Ladies and gentlemen, good day, and welcome to KPIT Q2 FY24 earnings conference call, hosted by Dolat Capital. As a reminder, all participant clients will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then 0 on your touchtone phone. 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, Ashia. Good evening, everyone. On behalf of Dolat Capital, I would like to thank KPIT Technologies Limited for giving us the opportunity to host this earnings call. Now I would like to hand the conference over to Mr. Sunil Phansalkar, who's the Head IR at KPIT, to do the management introductions. Over to you, Sunil.
Thank you, Rahul. A very warm welcome to everybody on the KPIT Q2 FY 2024 earnings call. I also take this opportunity to wish all of you and your families a very happy, healthy, and prosperous Diwali. On the call today, we have Mr. Kishor Patil, Co-founder, CEO and MD, Mr. Sachin Tikekar, President and Joint MD, and Mrs. Priya Hardikar, CFO, and Sunil from Investor Relations. As we always do, we will have the opening remarks by Mr. Kishor Patil on the performance and the way ahead, and then we will have it open for questions. Thank you once again for participating in this call, and I will now hand this over to Mr. Patil.
Good afternoon, everyone. I'm very happy to take you through the second quarter for 2024 for this year. Let me just first take you through the way the industry is. The industry continues to do well financially. If you look at all the results, they continue to do well. However, of course, there are certain issues on their mind. You know, if you look at the commentary, they're a bit, you know, worried about a few things, specifically about the electrification trends which are happening. Also, UAW strike, which is there.
They are also, you know, however, all of them are committed to software-defined vehicle, new architecture, investment, which is going to be very key for their future. Why they are doing that, as the companies are getting closer to the timelines, I think, they are realizing a lot of problems they can see into their solutioning and, areas in which, they need to fix. Now, KPIT being the company which has worked with multiple OEMs, having that experience and having a proactive solution in many of these areas, is in a best position to really help the client realize their SDV programs. In that context, I think KPIT continues to do well, and company can benefit from their spending into SDV, into their SDV spend.
So this quarter, KPIT's CC revenue grew 51.7% in terms of constant currency, 54.2% in reported currency. As a growth, quarter-on-quarter is 9% in constant currency, and 8.4% in terms of reported currency. Now, if you really look at, we continue to focus on our T25 strategy. 84% of revenue comes from real strategic clients. AUTOSAR, of course, has grown higher. While we are very, you know, also the commercial revenues are great. Revenues from commercial vehicles have also grown, but there we see a larger potential going forward. We also see our EBITDA margins to be 20%.
The critical, the most important part is this is after absorbing the increments, which have been higher single digit across the organization. Year-on-year, the profits have grown by 68.7%. Quarter-on-quarter, 5.1%, but actually, last quarter, there was a special other income which was there. If we had to look for like for like, it is about 19% increase into the net profit of quarter-on-quarter. The cash realizations look strong. DSO is at 37 days. The overall head count is 11,971, more than 4% increase. The attrition is all-time low. It is really into lower double digit.
In terms of our critical staff, which we capture, it is very low single digit, the attrition. KPIT has focused on at the KPIT Academy. We continue to invest heavily into training and people development. We must be probably the only company, as I know, which has done the 360-degree across the organization and created a individual development plan across the organization. We continue to focus on sustainability and, you know, culture of excellence, which really allows us to engage with our employees meaningfully. So based on all this, we actually, in looking at the macro environment, we do believe that our fundamentals, medium-term fundamentals are unchanged. KPIT's position has improved, if not unchanged.
While we see certain short-term, you know, uncertainties here and there, based on what we can see, we have increased our revenue guidance to 37% plus and EBITDA 20% plus. We do believe that there are many things which are happening in the industry. One is the technology spend, second is the competition like China, et cetera, which is really challenging companies in Europe and U.S. They have to really reduce costs substantially. I'm not talking about software costs, I'm talking about the overall cost of the vehicle. And the efficiency they need to bring in, the efficiency, and the time to market they have to improve. I think we believe we are in one of the best positions.
We are building our offerings in order to address these issues. In this context, we still feel very, as I said, we feel good about medium-term prospects of our company. The commentary we had given about the future is not changed at this point. Thank you. Thank you. We can now open it for questions, please.
Thank you very much, sir. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone phone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Chandramouli Nath from Goldman Sachs. Please go ahead, sir.
Hi, good evening, and thank you for taking my questions. My first question is on the Honda contract that was won earlier this year. It appears that there has been some amount of ramp up from the QoQ growth numbers on that contract. I think Honda has been presenting to investors on the sidelines of the Tokyo Motor Show, and Honda's senior leadership did call out KPIT and SCSK as partners. And I think from his public comments, it appears that he's talking about closer to sort of 3,000 employees to be engaged with KPIT. So just wanted to understand if you see any updates and an upside to your relationship with Honda. As I understand, I think earlier this year, KPIT had mentioned that the medium-term scope of that contract could be 2,000 employees.
So just wanted to understand your thoughts on specifically how the Honda contract might ramp up for KPIT over the medium term?
Thanks, Chandru, for your question. If you... It's a seven-year partnership agreement that we signed last year, and we just completed year one of that, and we are on track for the year one. Year two also, we are on track, as projected. Typically, what happens, Chandru, is when we get into a partnership, we take a long-term view, and we start with something that is visible. And when the engagement, when we get going with the engagement, there are other things that we uncovered, and our hope is that that could also happen in case of Honda. And we're, the partnership continues to go very well.
So our hope is that we'll go beyond 2000, but the agreement between the two organizations is that of 2000 as of now.
Got it. That's helpful. Just, just one more clarification on, on the Honda ramp up. So as I understand, I think that there was a few employees that were working from KPIT for the Honda business even before this SDV contract was signed. So is there any rough estimate as to, you know, at this point, at the end of 2Q, what percentage of KPIT employees is being sort of deployed on Honda-related projects?
The way it works, Chandru, is that we started the work five or six years ago, and we've been working in bits and pieces. And that work has made progress over the last five years. However, last year, we decided to sort of... Honda wanted to make, you know, a both parties wanted to make a long-term partnership. That's why we came up with the partnership for the next seven years. It's hard to go back and look at... Because the projects, new projects get started, it gets started and some of the old ones get over. So it's hard to keep track of, you know, the changes that happen periodically.
So, what we feel comfortable sharing with you is whatever target that we had by the end of the year, we have achieved that target, and there is a clear target that we have set up for the calendar year 2024. And, you know, we're going to do everything possible to make or beat that target.
Got it. Got it. That's helpful. My second question is on the revenue per employee metric. I think we had a phase of offshoring through COVID, which supported margins, but maybe on a revenue per employee basis, that wasn't so accretive. But I think post the Technica acquisition, we've seen also, you know, Renault ramp up and Honda ramp up. We've seen revenue per employee now I think this quarter was close to 5% better than the previous quarter.
... So I just want to understand, if there are any other factors at play there, and over the medium term, how we should think about, you know, your revenue per employee metrics, going forward?
I mean, we are happy we could do that. Basically, if you look at the overall, utilization, I mean, the number of people, headcount which we have added, and our revenue, it is, this, you know, we have added about 4% of headcount, and our revenue has gone up by 9%. Basically, we have been in a position to really improve the utilization, and basically, we have been adding freshers for a long time, as you know, because we are into, specialized areas. It takes us more time for people to get productive, and, we have been in a position to achieve that, during this quarter. So barring some of these changes or barring some of the ramp ups, I think, you know, it is constant.
But, some of these things will change, quarter to quarter. Hmm.
Got it, got it. That's helpful. Thank you very much, and all the best.
Thank you.
Thank you. The next question is from the line of Mr. Bhavik Mehta from JP Morgan. Please go ahead, sir.
Thanks, and congratulations on the margin for a really strong quarter. Two questions. Firstly, on the deal TCV, you know, whatever you've been asking over the past few quarters, can you talk about what is the average-
I'm sorry, you are not audible. There's a distortion in your voice, please.
Am I audible now?
There's still distortion at your end. Could you speak again?
Is it better?
Yes, sir, it's better. Please go ahead.
Yeah. Thank you. So two questions. Firstly, on the deal TCV, if you can just throw some color on what is the average duration of the deals you're signing. Is it more skewed towards shorter duration deals, which is giving you faster revenue conversion, or is it more skewed towards medium to long term deals? So that's one. And secondly, on the margins, you know, you obviously it's been a good execution over the past few quarters, and you, you have achieved a 20% target. So now where do we go from here over the next two, three years, let's say over the medium term? Should we assume margins keep on expanding, or do you intend to keep margins at 20% and reinvest all the gains back into the business? Thank you.
So the first part, I will answer on the margin part.
If you look at last three years, we talked about our margin between 18%-20%, and we did say that we'll protect 18% and we'll keep on investing into growth, anything beyond that. Slowly, as we become comfortable, we will increase the margins. That's why we have come to 20%. I think we would like to follow the same principle. We would like to invest anything beyond 20% for some time. As we become more comfortable, we will continue to increase. We believe right now, the way the industry is in a flux, we need to be proactive in investing into certain solutions and new technology areas.
But as we feel comfortable, I think, the margins will improve from here in next 2-3 years. But that, what speed, at what stage, you know, we'll keep on giving you the visibility. Next one. The second part is about the length of the engagements. I think our basic business is on focusing on T25 clients. We are frankly, I would request you not to... Beyond a point it is important, but it, beyond a point, not look at specific numbers in a quarter. It gives an indication, but as Sachin mentioned earlier, some of these are very long-term contracts and some of them are, you know, few years contracts, so it's a mix of both.
So, it's not. It cannot be as straight as one can make it.
Okay, sure. Got it. Thank you, ma'am. Thank you.
Thank you. The next question is from the line of Ms. Anika Mittal from Nvest Analytics Advisory LLP. Please go ahead, ma'am.
Hello? Am I audible, sir?
Yes, you are. Please go ahead.
Yeah. My first question is, we have several programs with data centers of pipeline. Can you put some light on our programs towards these, like, how we are moving as per the timeline or we are, how we are going to, are we going to execute the programs well before the expected timeline?
So sorry, try to get your question. What you're asking is, are we on track to execute-
Yes.
-the new engagement as per the decided timeline? Is that the question?
Yes. Yes.
Okay. Yes, I think it's the way I understood the question. Yes. If you look at our, there are about a few hundred programs that we are running or projects that we are running at any point in time. The general trend, vast majority of them are being executed on time. Some of them sometimes are slightly ahead of time and sometimes they're slightly delayed. But on an average, the big trend is they're all being delivered, you know, on time. And that's one of the key ways for us to build trust and long-term relationship with our partners, and that's something that we have done historically fairly well. And that's why the focus continues on T25, and we continue to go deeper and wider with them. Does that answer your question?
Yes, sir. Sir, my next question is: Currently, we are having around 20% revenue from commercial recurring. What is your strategy to penetrate in this segment going ahead? Do we have any potential customers or existing customers who with the negotiations are going on, or can we expect any deals in coming quarters?
As Mr. Patil mentioned earlier on, vast majority of our business, 70% plus, comes from passenger cars. And the business in commercial vehicles, you can look at it with two buckets: One is the trucks part, and second, from our perspective, second is the off-highway part. That has mining and agriculture. As far as trucks are concerned, so the twenty percent plus business that comes to us, vast majority of that comes from trucks. And there are existing relationships on the truck side. And we believe that the existing relationships can go further, plus there is headroom to add few more global clients to the truck part of the commercial vehicle. The area that we have started to invest is the off-highway part.
We are trying to understand the industry in a much better manner, so that we can provide technology solutions to solve their problems. We believe that many of the technologies that exist can be fixed to solve those problems. The growth from that segment, you'll probably see over the next, you know, over the next, 2- or 3-year horizon, that will complement the overall growth.
All right. Okay. My last question, sir, is on any update on QORIX? Have we got the regulatory approvals or any business we got in this bucket?
We are making very good progress. I think, soon we should get all the regulatory approvals.
Thank you, sir. That's it from me, sir.
Thank you.
The next question is from the line of Mr. Nitin Padmanabhan from Investec Capital Services India Private Limited. Please go ahead, sir.
Yeah, hi. Good evening. Congratulations on these consistent solid quarters. So, my first question is on what we are hearing broadly. So there are a lot of these news reports around VW, GM, and Ford halting production of EVs, citing low demand. Ford losing over $36,000 per car, and GM, Honda, having scrapped $5 billion JV, I mean, joint initiative to develop affordable EVs and so on, so forth, right? And there are some reports on shifts in focus to hydrogen. So in this context, it'd be great to have a sense of how you are reading what's actually happening on the ground. And basically, you did allude to this in some form, but is there any risk of any interim slowdown?
I am well aware that you are pretty spread across this technology stack, so either way as it goes, you should be fine. But still, good to get your thoughts on the same. Finally, some color on the order pipeline as well. Those are my questions. Thank you.
So overall, we think the trend towards electrification will be there in some way or the other. If not pure electric, it may be hybrid, right? It could be, of course, fuel cells, multiple technologies. But of course, EVs will remain dominant. And timelines can shift a bit here and there, but as we always mention, our basically spent is more for the future programs. So largely, those should be intact. But of course, there could be some minor changes here and there. But to just tell you, there are many companies we have already started working on fuel cell, we are working in hybrid technology. So we are otherwise ready for any alternate changes for powertrain from that perspective.
But the bigger opportunity we see in this, because any problem for our client is always an opportunity to us, is bring the efficiency in terms of technology and cost efficiency, which is for them to favorably compete with the Chinese and other players. And that is something we will double down on that, and we are engaged, of course, with some OEMs on that. Those will be our opportunities. Now, some, you gain somewhere, you have to figure it out some other parts, so that is there. But this is overall, we feel good about it because of our understanding of the overall space, our different skills which we have. Also, on the charging and other infrastructure, we have seen a very significant traction.
So all in all, I think, from that perspective, we feel comfortable about the space. So about the pipeline, Sachin?
Yes, about the pipeline, as Mr. Patil mentioned earlier on, pipeline from our perspective remains robust, and it has been robust for quite some time. We've not seen any kind of noticeable change in terms of creation of the pipeline or the closure of actual engagement. So, the trend continues, Nitin, in our case.
Perfect. That's, that's very helpful and very heartening to hear. Thank you so much, and all the very best.
Thank you.
The next question is from the line of Mr. Vimal Jamnadas Gohil from Alchemy Capital Management Private Limited. Please go ahead, sir.
... Yes, sir, thank you for the opportunity, and heartiest congratulations on a strong quarter again. Sir, my question was on vehicular architecture and its evolution. We have seen vehicles going from dispersed architecture, going to domain-specific architecture, and now probably we're moving toward centralized architecture. And you highlighted efficiencies as well, and that this could be a part of the centralized architecture that OEMs want to adopt. I just wanted to get a sense as to how will the software intensity increase over here, and the role of third-party service providers like us, what role can we play here? Thanks.
Sir, I think the complexity goes multiple four times. It is not only about the software going up in 10, but the complexity goes multiple times. And I think that is where exactly we are bringing out you know solution, both from integration perspective as well as architectural blueprinting, et cetera. So I think it's becoming very complex. And just to give you some idea, the overall testing and validation is going to go up by 3x plus you know than what it was being done earlier. So I think there are multiple opportunities in this area.
At the same time, I must bring out it is not a simple, straightforward software, and neither including testing or this, it is all performance-based, and the complexity of architecture is very high. So that really requires you, you know, lay, you know, understanding of architecture, even to do any kind of activity downstream.
Understood. Sir, and just one, you alluded to some short-term uncertainties that you're facing, although may not be very serious, but if you can just highlight something more on that?
Short-term uncertainty you alluded to. We are not facing it, the industry is facing it. That's why I mentioned. That, for example, UAW strikes or this. We are... I'm just—we just wanted to call it out, that there are these uncertainties the industries are facing right now.
Understood, sir. Okay, thank you so much. All the best.
Thank you.
Thank you. The next question is from the line of Mr. Mohit Jain from Anand Rathi Financial Services Limited. Please go ahead.
Sir, congrats, first of all, good quarter on all fronts. One is related to the deal pipeline. It is a follow-up to the previous one also. So from a large viewpoint, like, we had very good FY 2022, say, last four quarters. So how is your large deal pipeline looking like after the Honda deal? And should we expect the deal momentum or PCV that you announced to be maintained broadly, at a similar level?
Mohit, what is happening is, there are certain companies who like to go out and make an announcement of a large engagement, and then there are certain that just happen, correct? Where there is no announcement. Having said that, more and more as we work more closely with, as I mentioned earlier on, with the T-25, we have had long-standing relationships with many of them. The business continues to grow. So there is not necessarily one large engagement per se, all the time, but there are several projects and programs that we start as we go deep and wide with them. And we are seeing more and more of that with our existing clients across passenger car and commercial vehicles. That's what I would say in response to your question.
Okay. Like, let me try it once more.
Yes.
So we had, like, almost $990 million PCV in FY 2023, right? And FY 2024, do you think, like given whatever we have done so far or whatever is the pipeline, you need to deliver growth on that? Or do you think it, it's once in a multiple years, you get one such year where you touch almost $1 million in PCV?
Mohit, I think as Sachin was trying to explain, what we have been saying is that not every large engagement we would be able to announce, talk about upfront when we work on it. So there would be some of such engagements where we will work on them, execute them, and over a period, they will actually turn out to be mega engagements. So it might not reflect as we were able to do it for the large deals that we announced. But if you ask about the conversion rates and about the win rates, there is no reason why it should be different going forward.
Okay. And second follow-up was, like you guys are doing so well in Europe, but U.S. seems to be more or less flattish over the last two, three quarters. So how is your outlook changing in the U.S., plus or minus? And when should we see, U.S. maybe getting back to growth, or do you expect it to remain steady?
If you look at the year-on-year growth, it's still quite robust. And what happens is more and more programs are actually becoming global, so the recognition of revenue can actually shift from one geography to the other. Now, you know, that's that is true, and we are seeing more and more of that. Again, that's one of the outcomes of having a T-25 strategy. Essentially, we are growing with the clients where their footprint exists, and it exists across the globe. So just looking at geography may not be the most accurate measure of the broad-based growth. Having said that, if you look at purely from U.S. OEM perspective, there has been reasonable amount of growth, and we believe that the geography will continue to grow on its own.
... All right, sir. That's all. Thank you very much, sir. All the best.
Thank you.
The next question is from the line of Mr. Sandeep Shah from Equirus Securities. Please go ahead, sir.
Yeah, thanks. Thanks for the opportunity. Again, a question related to previous participants. So I think we have done extremely well, and congratulations for the same. Even in this year, if I strip out the inorganic growth, the organic growth would be in the high 20s. But it looks like it has been supported through some mega deal wins as well. So your growth outlook on an organic basis with the target and, the, vision to grow at 20% CAGR on an organic basis still continues, with whatever macro uncertainty remains? And will that be dependent in terms of one or two mega deals, large deals to be signed each year, or that is independent of that?
Because, the kind of program we are getting involved, even the current TCV quarterly basis would be enough for us to post a 20% kind of organic growth.
I think, Sandeep, we have answered this question multiple times. But, at a high level first, even this year, our organic growth has been more than 30%, not 20%. So that is one point. The second, I did mention in the beginning of the day, that, our medium term, whatever we mentioned about, outlook remains same. We are not, we are not changing any commentary for the long term. Now, whatever we have been talking about it, it is there. Naturally, for a specific year, we will come back and talk about it in the month of April, what we feel about the next year. But, overall, in the medium term, all the fundamentals are, are unchanged.
KPIT's position is unchanged, and we see actually, you know, as we said, multiple areas in which we can go out and help our clients. There are areas such as commercial and other areas which have seen a lot of potential, which we have not captured yet. So overall, we believe in the medium term, the market potential is unchanged.
Okay. Thanks. Thanks. Just the last question. Earlier we were seeing KPIT is involved in many strategic engagement related to SDV with 7 out of 10 OEMs. Any update on that, whether that number from 7 has gone up, and the potential for the same to go up?
So, first of all, I think, there is of course, potential to go up. There'll be more and more OEMs in future who will embark on SDV journey, and there are different parts of the journey. And, we will be part of more and more such journeys going forward. Not all of our T-25, clients have fully embarked on the journey, so we see headroom, over the next year or two, to have more SDV programs.
Okay, thanks a lot.
Thank you.
Thank you. The next question is from the line of Mr. Abhishek Pathak from HSBC. Please go ahead, sir.
Yes. Hi, audible?
Yes.
Yes, sir.
Yeah. Hi, hi, sir. Congrats on a great quarter again.
Thank you.
So, you know, my question, my question was, despite a strong H1, the implied CQGR seems to be meaningfully lower, maybe at around 2%-2.5%. So, you know, just some clarity, has there been some, I mean, some ramp up, which has been front-loaded, which won't happen in second half? Or are there some short-term factors at play in, in the second half? And I mean, I do see the irony in saying a 37% guidance as cautious, but, for want of a better word, what's driving the, the, the outlook? And is there any upside to, to the guidance? Thank you.
So, first thing is, I think at the beginning of the year, we had said that, as the environment was, you know, little, if I have to say, soft during that time, we said that we will maximize our opportunity in the first quarter, the first, half year. We had said that earlier, so that we could maximize it and ramp it up ahead of time. And we are very happy we could do that. That is number two. Third thing is, I think, I don't know how you did the calculation, but I think, the calculations are little better than that, what you mentioned. I think it is still reasonable, numbers, even to get to 37%. And we have said 37% plus, because frankly, we do not want to, say something.
As I said, there are some smaller, nuances here and there. I guess, some of the strikes can get closed tomorrow, but, you know, we have to, we have to be cautious in saying what we say. So with all that, I think 37% is not a bad number. I think, and the profit number, right, in our, in our opinion, is, pretty good, what we have mentioned. So I think this is, what we see, we see today. There is nothing, fundamentally I said, the fundamentals are unchanged and KPIT's position remains unchanged.
Thank you, sir. Thank you.
Thank you.
Thank you. The next question is from the line of Mr. Rajit, an individual investor. Please go ahead, sir.
Good evening, sir, and I'm sorry for the disturbance.
... No problem. We can hear you.
All right, sir. So the question is related to the JV. So I missed the initial update, but my question is more related to how the JV will pan out in terms of client ownership, client serviceability and revenue distribution. And the reason I'm asking is, I'm assuming that the certain IP is moving to the JV from our side, there will be certain revenue which might move to the JV as well. And going forward, I mean, do you see KPIT as it stands now, foregoing some revenue to the JV, and in turn, will there be something accruing to the KPIT as of today? So basically, I mean, how will it pan out six months down the line and maybe five years down the line in terms of our own turnover?
See, the first thing, the reason we did the JV, as we mentioned in the genesis of the JV, was, from pure AUTOSAR, classic AUTOSAR, the whole thing moved towards a middleware, which is includes, classic AUTOSAR plus safety, plus, plus, plus, plus OTA, plus OTA, other things. So it is much more than that. So the investments required were very significant, in excess of about $100 million worth of investments required to realize the product. So that was point number one. Point number two is it has to become an industry standard. We wanted to catch up and leverage partners, and we did say that we have one partner today, but we may look at additional partners. So that was the idea. So first idea was to really, reduce the investment. The second is to get the better market share.
And the KPIT, the way it will really benefit from, is all the integration will come to KPIT revenue. And, so revenues will come to KPIT. So from that perspective, it's a win-win because, that's how KPIT will benefit from this. Plus, it will of course, get a share of, profits, in due course, from the JV, as well. So, that is the genesis of the JV.
Right, sir. Thank you. So I mean... All right, so my second question is related to the finance cost. There is a, an item which has been there for the last couple of quarters at least, which is unwinding of certain contracts, and that number is always small, but over a period of time, I think it's more than INR 10 crore. So I just wanted to understand a little bit more in detail what are those contracts and how are we accounting for the unwinding costs? And are these actually cash costs?
No, no. So if you look at finance costs per se, in a particular quarter, that does not include the unwinding cost of hedges that you mentioned. If you look at the published results, we give a table of what it is, the actual working capital borrowing cost and what is the indirect accounting treatment on various leases or other items. So the finance cost is not the one that you're referring. If you look at the note in the published results, you'll get the answer.
Okay. I'm sorry. I might be referring to the other income or the other cost, but anyhow, I'll come back to you offline on that.
If you look at the other income-
Yeah.
-then, yes.
Yeah.
Other income, we've had profit this time because of some of the hedges that have turned profitable to us. Yes.
These are actual cash,
Yes.
Cash income?
That is correct. Yes.
These hedges are, I mean, are these derivatives or are these plain, simple forward contracts?
No, our hedging policy, we have said it is plain forward contracts, and in our investor update, you will find the details of the hedge quantity and the average hedge rate that we have at the end of every quarter.
So, I've seen that. If I may, just last follow-up. So we cancel those forward contracts in an event when we don't have an incoming receipt against those forward contracts and then book the profit. Is it? Is my understanding correct?
There is a particular treatment in accounting under Ind AS 13.
Right, right.
So you may connect subsequently with Sunil, and, you know, he'll explain to you, but the accounting standards mandate the accounting treatment. So-
No, I...
One for, one underline for our forward contracts. If you look at the quantum of hedges that we have done and the incoming, the inflow of the Forex, foreign exchange, we typically are in the range of about 75%-90% of our net exposure, not the gross exposure, but the net exposure in foreign currency. So it is never that there is, all forward contracts have a strong underlying, associated with them. We don't cancel, we don't cancel, we don't cancel anything.
No.
They are right.
Okay. Thank you. Thanks a lot, sir, and wish you all a happy party.
Thank you.
Thank you. The next question is from the line of Mr. Akshay from Axis Capital Limited. Please go ahead, sir.
Hi, congrats on a good set of numbers again. So, you talked about Chinese OEMs becoming aggressive in the market and your role to help the developed market OEMs for cost efficiencies. So if you can just elaborate on that point, what did you exactly mean by those cost efficiencies? Were you talking about offshoring or was there something else as well, which you were trying to convey?
If you look at, Akshay, if you look at, typically there is a cost difference of, you know, in a normal vehicle, there is a cost difference of 20%, between the, you know, the like-to-like Chinese, electric vehicle versus the ones that are available in the western part of the world. So the key here is how to reduce the overall vehicle cost. And from KPIT's perspective, what we are doing is we are actually looking at their entire architecture, and the new architecture, along with the blueprint and execution of it, will provide substantial cost benefit to the OEMs per vehicle. So that's one area where we are creating efficiency, for the OEMs from the software and architecture and software perspective.
That's our way of helping them. Of course, there are multiple other ways that they can actually reduce the cost, but this is really going to be our role in helping them. That is one part, and secondly, it's one is the cost competitiveness, and secondly, just making the overall vehicle more attractive. There are other aspects to it. For some of the Chinese OEMs, if you look at their off-board experience, they are taking the lead. It also creates an opportunity for KPIT to create, you know, whether it's the in-cabin experience or off-board data and services, there are certain learnings that we have from some of the Chinese OEMs that we can take to the global OEMs outside of China. It's both ways, right?
The first part is to actually reduce the cost of their vehicle, and second part is to make the vehicles more attractive and competitive.
Got that. Got it. But just thinking out loud, these things typically have been done in-house historically. So what drives your confidence for these engagements, a company like KPIT being chosen for these kind of engagements?
So, one is the evidence. We have already engaged with some of the OEMs, and there are ongoing conversations with some of the others, so that gives us the confidence that we can actually do it, and we are doing it. And secondly, if you look at the expertise, the deep expertise that are needed, very few OEMs actually have that at scale, correct? If any. And that's why they need a proven, scalable partner with the deep expertise to help them make that journey. So it's a two-way street.
Hmm. That's clear. So, so another question was on the revenue per development employee which you report. So that has been steadily increasing every quarter for the past four quarters. So wanted to get some color around that. I know you touched upon utilization, but would be good to, if you could break that, more to what, what factors, other, other factors would have contributed, like utilization, on-site mix, price hikes, if you would have seen anything of that sort. So, I know nothing quantitative, but qualitatively, which are the factors which are more predominant in helping that number go up?
So Akshay, what, we have said and we have been focusing upon is, improving the, net, rate realization, and that has got, multiple components. So it includes, the actual, rate that you bill to a client, and, we have been focusing on taking that up steadily, in every new engagement that we do. The second part of it is related to your, efficiency, which is utilization. So we are, when we were in the ramp-up stage, for the large engagements, we had ahead, hired ahead of time, and of course, there were also freshers hired who are getting utilized, and hence the utilization has gone up. And the third factor is, the productivity, and, productivity is, I mean, one is we talked about our platform tools, accelerators that we can use.
The more fixed projects we do, the better. It helps for net rate realization and also for personal productivity. So these are some of the components of rate realizations which have been improving across quarters. If you look in the last 4, 5 quarters, they have been continuously improving, and I think that has resulted into improvement in the net revenue per employee.
Got it. The last one from my side would be, so you talked about this JV with ZF. So I wanted to understand who would be the competitors who would be developing similar middleware platform, similar to what this JV tries to achieve? Any color around that?
There are the traditional tier ones who are trying to build a platform. Some of the large traditional tier ones, they are in the play. And then, some of the OEMs may also want to take the platform that company like KPIT is building for them, to their, siblings or cousins, so to speak. Correct? So that's, that's another option that they have. And, there are other, system integrators who are also thinking about, getting into this. So it's an evolving field at this point in time, because-
Five years from-
We'll have... Is there... Did you say something? Hello?
No, no. Please continue, sir.
Please continue on.
Yeah. So, you know, it's new in some ways, and that's why it'll continue to evolve. And, you know, we are certain that we'll face new competition as the years go by.
Great, thanks. Thanks for answering my questions. Best of luck for the future.
Thank you.
Thank you. Participants, if you wish to ask questions, please press star and one on your touchtone phone. We will wait for the question queue to assemble. The next question is from the line of Mr. Puranik from Enam Holdings Private Limited. Please go ahead, sir.
Hi, Kishor and Sachin. Fantastic quarter.
Hi, Mr. Puranik.
Nice to see you in the 20% margin bracket, and 30% growth, 30+% growth bracket. I have a question on, the vehicle architecture, you're developing. It's, amongst the highest in the value chain. How design and architecture intensive it is in terms of people, process and all? And also, you also mentioned about, the testing and validation intensity of this. How intensive it is this, in terms of people, process, and opportunity? And this, in turn, gives you a lot more fixed price contract and, better margin.
Absolutely. Absolutely, and I think what actually we have realized is, in specifically the way the vehicle change to the central architecture, the most critical part is the architecture. And I think it really defines the cost, quality, and time one will take to deliver on the contract. So we have really doubled down on that. As you know, we did some very, very good acquisitions, like Technica. We of course had a lot of expertise earlier. So we actually put all this together, and then now we are developing future areas where we can really create what we call the left shifting of the quality, where the whole architecture—the quality is driven by architecture.
Mm-hmm.
And then basically, subsequently, the validation and virtualization is also done as early in the stage as possible and through software, rather than the hardware. So that is where our focus is, and I think that's where we see tremendous opportunity.
The intensity in terms of effort spent on both architecture and R&D and testing and validation?
Yeah. The complexity is very high, so we would like to automate as much as we can-
Mm.
and, make it into what we call blueprinting.
Mm.
Basically, bring all the knowledge into either the architecture or what platform we are building for this, and de-skill the efforts, which we will have to do on a project.
So when you say a platform, vehicle architecture platform, can you explain what the elements that this platform has, both in terms of, domain technology, process, and regulation?
Yeah. I mean, the, there are two Power Points I want to mention about. One is the, it talks about the architecture. When you talk about the architecture, it talks about vehicle architecture, it talks about software architecture, basically it talks about network architecture. And there is basically. These, all these need to be, if I have to say, in harmony, and that's where, and the, and the last but not the least, is the data architecture, this, which is also this. So this has to be in harmony, and that is the most critical part, and that's where most of the clients which have made mistakes, have made in that part. Now, the other part of this is, when you do this, along with the semicon and the hardware part, then the performance can be very different.
You can see that what you have in this E/E architecture, in the software or network architecture, cannot be realized in a physical form, physical form. So we have created certain tools and this, so this can be virtualized ahead of time. The performance as well as the issues which can come can be picked up earlier. That is what really brings our uniqueness.
These tools, components, and subsystem, how they get used up in a project development?
Is what we, I mean, they're owned by us, so we...
Uh.
We use it as a part of our component.
I see. When you say vehicle architecture, so where, let's say you're doing it for another client, so how do you leverage these tools?
No, I think these are not, these are basically blueprints kind of a thing, if I have to say, in some way.
Mm.
So that we give, and in case of network architecture, these are tools which are sold to them.
I see. And you also have productivity tools?
Productivity tools are internal, software productivity tools. Of course, we have many and they are many.
Kishor, where do you make your 20%-30% margin? Is it in architecture or in validation testing?
It actually would be both way, because if you just do it at a very high end, it is difficult, as you know. So we have to do it at both sides. So we have to have constant business to realize the margin and what it is.
Very interesting. So the... and fixed price component is what, of the revenue?
If you look at the, during this quarter, it has gone up by almost 5%, right?
Mm, mm.
So it is going up, and as we feel, as our SDV programs go, you know, forward, I think-
Mm.
We'll see that increase.
As you rightly said, cost, quality, time is very important. That's important for fixed price projects also, and for the margin also, isn't it?
Yeah. Yeah.
That's where you make your 20%-30% margin.
It will be 20%. We are-
No, no, that's good.
Yeah.
That's great. I don't think you need to do more than 20%. Keep reinvest in the business. 20% is really great. That's fantastic and excellent. So when will you get your next $100 million account?
No, no, I think we spoke about it. I think we look at every account, billions as our opportunity to do that. In some cases, we upfront announce it, in the other cases, we build it over the period.
Sure, sure. Wonderful, Kishor and Sachin. All the best to you.
Thank you very much. Nice speaking to you.
Thank you. In the interest of time, that would be the last question. I would now like to hand over the conference to the management for closing comments.
Thank you. Thank you for your participation, and if you still have some questions, please feel free to write to us, and we'll be happy to get back to you. Have a great evening. Thank you and bye-bye.
Thank you, sir. On behalf of Dolat Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.