KPIT Technologies Ltd
NSE:KPITTECH
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Mastercard Inc
NYSE:MA
|
Technology
|
| US |
|
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Walmart Inc
NYSE:WMT
|
Retail
|
| US |
|
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
1 290.2
1 868.7
|
| Price Target |
|
We'll email you a reminder when the closing price reaches INR.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Mastercard Inc
NYSE:MA
|
US |
|
|
UnitedHealth Group Inc
NYSE:UNH
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Walmart Inc
NYSE:WMT
|
US |
|
|
Verizon Communications Inc
NYSE:VZ
|
US |
This alert will be permanently deleted.
KPIT Technologies Ltd
You don't have any saved screeners yet
Ladies and gentlemen, good day, and welcome to the KPIT Technologies Limited Q3 FY '23 Earnings Conference Call hosted by Dolat Capital Markets Private Limited. [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, Robin. 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.
Now I would like to hand the conference over to Sunil Phansalkar, who is Head of IR at KPIT to do the management introductions. Over to you, Sunil.
Thank you, Rahul. A very warm welcome to everybody on the Q3 FY '23 Earnings Conference Call of KPIT. Today on the call, we have Mr. Kishor Patil, CEO and MD; Mr. Sachin Tikekar, President and Joint MD; Mr. Anup Sable, Whole-time Director and CTO; and Ms. Priya Hardikar, CFO.
So as we do always, we'll have the opening comments on the performance of the quarter and the way we look it by Mr. Kishor Patil, and then we can have the floor open for questions. So once again, a very warm welcome to all of you, and I will hand it over to Mr. Patil.
So good evening, everyone. I'm very happy to take you through Q3 results. This year, we started, as you know, a little cautiously and we gave an outlook a bit [ cumulatively ] between 18% and 21% growth, which was based on that visibility we've had. But as the year progressed, I think we got a better engagement, deeper engagement and many wins with our key clients.
During the year, we also acquired SOMIT Solutions and Technica. And specifically on Technica, I think, basically, this really also accelerated our engagement with our clients. In the CES recently, that is Consumer Electronics Show, where we had given the full story of KPIT plus Technica. It was very highly appreciated by the clients. And I think -- so from where we started and during the year, we have seen a stronger engagement with the clients from the proposition from the KPIT side. And that has really started resulting into engagements with our clients.
So coming back to the Q3 results, on the Q3 FY '23, we had a year-on-year constant currency growth of 44.7% and 19.3% quarter-on-quarter. Organically, that is excluding the Technica, it is 24.6% Y-o-Y and 4.9% quarter-on-quarter. In terms of profit, it's a 43.5% year-on-year and 20.4% quarter-on-quarter.
So our profit first time crossed INR 100 crore mark for the quarter, and our EBITDA remained at 18.5%. Now during this part, overall, there has been volatility in the currency. During the quarter, the other income increased by INR 9 crores basically because of the rates, euro as well as pound being stronger. The tax rate is 25% during the quarter, but on an annual basis, we will remain at 23%. And during the quarter, we have deal expenses roughly about INR 14 crores from Technica, which has been extended.
So looking at the quality of the growth. So first thing I also mentioned -- I would like to mention is that cross currency has also impact in terms of reported versus constant currency growth numbers. And we hope that the picture hopefully will change as the currency will stabilize henceforth. During the quarter, specifically, there has been a big change in the currency euro, the rate and that has impacted really more in terms of the difference between the rupee and the -- dollar and rupee growth.
We have in order to -- I mean, we have a very consistent policy of how we do this. But because the variations are higher, we have put on the website of KPIT, what is our policy of -- accounting policy for taking into cross currency -- I mean, it's constant currency calculation. I think that we have made for people to know better.
In terms of growth, the Feature Development & Integration revenues grew 20.6% year-on-year and 10% quarter-on-quarter. Architecture & Middleware practice grew by 73% year-on-year and 50% quarter-on-quarter. Of course, quarter-on-quarter numbers include Technica numbers as well. And Cloud Based Connected Services grew 49% year-on-year and 20% quarter-on-quarter.
If you look at the geography, and I would like to again mention that these are not the numbers we look at it but this is how are get reported. But because most of our clients are global. But however, U.S.A. has grown 16.3% year-on-year and 1.7% quarter-on-quarter. Europe has grown 62% year-on-year and 38.6% quarter-on-quarter. Asia has been flat. However, if you take the year as a period, and you will see it going forward, you will see a growth across all the 3 geographies. And all our pipeline is strong across all the 3 geographies.
Looking at the people side, there is a significant drop in the attrition, which we have experienced for last 2 quarters consistently. The drop, while we do not publish the number, I may say that the drop is about 3% quarter-on-quarter. And we expect that to at least have that kind of attrition -- lower attrition to continue over next quarter, if not drop further.
We have added during the quarter, the numbers, we have 291 people from Technica. Hiring is pretty strong. Our focus is really take the benefit of the current environment and really improve the quality of hiring and get the best talent possible. That's what we are focusing on.
Strategic. If you look at the strategic engagements with our clients, during the quarter we closed $272 million worth engagements with our clients, out of which one is $100 million with Renault. The Renault engagement is bigger, but some part of it was reported last quarter, which we had closed last quarter. So the remaining, we are accounting for here.
The pipeline is pretty strong, includes one large engagement as well as we had mentioned last time. I would like to mention that our growth is not really necessarily depending upon only the large deals, as we call our engagements, basically because our focus is on all OEMs, and these are very significant client engagements.
And wherever there is not -- even though not a single -- one single engagement, we are growing quarter-on-quarter very strongly in all the accounts -- in most of the accounts. So we have this, as I had mentioned last time, [ in negative ]. But otherwise, also our growth is dependent really irrespective of such engagements, which will be very far and few, basically because this is not how the [ planned engagements end ]. As you know, many times, we are not used to announcing such kind of engagements.
Overall, we see that the sandbox which we have of our strategic clients has a very large spend and are fortunately in front of us. And we would like to bring a sharper focus on the clients which we have. And we believe the opportunity is much higher for us to grow going forward without making any change and actually having the sharper focus on our client. We can certainly grow at least double in most of our clients from where we are. So we continue to focus on the execution of good quality deliverables with our clients.
So Technica has been a major development during the quarter. The integration has started. During the quarter, we have about [ $14 million ] revenue from Technica with 20% plus profitability. This is the best quarter for them. They have a bit of a seasonability where the last quarter there is a higher growth. And quarter 1 is a bigger one, where it comes down by about 20% from this year. But overall, Technica will deliver 15% to 20% growth in the year, just to make it clearer.
In FY '22-'23, overall as a year, when we started, we have given -- I mean, in spite of uncertain environment, macroeconomic conditions, we started with 18% to 20% growth. We increased it to 31% to 32% last quarter and with organic growth of 23% from there. And we believe as we have made [indiscernible] and our overall growth will be certainly in excess of 33% and more than 24% on an organic level. EBITDA will be between 18.5% to 19% and will remain in that range.
The Q4, just some specific things I would like to bring out. The Technica revenue will drop, as I mentioned, and hence, the margins. However, our organic growth will remain strong and the profitability, which will more than make up for that -- to have our normal growth and profitability. And that will be after also taking into consideration certain intangible customer -- intangibles, which we may start spending raking up.
Overall, we are very happy with the quarter. And overall, we are very happy with where we are. Specifically the positioning which we have, specifically the confidence the client -- we have in our client engagements in spite of the economic environment. And we believe that the next year also, while we -- there will outlook, et cetera, at the end of the Q4, we see a very -- we see that this trend continuing into next year, and we feel very confident about growth continuing into next year. Thank you.
[Operator Instructions] The first question is from the line of Chandramouli Muthiah from Goldman Sachs.
First question is on the comments on the outlook in your presentation, you've called out that there's some degree of confidence that you can beat your organic revenue growth guidance. Now you, I think, have upgraded that to 24% plus in constant currency terms. So could you clarify what is the 9M organic constant currency growth so far? And any drivers that give us comfort around why we see upside to these targets?
When we come back to the numbers. Overall, I think this closure, which I mentioned to you -- about the deal closures, which I mentioned to you during the quarter as well as our engagement. I think that gives us the confidence. Sunil you can...
Yes. The YTD growth in CC terms is 24%, 9 months over the ran rate of last year.
Got it. Got it. That's helpful. Second question is around the integration cost for Technica. I think you called out about INR 14 crores this quarter. And you've also mentioned that this is a 20% plus margin business long term. So while we see that across KPIT's accounts this quarter, wages as a percentage of revenue have declined meaningfully Q-o-Q, we don't necessarily see the margin benefits of the acquisition because of the integration costs involved. So could you quantify sort of what the other costs are?
I think INR 14 crore, you quantified as deal costs. But even over and above that, there seems to be a pretty big spike in other expenses quarter-on-quarter. So just trying to understand what should be an appropriate run rate for other expenses going forward. Because I think you've mentioned that even the next couple of quarters, you might have some amount of integration cost. So just any color here would be very helpful.
So if you look sequentially, the other expenses also this quarter include the cost in Technica. So apart from the deal expenses, I think the consolidation of Technica is the reason. There is no other specific cost that has gone up disproportionately or that is a onetime element -- that has a onetime element in the other expenses.
And the expenses, which may, to some extent, will be there in quarter and nothing too significant as compared to this quarter, but some expenses will be mainly -- they are taking some services from a consulting organization to ensure that the integration plan as well as the review of our integration plan is proper because this is very critical for us.
Got it. Just as a follow-up. I was just trying to understand, I think the previous quarter, we had about INR 110 crores of other expenses. And if I add maybe INR 14 crores to that for the deals, deal expenses that takes us to maybe INR 124 crore. But this quarter, I think we've been at close to INR 166 crores. So just trying to understand what that delta is? And any color there would be really helpful.
What I said is that delta is we have consolidated Technica during the quarter, and Technica margins are at around 20%. I mean delta between that goes to other expenses as well as the personnel expenses. So that change in other expense is only because of the expenses of Technica, which have also got added because we have consolidated.
So when you are looking at an absolute increase, the absolute increase will have to increase because of Technica, it will have to increase because of the growth that we had during the quarter and the increase because of the deal expenses that we had in the quarter.
Got it. That's very clear. And just lastly, we've been talking about the 10 large middleware mega deals that are under discussions globally and how KPIT as of last quarter was active in 7 of them. You had guided to one more potential $100 million plus deal opportunity in the first half of this calendar year. So any updates on the broader middleware deal pipeline and how we should think about timing for the second opportunity?
No, I think I would like to clarify. I think maybe there is some miscommunication in this area. What we said is this is our engagement with the client. It doesn't mean that there will be [ several negatives ]. What we said is these are the programs in which we have engaged. And I again explained just now is our basic business model is to grow with the clients and engage with them and grow quarter-on-quarter, and we have very strong growth where we do not have one single large -- big deal with the clients.
But what I had mentioned last time is there are 2 deals, which I had mentioned about, 1 of which we announced for Renault. And there will be 1 more which we will -- come in some time. That is what I had mentioned in the last quarter. Sachin, do you want add?
No, there is nothing more to add. That's exactly what we said last time. And the first half of the year, we still have 5 months. So hopefully, we'll have the announcement of the second one too in times to come. Nothing additional to mention.
Is that -- does this answer your question?
Yes, that's very helpful.
The next question is from the line of Vimal Gohil from Alchemy Capital Management Private Limited.
Sir, my question is firstly on the calculation of details about, you said that $14 million is what you recorded in this quarter from Technica. Now if I were to further consider that with the current revenue, we've come to around $96.5 million. It is about 2.5%, close to 2.5% kind of organic reported yearly growth. Now that -- and if you're going to surpass the 24% of growth for the full year, that implies a very sharp improvement in the next quarter even after 20% quarterly reduction from Technica.
So just wanted to get a sense on -- I mean, the -- what -- where is this conference sort of coming from. I mean I understand the deal wins have been very strong, but the growth rate is materially higher than what we delivered in the very, very recent past. So that is...
Correction is, the comparison of 2.5% reported growth and the 24% growth is not correct because if you look at the organic CC growth this quarter, that has been 4.9%. So I think that is what needs to be compared because 24% plus is also the CC organic growth.
Okay. Understood. And sir, I just wanted to understand the seasonality difference in Technica. Typically company plays out of Europe or U.S., typically have a weakish kind of a quarter in December. By that way Technica is completely opposite. So what drives this unusual seasonality?
It is -- I mean, frankly, I think it is more to do with a lot of European clients also have a lot of spend, and they have certain products and infrastructure, which they actually -- they provide to the clients. And I think that is what mostly has resulted into this growth, additional revenues during the last quarter. Anup, you have anything to add?
No.
Sir, just another point was on attrition. You mentioned that attrition has drop of by almost 3 percentage points. In that backdrop, would it be fair to say that this year, we will probably ending at about 10,700, 10,800 employees, adding about 2,500-odd employees. Will the hiring intensity continue to remain the same? Or do you think that in the backdrop of reducing attrition you might not require as strong a hire [ innovation ] as we did in the last 2 years?
See, I mean we are planning for a strong hiring. But naturally, we have a clear, what you can say, a process by which every 2 quarters -- remaining 2 quarters we plan based on the revenue visibility, attrition, because you'll get to know about attrition 3 months in advance, roughly and this will make those numbers. But in spite of that, we believe that we will have to hire -- continue a strong hiring for the next year.
The next question is from the line of Karan Uppal from PhillipCapital India.
Congratulations on a very strong set of numbers yet again. Sir, fist question is on the deal wins which we have announced. So the TCV trend continues to be very strong for the last 3 quarters. So just wanted to understand what are the major components of it, be it in terms of ADAS, connected or [indiscernible] opportunity. And also, if you can quantify what is our share in the overall SDV-related deals?
The percentage in the PCBs has been stronger in the last [ 3 quarters ]. So any sense that we can be on the type of work relations, I think, right? And then [indiscernible].
I think in terms of -- there are 3 parts that we typically report. One is the Feature Development & Integration part, then the Architecture & Middleware and the Cloud Base. We're seeing growth, which is fairly balanced across the three. And with more and more middleware engagements that we start at the beginning, it also sort of creates opportunities for the other 2 practices to grow. So something takes a lead and then it follows -- it also benefits the other two practices. That's the trend that we have seen over the last 3 or 4 quarters. And we believe that's the trend that will continue in the immediate future, which is the early part of next year.
We've had a fairly balanced growth across, if you take the year-on-year, and quarter-on-quarter it can be a change, but the growth looks fairly balanced going forward. Was there anything else that you wanted me to address? Or you just wanted me to specifically talk about whether it was balanced growth or not?
Yes, sir, just wanted to ask on the software-defined vehicle, the detail of opportunity. Can you quantify in terms of the overall deals which you have won? How much was related to that? And what is the pipeline?
So there are -- as we mentioned last time, there are 6 engagements. We are already engaged in 6 of them. And those are, as you would imagine, everybody is trying to do these kinds of engagements for the first time. So we have our hands full with software-defined vehicle kind of program. They are very critical to the clients. So the focus is to now make sure that we are on track, and we are able to deliver them successfully. That will be the #1 focus.
And as we create more bandwidth, we'll look at more SDV kind of engagement. Some of our other clients would also want us to engage. For instance, commercial vehicles, will they take up some of these in a year or 2. So it's just for [indiscernible] that we sort of stagger them out over a period of time rather than trying to do many all at the same time.
And the earlier point, when we talk about SDV kind of engagement, it touches all 3 buckets that we talked about. We initially start with consultant, then it leads to bulk of the work that was getting started on the middleware. And then it leads to feature development and also going into the cloud piece, right? So that cycle will continue in the foreseeable future.
And just to add to that, I think most of our new wins, a large part of it, I would say, I don't have exact number, but maybe around 60% to 70% are related to [ SDV ].
Yes. Yes, [indiscernible], that we've already started.
Okay. Okay. The next question was on margins. So how should we think about the margin trajectory from here, given that Technica operates at a higher margin, but also has a seasonality to it? And organically also, we are doing very well. So there will be some support from the organic growth. So from here on for next four quarters, how should we think about the margin trajectory for KPIT?
So I think the way I would put it is we have given a very -- I mean probably we have given a guidance or outlook, which has been very consistent. We initially, we gave 18% to 19%, then we have given 18.5% to 19%. And we will be in that range. We will give our outlook for the next year at the end of the next quarter.
Overall, our strategy has been to really have -- to bigger margins to be in this range and invest into any future growth. However, if we see that there is an additional opportunity to improve it, we will let you know when we give outlook for the next year.
We have the next question from Mohit Jain from Anand Rathi.
So first half, you spoke in the opening remarks about intangible write-off that you are anticipating, I could not get the context of that. But is there any such thing which you have run for 4Q for FY '23?
So the context there is the Technica acquisition. When we do the acquisition, we actually have a period of 1 year to recognize any -- or to recognize the intangible assets that we can have, which will reduce the goodwill on the books. So that exercise we are currently doing.
And there is a possibility that we might be able to account for those assets -- for Technica that we have acquired and then start the amortization of those assets. But they are not -- I mean, it could happen in Q4 or it could start from Q1, but that is something that will happen when we do the purchase price allocation of Technica. So that's what we are talking about.
Understood. Second, if you could comment a little bit on the deal pipeline like because we had very strong bookings this quarter. Has it moved up? How much has it moved up? Anything that will help us understand last 12 months, where will we get?
Overall, if you look at the trend for the last 7, 8 quarters now, it's grown substantially quarter-on-quarter. And this quarter was not -- the last quarter wasn't an exception, it improved substantially from the previous quarter to that, almost 70% to 80% growth in that. And we do see strong demand coming our way. And we believe that as we enter the next year, we should start the next year on a strong pipeline.
And again, as Mr. Patil mentioned earlier on, no bulk of it is actually coming from our existing strategic accounts. And if they -- it's not going to be something that is going to be separately called out or called as a live engagement. It's just that because the way in which we engage with them, there is so much more that we can do with the client.
But that will pass through your TCV numbers that you report, right, irrespective of the size?
That is correct. That is correct.
Okay. And a follow-up [indiscernible] 70%, 80%, 3Q '23 versus 3Q '22. Is that the right number?
Yes. Over the last [indiscernible].
Okay. And coming to margins, we had this INR 14 crore integration cost, which practically take margins above 20% for third quarter itself. Assuming there are cross currency tailwinds for next quarter and supply side is inching up, shouldn't we expect that margins to be eventually head towards in that direction for '24?
I think I explained that basically, right now, the way we are focusing on, I think one bigger focus for the company, the biggest focus for our company is best execution for our clients. And we -- that's why they had given us some range, and we will remain range-bound. Every quarter is different that something else comes like, during this quarter, we got other income, which we may [indiscernible] at next quarter. It really depends.
But as a custom, what we are doing is keeping it into that range. And the rest we try to meaningfully if we can allocate for better execution for growth, we do that. And so I mean, naturally, that allows us to continue with the strong growth and better execution with the client, which is very critical to our success. For the next year as a whole, how it will pan out, we'll give you some indication end of the Q4.
The next question is from the line of Akshay Ramnani from Axis Capital.
Congrats on good set of numbers. So the first question was on client metrics. So when I look at the client metrics, active clients are flat Q-on-Q while client concentration has reduced despite [indiscernible] after acquiring Technica. So is it fair to assume that you are already working with all of the Technica's clients? And also does Technica integration change our thought on the strategic T25 customers bucket which we have?
So let me address the first part. The strategic intent doesn't change. In fact, Technica fits in really well with what we are trying to do with our [indiscernible] clients. And there was a really good validation as Mr. Patil mentioned during the year, that many such clients are excited about having Technica being part of KPIT if Technica allows us to go deeper and wider within the existing clients. And that's something that we will continue going forward as well.
Now on to your second question, yes, of course, the point is not here to add clients quarter-on-quarter. We are very selective about adding clients, and that's something that we decided at the beginning of the year. So when we plan for next year, we'll have clarity in terms of which clients we'll really focus on adding for the next year.
But your question about the concentration, I think there are certain revenues in Technica that are not related to our T25 clients that came in. And that had a -- so organically, we have had growth which has been very sound. With Technica coming in, there is some -- there are certain [indiscernible] as of now. That's why you see a little bit of...
But you will see that over the next few quarters, it will come back to the same numbers [indiscernible] taking every quarter, we are also disengaging -- there is some noise on the call. Somebody -- can you mute, please? Hello, can you mute please?
So we are also disengaging with certain clients, which are not intent in our focus. So I mean, what works out the same number, but it may not be exactly the same.
Got that. And another question was to understand the cost structure of Technica better. So we added about 290 employees from Technica, about $14 million of revenue, which translates to a fairly high revenue per employee. Is it fair to assume that Technica will also have high subcontracting cost in your cost structure, which might be sitting in the other expenses? I think that is the case. How do we plan to -- do we expect to continue with the similar cost structure? Or is there a sales [indiscernible] about that?
So if you remember, when we announced the deal, there is an entity in Tunisia, which was a subsidiary for Technica. So that -- those employees are not a part of KPIT today. We will acquire that entity going forward. But right now, those employees are not a part of the total employees of Technica. But they provide services for Technica and hence, you see that it is appearing to be a little bit higher right now. It would be essentially the subcontracting costs, yes.
The next question is from the line of Nitin Padmanabhan from Investec.
Congrats on the strong quarter. My question was on margins. So this quarter, excluding the integration costs, obviously, margins would have been higher by maybe 140 bps or 150 bps. Now what has sort of driven this delta on margins during the quarter? Is it anything related to realizations? Or is it the positive seasonality or what of Technica -- or do you think this is -- these margins are in some way -- the gains that we have made in these margins are somewhat defensible? So I just wanted to understand the drivers of this margin improvement for the quarter. So that's the first one.
And the second one, if I have -- made during the call was about -- I think in the last quarter, you spoke about 2 megadeals, and I think 1 has come through. And I just wanted your thoughts on the second and also, if there are any more in the pipeline of this [indiscernible] structure?
And lastly, I just wanted to understand, these deals are basically for model launches in 2025, 2026. And I presume companies, OEMs who are looking to launch these models would be in a hurry to sort of -- for the deals to really come out. So should we sort of -- are you -- is it the right way to think that a lot of these deals will be upfronted in terms of the way they accrue to you? Or do you think the deal structure for the other clients are a little more broken down and not [indiscernible]? So these are the 3 questions.
So let me address the second question first. Yes, we did talk about 2 very long-term large engagement when we announced -- during the last quarter. And second one, as I mentioned earlier on, we said it will be in the first half of this calendar year. So we still have 4 or 5 months to go. Our hope is that we'll conclude that in the next few months to come. That's the first part of your question.
The second part is about -- you're right. Some of these engagements that we have signed up for, some in nature of what we will call mega type of engagements, other as projects and programs being carved out and coming our way, but all heading towards the '25, '26 model here. That will continue. There will be -- as we mentioned, that we won, we hope that there is 1 more that we'll announce in the near future. And then even out maybe 1 or 2 going forward. But there are not going to be -- not all of them are going to come in that kind of fall. To your point, many of them will also come as part of an extension of the work that we are doing of these programs coming our way, but not quite structured in a mega engagement kind of. So it will be a mixed bag across.
Sure.
Yes. And on the margin part. So if you look at it, the major contribution, obviously, is revenue growth. And when we have revenue growth, also the pressures that we had added earlier, they have got [indiscernible] on to projects. So that process is continuing. And there is a net realization improvement that -- which is [indiscernible] every quarter, which is a combination of rate increases plus productivity increment that we focus on. So I think all of these teams have played their part in the margins that we have shown after the [indiscernible]?
So these margins are defensible. It's just a choice that you would make on a going forward basis as to how much you would want to retain or what to retain above that?
Absolutely. Absolutely. I mean the consistent business is that the margins -- and this has been the case for last more than a year.
Correct. Just one thing, is that I think what we have demonstrated over the past few years, you said margins have been on a consistent upward trajectory? I mean you have never maximized on margins in any particular year, you always use some of that for growth. So when we think out as investors, is it fair to assume that directionally it would -- because of the kind of structure you are in, there will always be room to improve margins? At the same time, it will be very calibrated over longer period of time. So is that fair?
That is true, that is true.
The next question is from the line of Dipesh Mehta from Emkay Global.
A couple of questions. Entering into next year, what do you find more challenging in terms of demand-side situation or supply side? Because we are growing at a fairly rapid growth trajectory. So do you think which one would be more challenging for -- one look at calendar '23? Second question is about the deal TCV number, what we report. Can you help us understand it includes only new portion or did it include new plus renewals, what happened during the quarter?
Sorry, I'll just answer that question, the TCV number includes both renewals as well as new.
Sorry. This is Anup here. So going forward, I think definitely it's an issue of supply side. And if you look at the LTV programs, which Mr. Patil talked about in terms of being the largest contributor, current as well as the future growth. There are certain elements in the LTV where -- which requires a reasonably good understanding of what competencies are required. So there is a shift in the competency. So from a supply perspective, getting the right people, making sure that they have the right competencies and of course, then delivering and focusing on the execution of that is the biggest challenge.
[indiscernible] portion to a higher number of people. I think the quality is something which we are looking to improve here [indiscernible].
If I may just add a further nuance to what Mr. Sable and Mr. Patil said, is more than -- in our opinion, the supply side will also get -- in terms of quantity, it'll get easier, it is already getting easier in terms of the quality. But more importantly, I think the execution of very complex program, that is going to be the #1 challenges. The program that nobody else has done before, right? So that will be our #1 challenge.
Understood. And if I can ask 2 more questions. First about the commercial vehicle. If I look at is showing some kind of moderation for last 3, 4 quarters. So if you can provide some outlook on the demand trend, what we are seeing. And last is about the [ Technica ], you indicated some kind of subcontracting arrangement with some company and we may potentially acquire. If you can give some detail what we are looking at here?
So let me address the commercial vehicle part. Commercial vehicle, I think -- I mean looking at anything, it is just for 1 quarter is not a fair way of looking at it. It's like looking at our growth across geographies, where we believe that the growth will be balanced across geographies, it may change from quarter-to-quarter from one to the other. It's the same thing with commercial vehicles. Our business over the last few years has grown consistently in commercial vehicle. And we believe that will continue to grow in the next one.
It's just that passenger current business, the growth has been significantly driven by software-defined vehicle. But we are still quite bullish on commercial vehicles when it comes to [indiscernible] to make sort of -- and if you look at the number, I think Y-o-Y growth is about 15% in CV. And if [indiscernible] at last quarter, the sequential growth was very strong at 6%. So the growth has been stronger. It is just this quarter that it is flattish, but I mean if you look at the Y-o-Y trends or even on [indiscernible] trend, you will see that growth is there.
So on the last, let me explain a bit in terms of the confusion. One, we acquire Technica, they have multiple centers and one of the centers is Tunisia, which is their own company but really differently structured, and we decided to acquire it after fulfilling some changes in their structure, et cetera. We don't have to pay anything additional for it. It is just our choice to get a few things done before we acquire it. And that's why it is appearing as a subcontracting, there is no -- otherwise there is no difference. Did I answer your question?
Understood.
We have the next question from the line of Sandeep Shah from Equirus Securities.
Congrats for a very strong execution. Just the first question after Technica coming into your bag or umbrella. Is it fair to say now we have addressed all the gaps to be addressed in terms of the software-defined vehicle or [ ACV ] trend? Or do we still have gaps? And if not, then in that scenario getting a position in terms of a larger size deals would be much stronger going forward versus what it used to be around 1 quarter back?
We have addressed some of the gaps, especially on the upper left-hand side of the process development view and the upper right-hand side of the software development view. So 15 networking system proof of concept and 15 validation part and it's a very strong fit in terms of what we have. The pursuit of what the customer wants and what are the white spaces that are available is an ongoing thing. And as we speak, we are continuously finding out new white spaces in the ACV space as the customer is also finding out some of the new white spaces in the ACV space. We will keep on discovering them and focusing on them. So far so good. But I think going forward, we'll see many more white spaces coming up, which we will capture.
And if you look at last 2 years, some of these gaps have been build -- we use the strategy of build, buy and partner. Some of these we have actually built internally through acquisition of Technica and past partners, we have actually acquired -- bridged the gap to acquisitions. And not in the entire ecosystem, one company cannot do it all. So we also have to partner with some other key players to provide a more comprehensive solution to the clients.
Okay. Okay. And just looking at the macro scenario in Europe, is there any instances despite the projects which we work are critical for the models to be launched in the future? Clients are slightly behaving conservative in terms of their decision making or in terms of awarding deals or after awarding start of the projects or after start ramping up the projects? Any instances are you facing?
So I think there are 2 answers. So overall, given the macro scenario, all clients are going to be very cautious. Some clients are -- they've taken some proactive steps to cut costs. Fortunately, for us they're cutting costs in other areas and they're prioritizing things like software-defined vehicles and so forth. So overall, clients are becoming more and more cautious about the spend. But as far as KPIT and our pipeline and our programs are concerned, we have not seen anything that is likely to impact us in the immediate future.
Okay, okay. And just last few bookkeeping questions. So I think this quarter in the P&L, we had a cost of goods sold related to material consumption and the finished good inventory. So is it largely related to Technica? And will it continue in future quarters? Or it is more specific to third quarter being seasonally a strong quarter as a whole?
It is completely related to Technica. And it will be more or less it will go up and down, but it will be there going forward also.
Okay. Okay. And in the initial remarks, we said the effective tax rate on a going-forward basis would be 23%, right?
On an annual basis, it'll be 23%.
Yes. So on an annual basis, we'll be around 23 plus.
Okay. Okay. Okay. And with amortization of intangibles for the Technica, do you believe the depreciation amortization as a percentage to revenue may go up or may actually come down with some of the other assets which are organic becoming older and then depreciation may come down?
I think we'll have to really decide on the quantum that we will arrive at for doing this. And obviously, when we do it initially, which will have some marginal impact. But of course, as the revenue grows, that percentage will come down. But obviously, we have not yet decided what is the quantum, we'll have to work on it and then come up with a number, which we will share with you once it has been done.
Okay. Okay. And in the presentation, you said M&A-related cost is still pending. So will it come largely in Q4 or it may come still 1Q of next financial year? And what could be the quantum?
No, no. It is -- what -- as Mr. Patil said in the initial remarks that some parts that we will do for integration will come in the next 2 quarters.
No, no. That INR 14 crores has happened [indiscernible] ...
Yes, yes, it has happened.
Okay. Okay. So the quantum may decline in the Q4 and Q1 related to some of the consultant costs?
Yes.
Okay, okay. And in terms of practice...
Many questions I think [indiscernible].
Okay. No issue. I will come in the follow-up.
The next question is from the line of Saurabh Sadhwani from Sahasrar Capital.
So in this quarter, as employee expenses have not grown as much as our revenue and they have also decreased as a percentage of our revenue. So how did this happen? And is it sustainable?
I think if you look at it, as we have said, good growth and with improved the productivity, we intend to have that number to be in this range or slightly lower as we move ahead. So that's what this number is. This is also a factor of fraction of the [indiscernible] that we have recruited over the last 3, 4 quarters, and that has improved the overall cost structure.
So we have better utilization now, yes?
Yes. We will have it as we move forward.
Okay. Okay. And also you commented that there's a need to grow double from our current position with most of our clients. So is it an aspiration? Or are you aiming for that? And how long -- what would be the timing for that?
I think it's a great question. When we say that we'll focus on a handful of clients that we have no choice than to double the revenues there. No, jokes apart, what we have realized is that we engage with them deeper, we are also getting the broader insights into the areas in which they need help. And as Mr. Sable pointed out earlier, we are also responding to their needs and creating offerings that are relevant to them. And this goes back to becoming the truly trusted partner to them. And given that model, we think that over the next 3 to 4 years, we'll be able to double our growth with the existing clients.
We have the next question from the line of Vimal Gohil from Alchemy Capital Management Private Limited.
My question is on the -- some of the hardware costs have been answered. If you can help us revise, you had done the acquisition sometime back of FMS, which was into ADAS, et cetera. If your current quarterly numbers on the share of those [indiscernible] is anything to go by, there has been some slowdown there. Can you just highlight any important update there? How is the company performing? Is it is in line with your expectations or not? What is the current revenue run rate that it is clocking?
I think -- it is in line with what we doing. I think the company is doing well. But we are still a minority company in that. I think the result for acquisitions will come in next quarter or so. So we can give the details once we conclude that. Right now, it may not be appropriate to share the details but the company is doing well, and there is a -- on the profitability front, they're in line with the company profitability.
Right. Sir, the decline in -- the number is not significant as of now, but the share of associates declined sharp -- sharp decline is not related to FMS? Or did you have any other entity there? Or how is it?
No, there is no correlation there.
Okay. So the share of associates, ma'am, is regarding which entity right now?
[indiscernible].
So the answer is that it is just a quarterly phenomenon, and we do see that as a -- we should not take that as a trend in FMS, but we're saying if you take the year as a whole, they are on track to do the targets that we had in mind in terms of revenue and profits. So though quarter-on-quarter, it has gone down, we will see that going up, and there is no issue in terms of the targeted revenue or the targeted profits that we had in mind.
The next question is from the line of [ Karan Janti ] from [ Jetta ] Global.
Okay. Great. So I had a few questions. The first just being on whether there's any integration risk with the second acquisition. I mean I know it's a different country and probably there have been combined workforces in India. So is it fair to say there's a limited integration risk?
Yes. So every company that has acquired carries some kind of a risk. So we have done a very detailed risk assessment. And we have a regular meeting, [indiscernible] meeting to mitigate and plan in terms of what needs to be done. So far, so we don't see any major risks right.
Actually, they are very excited looking at the opportunity that they see with our market plan. I think, I mean, from their point of view, they would have never got that kind of exposure to these clients globally that they expected.
We have overall excitement at the moment in terms of the opportunities that we see and what real value add we could do to the clients together.
Okay. Got it. And then I guess one other question relating to how you think about different deals. I'm curious what the offshore -- kind of onshore ratio for that deal is? And then even if you look at kind of revenue bit per head, is that accretive to the current business? It's sort of a new deal, so you might have a better view on it?
So we do not provide the breakup in terms of on-site and offshore revenues. Our engagement swings basically depending upon their space, location, where we are engaged. So huge [indiscernible]. But overall, we -- as we mentioned that if you look at a year back, the on-site had gone up overall, our people on-site have gone up a bit. And that is for multiple reasons, including our engagements, we need to do in some of these [indiscernible] in the first part. But most of this work will be largely delivered out of offshore location, not necessarily India.
Okay. Got it. And then just the last one. I think your TCV based in the last 4 quarters, and you only started reporting 4 quarters ago, it was about $700 million. Maybe the overall TCV is even higher than that. How do we think about conversion and visibility? I mean does that mean that if you have a 3-year average deal life, you're looking at 40% of your revenues being visible in the next -- into the coming fiscal? Or what's the right way to think about that?
Many of these deals are anywhere between 3 to 5 year kind of duration. So it changes.
Yes. Hard to sort of put a formula and tell you, depending on -- I think there are different flavors to it. And as Mr. Patil said earlier on, we are in a good position at this point in time. We've given the guidance. We've revised the guidance. And by end of next quarter, we'll give you the guidance for the next year. But it's kind of hard to translate that into...
The next question is from the line of Dhanshree Jadhav from Anvil Share & Stock Broking.
Hello?
Dhanshree Jadhav, you may unmute your mic, please, and ask your question. Your line has been unmuted from our end. As there is no response from the current participant in the queue, we will move to the next question.
The next question is from the line of [ Dhaval Shah ] from [ RBSE ] Investment Managers.
So my question is related to the business mix. So I just wanted to understand our actual business mix. So how are they different in terms of client engagement and as well as on the margin profile and what KPIT is strategizing? So is it we are doing more focus on the middleware or we are going to focus on the cloud base? So I'm talking about more on the [indiscernible]?
I think as we mentioned, these are the 3 important parts for [indiscernible] and even in the SDV program, all the 3 parts are [indiscernible]. The reason we have made it because this is how the buying centers have to bank [ better ]. So they have mapped our organization to the client bank.
And that -- the second thing is earlier we used to give a practice size, but that's not how the organizations work at the client side. That's why we changed the structure to map with the client organization. So to your point, our focus is across. But some of the areas like architecture, middleware and cloud-based connected services, these are somewhere recent in last couple of years and size is relatively modest as compared to the one which -- where it is electrification autonomous, which we have built over the last 5, 6 years.
So that's why they have -- they are going faster. But at the same time, as Mr. Tikekar mentioned, I think one moves to another. So it's kind of a combined podium. That's why actually this Technica and other acquisitions, we are in a position to give a blueprint to the execution full story from KPIT.
Okay. And just on the margin [indiscernible] also, are these 3 have a similar kind of margin profile and form of contracts? Or do these vary on the bases of [indiscernible]?
At a gross contribution of this level, there are some changes. I think there are some ones little more profitable than the others, but they have been volume is higher in some cases versus some other case is different. So it changes, but I mean, it's -- the mix is not going to impact significantly anything what we have mentioned.
Okay. Got it. And my another question is on more on the margin. So I understand that we have giving the guidance of 18.5% to 19% as of now. But looking at the kind of services we aspire to provide, so what is our long-term aspirational margins even after 3 to 5 year? So if you are providing more value-added services and more integrated services to our clients, then what would be our aspirational EBITDA margin you are looking at?
It is not -- particularly, what we have mentioned always is we will show a consistent growth in the margins. And we will invest anything over and above if we can meaningfully invest into anything else in the growth or delivery. So we have said that we will cross 20% in next couple of years. That's what we mentioned. So that's what we have said. Now anything above -- I mean, as I always said, there is always a margin to grow. It is our choice to invest into growth and new technology investments, which we will continue to do because I think that is important for us and that's how we are managing the [ masses ].
[Operator Instructions] The next question is from the line of [ Chirag Kacharia ] from Ashika Institutional Equities.
Congratulations on a good set of numbers. Broadly a [indiscernible] with the rest of the world geography. So which are the countries that we are present other than U.S. and Europe? And what current environment there which is more supportive to us? And what sort of profitability we'll do in those geographies other than U.S. and Euro?
In Asia, a bulk of our revenues actually come from Japan. And there are some revenues from Korea and China, and we have 1 client in Vietnam. And of course, there is some business that is in India, which is where we service some of our global clients. So those are the ones. Bulk of the revenues come from Japan.
And we think that we'll continue to grow in Japan, also in Korea. China, as you know, the situation has been -- in China has been very difficult over the last 3 years. Now there things are opening up finally. You have to see how to sort of put rigor into China over mid to long. Japan will continue to be the key growth driver for Asia in the immediate future.
Okay. And sir, just one more guidance on like, there was a news a year back that there's some shortage of [indiscernible] in automotive that is there to do [indiscernible]. So does any of our clients [indiscernible] or the [indiscernible]?
Yes, it has been a huge challenge for the last couple of years for most of the OEMs, not just in the automotive industry but in other industries. It's getting better by the day. It's still not behind us, but I think the supply has increased a little bit. And as things have opened up globally, things are actually getting better by the day.
The next question is from the line of Abhimanyu Kasliwal from Choice India Limited.
Firstly, congratulations, sir, on a good set of numbers and good organic growth. Now my point, sir, is that, initially -- we are working on the revenue for employee trying to expand, expand as and where we can and trying to decrease our cost per employ as much as we can so that we can get a good employee [indiscernible].
I wanted to ask, what is your trajectory, what is your outlook on that in the employee [indiscernible] shortage space. We are increasing our employees on a slightly lower rate than what could have been expected. So does that mean that now we are on a sustainable improvement in employee yield that we're hoping to have more revenue per employee as opposed to cost for employees so that will lead to uptick in yield? So what would be your -- if you could give any guidance, would be very grateful.
So we have talked about the margins, which is -- I mean, all of these metrics that we talked about, whether it is employee -- revenue per employee, profit per employee, utilization. All of that will materialize into the operating margins that we have talked about, and that is the increase that we have seen.
I don't think we'll be able to say that what will be the trajectory there. If you look at the last 4 quarters, actually, our hiring has been higher for the future than our revenue growth. And -- but if you see as a trend in the medium term. Obviously, the aim is to improve that number as revenue per employee and also the profit per employee to go up, which will result into the steady improvement in operating margins.
Sir, are we seeing any trajectory like that in terms of the contracts. Right now we are seeing higher-value contracts, which are more cyclical in nature and which we're able to relay more revenue per employ as such? Or is it the same kind of contract [indiscernible]?
At a high level, I can say that our realizations are improving with the new contracts.
We have the next question from the line of Sandeep Shah from Equirus Securities.
Just lastly, in terms of the practice revenues, it looks like the Technica has been added across service lines because the incremental revenue across service lines does not [indiscernible]?
That is true.
Okay. Okay. And the 20% Technica margins are at EBITDA or EBIT level?
The 20% margins are at EBIT level.
I think we'll have to take a stop now. We are already 15 minutes past the call. So one last question and we should...
Sure. We have Ms. [ Tanashi Jadhav ] from Anvil Share & Stock Broking with the next question.
Yes. Congrats on great set of numbers. My question was on the growth that we have witnessed in architecture and middleware consulting. The growth is quite strong at 50% quarter-on-quarter. And as you said, it includes Technica. So I just want to know, excluding Technica, what would be the growth there? And what is driving this growth? And what will drive this growth in the near term and in long run, is what I want to gauge from the management?
It -- I mean, I don't have a quick number, but roughly, I can say that it will be about double-digit growth quarter-on-quarter for this practice organically.
The -- if you look at what middleware is, it is the most critical part of the software-defined vehicle. So when software needs to basically define the vehicle, middleware becomes a very important component of that. And it is the first and the earliest change that will happen. And I think when you see all these SUV programs being kicked in, this is the first and foremost development that starts kicking in. And that is why there is a growth.
On that, if I just want to add on to it, like any particular client or deal has led this growth, if you can call out something there? And also in contact with Europe, Europe for KPIT has been making very strong growth in the last couple of quarters. This quarter, it was obviously including Technica. Somewhere, if you can, in that contract, what all separately you some call out for the growth in organic basis is what I would like to know?
Yes. I'm sorry. Can you repeat the first question? I remember the second part. What was the first part?
The middleware, the growth in the middleware on organic. I mean, any particular client being that -- driving that organically? And if that can be in a context with the kind of growth we are seeing in Europe, because that was quite strong for KPIT? And this year, obviously, it was including Technica, but something you can call out in terms of any particular trend you are looking, that would be helpful.
Yes. Okay. And thank you for reminding. As we mentioned earlier in the call, there are about 6 SDV programs that we are working on. And as one would expect bulk of them are in Europe. That's why the growth is driven by the 6 SDV programs in the middleware and overall SDV. And some of the key clients have been in Europe, that has also driven the growth organically in Europe. And now as the Technica acquisition has even made it stronger. Does that answer your question?
Yes, that's helpful. And one last question. Management had conveyed that we would think on sustainable basis the growth to be at 20% like annual. So is that maintained? Or there would be some challenges to it? How do we see [indiscernible]? I am asking for the long term.
I think we have given that overview overall last year when we gave and we were reasonably confident about -- you have seen what we have performed this year. And we have -- there is nothing which warrants any change in our view.
Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments. Over to you, sir.
Thank you very much for your interest and participation. So if you still have any more queries, please feel free to write to me, and I'll be happy to address those. Thank you, and have a great evening.
Thank you. On behalf of Dolat Capital, that concludes the conference call. Thank you for joining us. You may now disconnect your lines.