers.
Fair. And no challenges on completing projects at this point in time because of that?
Not about -- we do not have any impact on CSAT. Actually, it has gone up during the quarter. But we are aware that we need to control the attrition. So we have taken the firm steps.
[Operator Instructions] The next question is from the line of Rahul Jain from Dolat Capital.
Any incremental inputs you would like to give on this Future Mobility transaction? What is the payout? What is the expected time line and tranches on it? And key rationale of this transaction given the minority allocation at this point?
I think I'll give you the numbers because this is all -- it's in public announcement, actually.
So see, I mean, if you look at it, we said that we'll acquire 25% equity stake right now and the balance, 75% over a period of 3 years. That is what we will do, and this is the basis, as Kishor explained earlier, on certain qualitative as well as quantitative targets that we have and milestones that we have to achieve. The majority stake should happen anywhere in the next 12 to 15 months.
See the -- basically, we wanted to -- because it's a pretty, if I had to say, a young company. So we wanted to ensure that we -- there are 2 aspects we were looking at. One is naturally a specific engagement with one of the key OEMs in the -- Europe as well as some of the offerings we wanted to build for Future. So as long as they don't -- as long as they deliver on both these, we will be in a position to acquire the majority. That's how we have structured the transaction.
Right. And any overall view on M&A? The reason of asking this is our past experience, it has not been very exciting.
I would really question this. Basically, we acquired MicroFuzzy in about...
2017.
2017. And the revenues have gone up by 5x actually.
More than that, actually, yes.
5x. You can look at it. And the profitability has gone significantly higher. So I don't know if you carry anything from the very old IT side, anything I don't remember. Actually, our overall experience has been very positive.And there are 2 more important points for us. One is we are not looking at anything major acquisition or any too large an acquisition, number one. Number two, we are actually -- in all these cases, we have a very significant understanding, and the client segment is the same. We are not looking at increasing the client segment. So we have a very good understanding of the clients where we are doing it.Third thing is we have increased and as you have seen in -- whether it is in terms of cash or many other areas, we have really strengthened our processes internally so that we can integrate such acquisitions. So I think we are very confident.
As there no further questions from the participants, I now hand the conference over to the management for closing comments.
So thank you, everybody, for your participation on this call. And once again, wish you a very Happy Diwali. Take care. Stay safe. Bye.
Thank you. On behalf of Dolat[Audio Gap]