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KPIT Technologies Ltd
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Ladies and gentlemen, good day, and welcome to the KPIT Technologies Limited Q3 FY '20 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 from Dolat Capital. Thank you. And over to you, sir.
Thank you, Faizan. Good evening, everyone. On behalf of Dolat Capital, I would like to thank KPIT Technologies for giving us the opportunity to host this call. And now I would like to hand this conference over to Mr. Sunil Phansalkar, who is a VP and Head IR at KPIT to do the management introduction. Over to you.
Thanks, Rahul. A very warm welcome to everybody and good evening. Welcome to the Q3 FY '20 Earnings Conference Call of KPIT Technologies Limited. Today on the call, we have Mr. Kishor Patil, CEO and MD; Sachin Tikekar, President and Board Member; and Vinit Teredesai, CFO. As always, we will have the opening remarks by Mr. Kishor Patil on the performance of the company and the outlook, and then we'll have it open for all of you to ask questions. So a very warm welcome once again, and I will hand it over to Kishor now. Thank you.
So good afternoon. I'm very happy to welcome you on the first anniversary of the new KPIT. Post the incarnation of the KPIT, when we decided to focus only on the mobility software, it has been exactly one year. We are very happy to take you through what we achieved during this period. So for the year '19/'20, YTD until December, for 9 months, we had 15.5% constant currency growth year-on-year. This -- the EBITDA has been stable at 13.5%. Apart from other things, I think one important thing we achieved is the effective tax rate has come down. With that, the EPS is at INR 1.56 per quarter, INR 6.25 annualized, on fully diluted basis. The net cash position has really improved. I think our DSO has consistently come down quarter-on-quarter. We are at 64 days, the lowest till now. All short-term debt have been paid. And with this, based on the back of this consistent performance over this quarter, we decided to declare an interim dividend of INR 0.55 per share as against INR 0.75 per share for the full year last time. The other important -- very important part when we started to focus on mobility is we have to be a net talent creator. We are one of the largest player in the mobility and the new technology areas, and that's why it is very important for us to really focus on building of the talent and building the competence of the talent in the new technology, because there are not many companies from where we can hire. We're very happy with the overall engagement with the people. We have -- our attrition continues to go down, and we are one of the lowest in the industry. And our attrition is on a very low double digit. There are a few things, I believe, we could have done better than what we did. Even though our growth has been, I guess, the leading growth in the industry, still we could have done better. I think in some of the practice areas where there is a very high demand, we did extremely well. And there are some other areas where also the environment is good, I think, we could have grown better in some of these areas. We are putting together our overall system so that we can achieve that growth because very well -- we are very well positioned in these areas as well. And there is a significant demand in the industry for these practices also. Second thing we could have done better is also on the profitability. While we will be in the range what we mentioned, but I think the important part is during this period, on a couple of counts, one was the high increments we gave to the -- in the -- to our people, and it was -- I must say that it was more than what we had budgeted initially. And we did that in order to really make sure that we retain the talent and build the talent to the next level. And the second thing we invested was really into certain building of certain capabilities, and that, too, mainly outside India, some of these areas. And I think we could have -- we could have posted a higher profit but -- for this investment, but we are very sure that this investment can be leveraged very -- in a better manner over next year. Overall, looking at the environment, I think there are opportunities across the practices. There are opportunities across the vertical, whether it is a passenger car, commercial car or new mobility. Across the geos, it is in Europe, it is in Asia, it is in U.S. Overall, there are also large deals opportunities which we are getting from, which are in the pipeline. What we are very focused on for -- as a company is on the profitability. We want to ensure that we really deliver higher profitability in next year and years to come. And that's why we are very focused on closure of this deal. We want to ensure -- bring our focus in closure of this deal, but we also want to ensure that we will and execute this deal's profitably. So this is in short where we are after a year, after since we formed the company. And I would like to thank you for your support and would be very happy to take your questions.
[Operator Instructions] The first question is from the line of Baidik Sarkar from Unifi Capital.
Broadly, 2 questions. Firstly, if you could help us understand how your IP revenues performed this year? If you could quantify that, produce number and trends in growth. And how much of a margin impact that's been happening over the last? And secondly, if you could please set the context of the sequential decline we witnessed in the U.S. and Asia. Are these structural client-level weaknesses? Or was it projectization?
So the first question is the IP revenue.
So let me take the first question, IP revenue. I think as a company, what we have decided is to -- while we have IP revenues across the practices, we have decided that we are positioned to be a software integrator for the end customer. And the go-to-market for us is to go with the full solution, and we do a specific value proposition. One is quick to market, so we can bring the customer's product to the market quicker. And second will be production-ready, because we are one of the very few companies who have delivered a large, complex production-release projects. So in a way, a little bit of a -- in a way, we are not focusing on IP per se, but we are focusing on IP as a means to deliver the projects quicker to the customer. That's the change we have made consciously. Of course, there are certain products in some areas. We do have specific IP revenues, but that's what has been a change in our go-to-market efforts.
The second question is U.S. and Asia, the decline in [indiscernible].
If you take a view on both geographies, I think Asia, the year-on-year growth is very healthy. U.S. also slightly on the lower side, but U.S. growth has been on the lower side compared to Europe and Asia. We don't see any issues that will stop us from continuing to have growth in U.S. as well as in Asia going forward. It's just some of the programs getting started or getting over. It was a question of that. But if you -- our view is that if you take a year-on-year view, that's the right way of looking at it. And we believe that, that trend needs to continue going forward.
Sure. Last question before I get back. So is your visibility for the next, say, 15, 18 months demonstrated on the basic -- on the basis of firm committed executable order book? Or is it -- or are you hopping on the back of relationships, which lead you to believe that project -- that new projects would eventually come up? I'm just trying to understand what gives you the visibility of growth, say, over next 15 to 18 months.
The visibility of growth comes from 2 factors: One is we are sharply focused on T25 as customers. And we have very deep relations across, and we continue to engage with them, and we are working on the production programs, which are a multiyear. That is point number one. Point number two is the overall opportunities we are pursuing at this point of time, the sizes of the opportunities, I think that is the point number two. Based on this, we have this confidence overall of positive demand environment.
The next question is from the line of Nitin Padmanabhan from Investec.
This -- now you spoke about large deals in the pipeline and opportunities there. When you look at those deals, what would be the rough sizes of these deals? Some -- any context in terms of how one should think about the size of these deals?
Okay. So this sizes typically are 4- to 5-year kind of a time frame. And they are double-digit million dollars.
Okay. Sure. The second one was -- so this year, you did highlight that this is an industry where we are a net talent creator, and we actually had a higher compensation increase in the context of that. And considering the scale that we have, wouldn't that also be the case going forward? In that context, if you think about it, the compensation increases, considering that everyone will be vying for the talent, you might need to have high level of compensation increases. But do you think we'll be able to get an equivalent in terms of pricing increases from clients to sort of cover that? Are we seeing some sense in the market that clients are willing to pay more to basically cover up for wage inflation?
I think this is something we are really going into details in terms of every offering. Every offering is a bit different. And wherever we have these production programs or where the customers depending on us to deliver a product to his customer, I think we are in a position to have a decent premium. All other cases, our focus is to have a better productivity into services and building the tools and having a better productivity.
Secondly, if you look at it more and more, we are running more and more programs. And as Mr. Patil mentioned earlier on, our focus is to sort of help accelerate time to market. For that, we are using our tools and accelerators to do that. That also helps us to continue to improve on the profitability side, at the same time creating larger value for our customers.
So -- but do you think in terms of -- while the productivity is something that we have always done reasonably well, on the, what I call, pricing side, do you think it'll start -- we should see some benefits starting to flow in going forward versus what we have seen this year?
Actually, I must say that our pricing is pretty different actually as compared to competitive pricing. I think, as I mentioned, our profitability impact is more on account of a couple of things we did this year specifically. And it takes some time to get an optimal cost in line with our investments, one -- both from the people perspective as well as some of the practices we invested outside India. But I would say, frankly, that it's a decent rate which we are getting.
Sure. Great. Just 2 data point questions, if I may: One is, should we assume the current tax rate to go as a standard going forward? And 2 -- also into the next year? And two, the depreciation seems to be inching up consistently. How should we think about depreciation overall for us? And what's driving this uptick?
Okay. So on the taxation front, you can look at our effective taxation rate for the next couple of years to be below 20%. That's the number you can take. And from a depreciation perspective, you look at it, the -- as we mentioned, our overall CapEx investment is in the range of 2% to 3% of our annual revenue. You have to look at -- the depreciation also now includes the impact on account of -- the changes made on account of the AS 116, which could impact effective April 1, 2019. So that is the second component of that depreciation. As we take more and more infrastructure of lease, there will be a certain impact coming up on that.
Sure. Is this over the last 2 quarters? We have seen the first quarter reset. But even the last 2 quarters seems to be growing ahead of revenue growth. So that's why I asked how should we think about that...
Yes. And Nitin, also keep in mind that we are relatively a new company. We are just 2 years old. Our entire infrastructure, both from a physical and IT perspective, we have made all the investments in the last 2 years. So compared to the competition, you'll always see that for the first few years we'll be in a slightly [indiscernible].
[Operator Instructions] The next question is from the line of Madhu Babu from Centrum Broking.
On the on-site investments, could you give us -- I mean, how many are currently in Germany and how many in North America? What is the local headcount in those regions? And what is the plan for the next 2 years in terms of on-site hiring?
So I just want to explain on this. It is not this -- so we have actually resources across. We have multiple development centers. One is in Germany. There are a couple up in U.S. One in Brazil, one in Southeast Asia, outside Germany and U.K., and there are -- one in Sweden, in China, in Japan. So we have multiple development centers across. There are -- in the normal course of time, normal course of business, people work with the customers from these offices. That is fine. But in -- basically, when we are building the new competencies, we made a decision to build a certain practices from Germany, specifically in Germany. And that's where we made a significant investment about -- and I think we have built it now, and we -- it's time for us to leverage across the world. But just to give you some number, I think, now we are in excess of 700, closer to 800 people there. And out of which, I would say not many of them, maybe 1/4 of them, may be working on the customer projects directly at the plant side. I think everybody else was. So at least 50% of the investment out of that is on technology development, which we of course leverage for projects to be delivered across the globe.
So 1/4 will be working on the client premises, and the other 3/4 would be working on delivery centers on-site on various client projects?
Including practices, including technology development.
So if I'm right, some of the new technologies on ADAS especially, and also how is the client comfort in sending it to offshore? Or is it predominantly the clients are asking for high...
No. So far, for last 12 months to 18 months, that was the issue because customers were not very comfortable sending it to offshore. Basically because these are new technology, they wanted it to be very close to them. But now they're getting comfortable in moving the projects, and we have moved many of these projects offshore.
Okay. And another one on the broader capital allocation. Sir, I mean, just on a strategic perspective, so we are one of the few companies on the single vertical focus. The technology refresh has been highest in the automotive space. So considering the steady cash accumulation on the balance sheet, would you look to acquire another vertical in any 1.5-, 2-year perspective as a part of diversification strategy?
We feel that even in mobility, we are in 3 areas: so pas car, commercial and new mobility. And apart from that, there are other areas of mobility, whether it is railways and there are some other terms. I think there are a lot of things to be explored, and there is enough diversity in terms of businesses within this vertical. But to your point, over the period, once we believe that we have clearly achieved leadership or a market potential in this vertical, then we will look at it. But I don't see it in the foreseeable future.
And last one on 4Q, do you expect the growth to come back on a strong footing? I mean this -- obviously, we had a [ further ] impact this quarter. And on the margins, do we expect a good recovery in 4Q?
I think we mentioned that overall demand environment is good, and this is that. And we have our outlook. So I think we should be. I mean, while we will be at the lower end of the outlook, we understand that. And that's what I expect. We had the opportunity to do better. And -- but we will be at the low end of the outlook.
[Operator Instructions] The next question is from the line of Dipesh Mehta from SBICAP Securities.
A couple of questions. First about the segmental performance. I think Europe has shown recovery on margin performance. So considering the Germany investment, which you earlier also alluded, how one should look at considering the revenue uptick, which is visible in Europe? Should we expect now it is sustainable or double-digit kind of margin coming back in Europe, which can help overall performance in terms of margin for us? That is question one. Second question is about understanding seasonality of the business. Now if one look at the segment which we report practices, so some of the practices as well as some of the vertical, which we report have seen significant weakness. Now if you can help us understand seasonality of the business because I think it is relatively new business, so if you can provide some perspective there.
On the first side, let me say that -- as I mentioned, I think we made those investments. And of course, we will see a better profitability in Europe, specifically on the back of 2 things: One is leveraging the investments we have made globally -- to be leveraged globally. The second is in terms of offshoring, which of course provide the potential to do more now. So I think based on this, you will see that. I think I would strongly suggest, as Mr. Tikekar has mentioned, to look at all our numbers on a yearly basis because there is always certain disruptions quarter to quarter for some specific project, customers. So I would say our plans on a community [ realty ] business are pretty consistent and in line with what we see coming future.
So if one look at on a Y-o-Y performance, your passenger car Y-o-Y growth was in mid-teens at the beginning of the year. Now we are slipping closer to high single-digit kind of thing. Similarly, if one look at performance in, let's say, some of the other segments, also we have seen those changes. So that's why I tried to get some sense about if you can provide some perspective. Or it is client-specific and which led to some kind of weakness in, let's say, passenger cars.
I think pas car will continue to lead the growth in the near future, and it will be followed by growth on commercial, so this too. And new mobility, we see opportunity but the size is small. So that's why I'm not particularly commenting on that. It's still an area which is new to the -- for us and also for them. So we will see growth for sure, but it's on a smaller base. But we see all growth in all the T25 customers. This year, good environment for us to grow, which is more dominant by pas car and then followed by commercial.
Because if one look at last year Q3, seasonality impact was not to the extent which we are seeing this quarter. So is there anything specific which played out this quarter? And which also led to our expectation also coming to closer to lower end of the guidance? So is there any change in the demand kind of thing, which listed from the beginning of quarter?
There is not much on demand side. There are some specific things like some projects moving to offshore, some projects getting emanated, like that. So I think -- see, even if we move more offshore, I think, hopefully, it improves the profitability. But sometimes, it can impact the revenue in the shorter term.
[Operator Instructions] The next question is from the line of Rahul Jain from Dolat Capital.
First question is more about the macro situation, given the lot of tariff imposition kind of a news flow that we heard during the quarter, do you see in your client conversation any trend related to that?
No. We have not seen any direct impact in any of our conversations yet. I think it is yet to be seen. There are multiple conversations that are going on across the countries, especially between U.S. and China and so forth. So right now, there is not much. Nothing different. Whatever risks that were there in terms of geopolitical risk, I don't think -- they have probably gone down a little bit rather than going up. So that part, we are not -- no significant difference in our conversations with our clients.
I think I was more referring to the European market, which was -- which happened a couple of weeks ago where I think existing 2.5% import duty was set to be going to 20%. That's got -- that's fair to watch, but I know -- if there's anything on that as well?
No, I think -- and frankly, I need to check on this specifically, but we haven't heard anything from one that our customer said.
Okay. Okay. Secondly, on the business side, on the couple of deals that we won, if you could share a bit more in terms of the scope, scale of some of the major deals that you announced. Which one of them -- which one of these are sizable? And any more flavor you want to give on that?
Yes. The first one is about Japanese OEM. This is -- we've been working with that OEM in the area of ADAS for several years now, even in connected vehicle side. What we have won is a large infotainment program for this OEM. So the relationship is very strong. And obviously, it's a multiyear, as Mr. Patil described, a large deal is a deal which goes across 5 years in double-digit million dollars. So this is one of those deals. And we believe that with this particular OE, it's -- we have displaced an existing partner in this area. So we are very hopeful of having significant growth, not only in the infotainment area but in some of the other areas. So that was about the Japanese OE. The European OEM in the ADAS area, it's our first deal with this OEM. So we -- it's a good sign. But as you know, we -- over the next one year, we really have to figure out how this pans out. The potential is significant if the relationship works out really well. So this was one of the pursuits that we had during the course of the year, and we are happy to close that deal. So in general, all of these deals, all 5-year plans are -- there are 3 of them that are what we call large deals. And then the other 2 are essentially net new pursuits that we had during the course of the year, and we'll see how things unfold with them over the next few quarters.
Right. That's it from my side. Just one more input. I think this is important that you added a new client because given our deep penetration already, we would appreciate if you could share which deals are new client for you going forward in your presentation. That would be helpful.
Yes. So during this period, actually we added 4 strategic clients to our customer base. So we have a T25 strategy. And we used to report on T17. I think we will soon start reporting on T21. And we have added 4 strategic customers to the list.
[Operator Instructions] The next question is from the line of Kunal Sangoi from Aditya Birla Sun Life.
So my question is with regards to the profitability. We have -- during the analyst investor meet also, we had highlighted that our profitability growth will certainly be much better than the revenue growth going forward. And given the industry trend, where there is a more platform for us, it is a platform strategy and more platforms are getting adopted and -- which we expect it to increase for across verticals. How should we look at the overall gross profit -- gross margin for us?
So I think that I mentioned to you, I think, in my commentary, that a couple of areas we could have done better. And one of the reasons I did say profitability, we could have increase more. And I think we did a little bit investment ahead in terms of people. I think we made the increments and the investments, which were made outside. I think, as I -- as we mentioned, I think our proposition to the customers currently is more on the first to market, quick to market. And the second is the production bearing. And the platform and the IPs and all other things become a part of this. So that's how we decided because finally the proposition is what the customer is looking for. And most of the customers are looking for adopting this new technology quicker. They want to bring their products and new models and platform quicker. So we changed our proposition in this direction specifically. And many of these technology are new. So there are a lot of issues which come into production cycle. And they need a very dependable partner who can take them through. So that's why we moved in this direction. To your point, I think we will -- you will see the -- I mean, I did say that for the next year, outlook will see a better profitability, is our number one goal. And it has taken a little more time than what we thought, but we will focus next year on that.
Sure. But given that, currently we are, say, at around 8.5% or 8.2% EBIT margins. Do you think business has the potential to deliver 11% or 12% EBIT margins over the next 2 to 3 years?
Yes, it has.
Okay. And are -- we should be able to achieve that also? So given the kind of -- drivers are there in terms of -- you're seeing that platform getting adopted. Because platform generally should at least yield a much better margin profile.
See, I agree with you. And I think that's why I mentioned about all the challenges and what we do. I think we are confident to improve the profitability. It has taken more time, that we acknowledged, but we are confident we can achieve.
[Operator Instructions] The next question is from the line of Apurva Prasad from HDFC Securities.
I just wanted to check again on the previous question. You talked about margin expansion. What do you think would be drivers here of this 200, 300 basis points expansion that you're targeting? I mean if you can split out at how much of it can be in the SG&A leverage and how much the gross?
I think it is both. But I think we are looking at improving more gross margin.
And any SG&A leverage that you see?
Of course, we will get that leverage.
Yes. See, from an SG&A perspective, we look at it -- one of the advantages that we have of focusing on this one industry and Top 25 strategy is that we already have our account management and sales functions very well established. So as we go deep within these clients, this would probably be incrementally beneficial for us. We are not required to meet that incremental investments on the [indiscernible].
Right. And would any form of sale rationalization, be part of that strategy? I see the active base seems to be reducing and flat this quarter. So will that also be part of that?
Every quarter, I think we are evaluating and probably engaging with 2 customers, which we believe both -- they do not see us as strategic, and we do not see them as strategic. And we don't see in line with our -- the road map. So we have -- every quarter, we have identified a few customers. And it's [indiscernible].
Right. And lastly, any comments that you can make in terms of how the deal durations would have changed over the past year? Any -- do you see that sort of increasing with sort of more larger deals coming in?
In general, yes, the trend is that. Also it's our effort, right? When you talk about strategic relationships, it's about having more visibility into all of their programs and aligning our practices and our deliveries to those programs. So as we continue to build these strategic relationships that will also -- the duration will also be longer. That has been the trend for the last couple of years, and we believe that -- and that's the whole purpose of building these strategic relationships, so that we have a direct line of sight in terms of what is happening with our key customers and what are the programs in which we are involved and so forth.
Right. Anything can you quantify in that in terms of duration? How much? Or the TCV, how would that have trended?
Usually, we take a 3- to 5-year view. But any production program, you take at least a 3-year view.
The next question is from the line of Madhu Babu from Centrum Broking.
So just a question on your engagement with captives, if any. I mean, let us say, some of the companies like Bosch and all have a sizable CapEx, even Mercedes and all in India. So I mean do we -- I mean, how much of our business is from getting to captives? And how are we working with them? And how do we see that relationship?
The way we look at our relationship is always take a global perspective. The Top 25, these are all global relationships. Now some of them happen to have centers in India or in China or in Eastern Europe. And it's all part of the strategy. There is a clear thing that our customers do with their captive centers. There are specific things that they do with us. So with most of these captives, we actually co-exist in a synergy sort of way. So it's hard to define how much business is actually from a captive because we never take a view of any customer that we just engage with them from a captive perspective. Does that provide a good answer, clarity?
I was meaning, let us say, Bosch India captive directly engages us with for some kind of work. I mean just an example of Bosch, not naming the client, but...
Yes. It's very, very little, if any. Occasionally, these are global programs with our global customers. Some of the work may -- we may do in collaboration with the local captive centers or technology centers. Some work we may do directly with them because they may not have the capability of certain programs that they're executing. So it really depends. But direct work only with captive is very -- it's a very small part of our business.
Adding to what Sachin mentioned, I think with a global program, which are in new areas, new technology areas, we do sometimes work with the captives, but it is more a global program, right? Only in some parts which is delivered in India.
Okay. And just one more. On the BMW, we have announced it officially that we are working on the tender platform, ADAS platform. But if we see BMW last 1.5 year, they've talked substantially China investments in the R&D, offshore captives in China. So is that work even being done by the BMW's captive in China, the same platform where we are working?
So the first thing is that platform is across many OEMs. It is not only BMW. Daimler is adopting it. FCA is adopting it, and there are few others who are adopting it. The second thing is this work as much KPIT does in terms of the work which is done by, if I have to say, a software specialist, we have a large share of. But of course, the individual companies, the OEMs do their own work, and they do it however mostly in Europe.
[Operator Instructions] The next question is from the line of [ Shah Madhu ] from Aditya Birla Sun Life Insurance.
So my question is more mainly on the outlook front. So while we have a declared few of key deal wins in this quarter, but we don't have any like revenue like quantification or the timeline of the deal. So being in outside that growth parameters, we should look to see that whether we are on the right path of meeting the double-digit growth or, let's say, invested in 12%, 15% as growth. What parameter we should look? And similarly, on the margin, like you had mentioned that you had to build some capabilities, and that's why the salary hikes have been higher than what you had anticipated. So what parameters on the margin point we should look at that we are now done with the investment phase and now the incremental revenue would directly flow into the margin part?
I think we give a better outlook for the next year, the end of the year. I think we'll give more specifics when we talk to you next year. That is in [indiscernible].
Because we don't have the order book number or the TCV win during the quarter or order backlog for next 12 months. So then it becomes a little bit difficult to like...
That's why we talked about the overall environment. And we will -- we'll continue to give a number -- directionally numbers invested. But we talked about the overall environment where the opportunities are higher and long term opportunities are also there. So I think we covered that in our overall environment part.
[Operator Instructions] As there are no further questions, I would now like to hand the conference over to the management for closing comments.
So thank you, everyone, for participating in the call. And if you have any afterthoughts, please get in touch with me anytime. Thank you and have a good day.
Thank you very much.
Thank you.
Thank you. On behalf of Dolat Capital, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.