Ladies and gentlemen, good day, and welcome to the Q2 FY 2022 Earnings Conference Call of KPIT Technologies, hosted by Dolat Capital. As a reminder, all participant lines 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 zero 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, Margaret. Good evening, everyone, on behalf of Dolat Capital. Trust all of you are keeping safe and wish all of you a very happy and prosperous Diwali. I would like to thank KPIT Technologies Limited for giving us the opportunity to host this earnings call. Now I would like to hand the conference over to Mr. Sunil Phansalkar, who is the VP and Head IR at KPIT, to do the management introductions. Over to you, Sunil.
Thank you, Rahul. Good afternoon and a very warm welcome to all on the Q2 FY 2022 earnings conference call of KPIT Technologies Limited. I take this opportunity to wish all of you a very happy, healthy, safe Diwali and a prosperous new year ahead. On the call today, we have Kishor Patil, CEO and MD, Sachin Tikekar, President and Board Member, and Priya Hardikar, CFO. As we do always, we'll have the opening remarks by Mr. Kishor Patil on the performance of the company during the quarter and the way forward, and then we'll have the floor open for questions. Once again, a very warm welcome to all of you, and I'll hand this over to Mr. Patil now.
Good afternoon, everyone. I'm very happy to take you through the results of this quarter and overall performance. As you may have read, the revenue has grown 23% year-on-year from $65.3 million last year to $80.4 million this year, this quarter. Generally the growth has come across the geography, across the verticals, and most of the practices have grown during this period. The growth continued to come from key 25, where there is almost 20% growth year-on-year. Commercial vehicles have grown faster and overall, passenger car has grown about 18% year-on-year. In terms of profitability, we continue to have the fifth consecutive growth in the EBITDA margin.
We have been in a position to expand this over last 5 consecutive quarters. Our EBITDA margins have expanded from 14.3% last year this quarter, to 17.6% this quarter. This has reflected into cash conversion, which has been extremely strong, from INR 528 crore last year to INR 933 crore this year is the cash balance. So good liquidity looking at about 6 months of expenses for the company. Overall, the cash conversion has been 145% of the operational profit, and if you take out dividend and our acquisition expenses, it's 85% conversion to the operating profit.
This profitability has been post a significant increase into our employee costs, which are on account of higher increments during this period, which we have given. Apart from special incentives we have given, medium-term incentives we have given to our employees. With this, with more than 1.5% increase in our overall wage costs, as compared to sales, from 66.2%-67.5%, we have been in a position to expand the margins during this period. This has been possible mainly because of the realization improvement, per person improvement, the mix of revenues, higher realizations, and of course, operational efficiency. This has helped us to do that.
There are two major announcements during this time and I would like to talk about both. First is a strategic engagement with one of the European OEMs. We have signed a $52 million engagement over the next five years. It is an electrification area and we take the full ownership of this program and then naturally subsequently the maintenance of it. Electrification continues to be a very strong area for growth and area of spend for our clients as they are trying to ensure that they are in a position to really increase their number of models as well as the number of vehicles in the electric field. So that continues to be a big area for growth for us.
Apart from that, connected area is also area where the clients are spending. While we continue to focus on the CASE, which is both on, I mean, area which is electrification, autonomous, connected, where we have significantly good capabilities and expertise and the scale, we believe that this will continue to grow. I mean, over a period, you will see all the practices growing, and this continues to be the area of spend. To increase our offerings in our targeted clients in the areas where they're spending, we are expanding the scope of our services. During that, basically one of the key area for services spending, as you must have seen, is the software-defined vehicle.
Which is basically in terms of architecture consulting, middleware, operating system, et c. In this regard, we have announced joint development of middleware platform along with ZF. It's a significant one because most of the clients will spend in this area. The common investment will help us in two ways. One is it will allow us to go to all our clients and help them in building their own systems more effectively, because we would have certain platforms, components, accelerators, which will reduce their time as well as reduce their cost, and we will be in a position to offer different business models.
The second is, of course, we will be in a better position to do testing as well as performance management of our systems because of the infrastructure which will be available from ZF, as well as their understanding of the hardware and lower level operating system. This will help us to go to almost all our clients. We will be in a position to go to almost all our clients. This is very important and, as I mentioned to you, as we have been focusing on CASE, this allows us to really expand our offerings in targeted clients.
We are also trying to expand our areas, which is third area, I would say, into, in terms of cloud and cloud as well as shared mobility. Or I would say connected services over cloud. We will look for expanding our areas, as I mentioned to you. During this quarter, we have done one acquisition, which is a partial acquisition, I would say, of FMS, where we have acquired 25% of the stake. This allows us to really get into one of the key clients in Europe. Apart from that, expand our scope of services in both connected as well as autonomous area in a different domain in a different service offering.
We will continue to look at inorganic options for us, but largely to expand the service offerings so that we can expand our scope of offerings to our existing and the targeted clients. As we go on to the people side, as you know, the overall environment is challenging, and the demand is more than the supply for the people. I think we have experienced a higher attrition as compared to the last quarter by a couple of percent. However, we are doing two things. One is we are trying to manage the attrition without minimal disruption to the client services, where we have increased the capacity to fulfill significantly.
We have more than doubled our capacity to make offers in a week. We are also creating multiple smaller centers and really attracting people from wherever they are available. We are doing all those kind of things with really minimal, or may I say, no CSAT impact on the part of clients. Actually, during this time, our CSAT rating have gone up, but we are very conscious of the fact that this may not be tenable if the attrition keeps at a high level. We have taken couple of very strong steps. The first step is very high, I mean, relatively very high increments as well as incentives to employees which accrue to them over medium term.
The second thing, as we have been, as you know that we are a net talent creator, we have been investing into creating a competency in this domain, specific domain, creating that expertise. I think we will continue to do that. That will accelerate that gives people opportunity to learn new skills as well as take different roles and make it an exciting technology career with us. We will continue to do that. Last but not the least is basically development of people through rotations and giving them different type of opportunity within the company. We are doing all this, and we are very confident that in the next four to five months we will get the attrition under control.
Of course, we'll continue to improve our performance both in terms of delivery as well as engagement with client. While we have done a good job during this quarter, we are taking some of these steps proactively. Overall, if I look at in the future, we see a very positive demand environment. We have shared in the past that many of the consulting companies have said that they look at 8-10 year cycle of 10% growth in engineering. We also see that in spite of challenges which has been there on the chip shortage, et c, which are more to do with manufacturing, the companies have been investing and increasing their spend actually, and you might have seen those announcements.
In the software, specifically into software-defined vehicles and the new architecture as well as, the domains, CASE domains as I spoke about. We believe that this trend will continue, and so we see a very positive demand environment over the period. In view of this, and in view of the strong lineup we have, we have improved our outlook for the year between 18%-20% revenue growth and profitability EBITDA growth of 17.5% from 16%-17% range we had given at the beginning of the year. This is what I wanted to cover about this quarter. Thank you. We can now have the questions, please.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use hands-free while asking a question. Anyone who would like to ask a question, please press star and one at this time. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Vimal Gohil from Union AMC. Please go ahead.
Yes, sir. Thank you for the opportunity and congratulations on a good quarter. Sir, my question was regarding your growth rate in this particular quarter. While you know the growth rate is well appreciated, if I were to look at you know your revenue growth rates across practices, there are a couple of practices which has actually declined. If I were to look at a slightly longer term trends, you know most of the practices like powertrain, et c, they've been volatile on a quarter-on-quarter basis. How should we sort of understand these trends on an overall basis? In your comments, you just mentioned-
Yeah.
that you are going forward, you are looking at broad-based growth, right?
Yes.
Going forward, should we assume that, you know, all your segments like powertrain, ADAS, connected vehicle and the other segment will grow in tandem? If you could just specify what was the reason behind the ADAS and connected vehicle segment declining. Post which I just have one more question on the balance sheet.
Yes. Let me give you a broader answer to this question. As I said, first, there is really a trend which is in terms of spending in this area by all the OEMs. Now, individual OEMs prioritize and also individual projects come in a quarter or later, you know, may not be there, some new projects may not come up in a quarter. If you really look at certainly next few years, at least three years or so, I see electrification as the strongest area in terms of domain which is being spent. As you probably know that while, I mean, there has been many companies which have been catching up in terms of electrification, which is right.
If Tesla is about 500,000 vehicles, I think there are now 2-3 OEMs who have crossed 350,000-400,000 vehicles in a year. There is a real investment in this area to increase the presence and bring them into market. They are growing at a much faster rate. The second part, of course, connected, again, spend is happening in this area specifically because the OEMs want to really earn revenues from these services which they want to provide to the passengers in a vehicle. There is a spend both in terms of cloud connected services in that area that is increasing.
Now in ADAS, what we have seen is, if you look at few years back, there was a high growth. Currently, I think many of the OEMs have prioritized level four and five of ADAS towards electrification, but we see a good pipeline of ADAS. Not only that, there are new offerings which are bringing, and I talked about FMS and some of these, which are a different type of offerings, which will probably improve our also long-term engagements. We see the third area where we are now seeing growth is also body domain, which, again, with the new architecture, is also becoming very important for the experience of a client when he is traveling.
With all this, I think we see growth across the domains. In a particular quarter, something may come up, something may go down. I think that. I mean, we cannot explain year-on-year if you look at it. Most of the services have grown.
Right. Sir, just to sort of give you some trends. If I were to look at ADAS as a service line, I think in FY 2020, if I were to look at the average run rate, you were at $70 million approximately, where you had two very strong quarters where you had almost $20 million. Today we are at about $14.5 million. I mean, my sense would be that this has been an area where customers have spent or the spend has, you know, it has increased, if not or at least has remained stable, if not declined.
What would explain our sort of decline in this particular practice over FY 2020 over the last two years?
There are two parts.
Yeah.
One is, I would say that as I mentioned to you, there are some larger clients who did prioritize the electrification over the last year and a half, which I have mentioned in our earlier calls. More importantly, in our case, it has not really reduced to that extent as it appears. Actually, we have moved a significant part of onsite to offshore during this era. Because the budgets and of course, as I have also explained that initially we build these practices and expertise onsite and we were in a position to, of course, charge at much higher rates. Over the period, I think, in this situation, we were in a position to move a lot of work offshore.
That is the reason the volume is not really significantly changed, but certainly the revenues have gone down. I do not see that as a big challenge because most of the clients are going towards L3 kind of situation. We see a reasonable pipeline in this area. I may say that a high growth in this area will come after about 18 months, 12-18 months. Not only that, the new architecture which I'm talking about or the middleware that is very much connected with autonomous. The performance of the system has to really match in case of autonomous system. Over a medium term, I don't see any challenge in that.
Okay. Probably, in the shorter run, you might see some underperformance vis-à-vis the company average in these two areas. Would that be a fair assessment to make?
Yeah.
The second question, if I may, on the balance sheet. What I notice is you have a fairly chunky sort of a liability number. In other current liabilities, you have this INR 234 crore number, which is almost like 10.5% of sales. If you could just explain what I believe is these are probably advances from customers, and you can correct me if I'm wrong. Will this sort of sustain? Because at this level, you will have almost a negative sort of a working capital cycle, which is unheard of in, you know, in the IT space, as such. How should we look at that area?
If you look at our current liabilities, they consist of trade payables and lease liabilities, and these are normal course of business here. The trade payables include employee liabilities, the normal, you know, creditors there.
Ma'am, actually, I was referring to the other current liability number.
which is INR 234 crore in H1 of 2022 and INR 210 crore in March 2021.
Other current liabilities will include, not only the advanced revenue, it will also include some bit of security deposits for the leased premises or statutory remittances, or some other transactions. It is not only a combination of only one portion of the revenues here.
Ma'am, how much would be your advance received from customers in this overall INR 434 crore?
It is not a significant portion, is what I can say right now. Our revenue recognition policy is also, you know, published there. We do account for the unearned revenue part, based on the policy.
Is it fair to say that, you know, given the fact that you have such a large liability portion, your overall working capital, I mean, including these liabilities, will probably stay in the negative area, or?
Uh, it-
No, I think it is difficult to say that whether it will stay. Obviously, it will change a bit as we move ahead and as these come down. To maintain it at the current level, to say it will be at the current level is not a good thing. Of course, the liabilities will go down a bit as we go ahead, and the working capital changes will be seen. We'll remain focused on cash realization as compared to the operating profit. I think that is basically the area of focus.
Right. Anything, I mean, obviously you are at negative. I mean, anything over and around 10% is fine. I mean, that would be in line with what the industry does. I'm not saying that we are, even if we increase to that level, we are fine. I'm just-
Yeah.
Sort of, is there any positive surprise that could come up from here, is what I want to know.
No.
Okay. Fair enough. Fair enough, sir.
Just one thing. My colleague thought that you mentioned that in these three areas, growth will be dampened. Is that what you made a statement? I thought it was.
No. What I read from your comments is probably the growth in ADAS in the short term, short run, should be lower than the company average. Whereas powertrain, wherein your electric vehicle practice is situated, that will see a robust growth.
Absolutely.
going forward at least.
That is fine.
The growth will be offset.
Yeah.
Overall, numbers would be, you know.
Yeah.
thereabout, I mean.
Yeah.
As per our expectations. Yeah.
Thank you so much. Sir, sorry, one last question on other expenses. There has been a sequential decline of 6%. What explains that?
The other expenses will include a lot of expenses in terms of, you know, facility-related expenses or a bit of expenses we must have incurred on vaccination drive. There may be some changes, you know, relatively lower from quarter-on-quarter.
Fair enough, sir. That's fair enough, ma'am. Thank you so much. All the very best.
Thank you.
Thank you. Ladies and gentlemen, in order to ensure that the management will be able to address questions from all participants, we would request you to please limit your question to two at a time. Should you have a follow-up question, please rejoin the queue. Thank you. The next question from the line of Karan Uppal from PhillipCapital. Please go ahead.
Yeah. Thanks for the opportunity and congratulations on a very strong set of numbers. Two questions from my side. First is on the macro part. We are hearing lots of news sources on the chip shortages, which is disrupting the global supply chain of the auto industry. Are you seeing any impact of it on the R&D spending and the budgets the OEMs and the tier ones are committing for, let's say, next three years or next five years? That is one. Secondly, great to see a large deal of INR 50 million in the EV space. Is the overall revenue recognized equally in the five years or is it front loaded?
Okay, this is Sachin Tikekar here. On the chip shortage, we all know that chip shortage across the industry, not just in the automotive and mobility has been a problem. That's because of the demand supply mismatch and, you know, different countries closing down at different times. Most of the OEMs have prioritized their vehicles, so because they are not getting enough chips. The good thing is the demand is there from the consumers for the vehicles and we are probably peaking out in terms of the shortages. I think OEMs are figuring out different ways of making the chips available. However, the problem will continue through 2022 and it will slowly normalize.
Having said that, at some point we'll see the sales go up as the chip shortage goes down because the pent-up demand needs to be met. That's the macro picture. Now, what does that mean to a company like KPIT? What we have seen is, throughout these ups and downs, all the OEMs and the ecosystem players are committed to making investments in software-defined vehicles. That's the future. Everybody's trying to play a catch-up game. All of them have reduced their expenses on the other side and have made a long-term commitment to make investments in software-defined vehicles. In fact, we have seen increase in inquiries and demand overall through the chip shortages.
We believe that for the areas that we specialize in around autonomous, connected and electric, that based on the software-defined vehicles including the whole software architecture and so forth, we think that the demand will continue to be robust at least for the 3-5 year horizon. Net-net, of course the macroeconomic impact is there. You know, there will be some ups and downs over the next few quarters. What it means to KPIT is a continued demand for the services that we offer. Does that answer your question?
Yeah. Just to conclude, no impact as such or no deferrals from the OEMs and tier ones on the project timelines and anything like that? Yeah.
We are saying that we are seeing more and more interest.
Right. Cool. Thanks. Next question was on the large deal in the EV space. The revenue will be recognized equally in five years or is it front-loaded?
Yeah. Somewhat, I think it's in equal installments over the next five years.
It's a milestone-based. I think it will depend upon how and when the milestones come.
Okay. Last question is on the commentary you had mentioned on the new deals which you are seeing in the pipeline in the new software architectures domain. Any progress on that front?
We have already started working with few of the programs already. These are the initial stages. This can scale in future. I talked about our focus on increasing our presence in this area.
Right. Okay. Thank you, sir. All the best for KPIT.
Thank you.
Thank you. Request participants to limit your question to two at a time. The next question from the line of Shyam Sundar Sriram from Sundaram Mutual Fund. Please go ahead.
Yeah. Hi, sir. Good day, good afternoon. This is Shyam from Sundaram Mutual. Thanks for taking my question, sir. Broadly from a slightly medium term perspective, this ZF partnership per se, does it fill in any gap on our offerings per se? You did talk about new middleware solution. Is this something that we don't have at this point? And how does it expand our addressable market opportunity? Just trying to understand a little bit more from a say a two or three year perspective per se. Also, is there any investment to be made by KPIT towards this other than the manpower costs that will be incurred in the R&D?
The other part of the question on the FMS acquisition, sir, is it more of a for customer acquisition or are we also acquiring new capabilities along with this? If you can please share your thoughts on that per se. Just an added question here. This new large deal what we have signed-
Can you please keep it to one or two?
Sure, sure.
So that I can-
Yeah. Sure. Yeah.
On the middleware perspective, I think we basically have already been investing. As you know, long back, we started with AUTOSAR, and this is much beyond AUTOSAR. There is a different thing called Adaptive AUTOSAR. There are multiple other elements which creates a overall middleware, which basically integrates different parts. It goes across the application as a pipe. This is the area where we had some presence. I think along with ZF, basically, we will be in a position to increase our speed in developing this as well as developing our expertise and capabilities because they will bring their own capabilities on the system side. That is what we are looking for.
We see this as a quite a growing area in next few years. As we discussed, 2024, 2025 is going to be a big growth area. It is a timeframe where most of the OEMs wants to bring this kind of architecture in their new vehicles. This is very critical for their delivery. In maybe it may take another 12 months or so, but I think beyond that you will see significant opportunities in other business going up in this area. That is on that part. On the FMS side, I think it is certainly one. It gives access to one client, certainly in Europe, one OEM.
I think the as much important is also it gives us certain capabilities in autonomous which with which we can build a few different offerings, which will be more long-term kind of a revenue streams for us. That's why FMS brings both these things to us.
Understood, sir. Sir, just one clarification. This new large deal that we have signed, is this an existing client or customer or, is this with a new, OEM per se?
All our focus is on T25 largely.
Oh, oh.
Most of the large deals we are putting in this T25 clients.
Understood, sir. One question on the cost side. You have called out subcontracting costs came down this quarter, and we have been, you know, structurally trying to reduce the subcontracting costs per se. Just if you can help us understand how much would have been subcontracting costs this quarter and last quarter, absolute number or a percentage sales would help. Just to understand all our efforts we are putting in to, you know, to keep the costs under check, per se.
It is not a major cost if you look at it as a total percentage. It would be roughly around INR 25-INR 30 crore, 25 odd crore a quarter.
Okay. Has this come down, sir? Because that we have called out as one-
Yes, it has come down over the years. We are having more. As work is also moved offshore over the last one year, I think, that has come down.
Okay. Understood, sir. Sir, one question, if I may ask, sir. On the passenger vehicle side, if you see generally our revenues has been largely flattish compared to pre-COVID. You did explain in depth about, you know, how we have shifted a lot of ADAS to offshore and, you know, that has in turn led to a slightly, I mean, a lower realization and therefore not the volume impact. Is this the same that is to be read for the passenger vehicle revenues as well, which has remained, you know, say INR 50 million- INR 58.3 million in Q4 FY 2020 to INR 59.7 million now.
I mean, this on-site offshore shift in ADAS, that would have been one major factor for the revenues remaining just about slightly above the pre-COVID level.
I would suggest you to keep to a certain guideline. We are giving year-on-year numbers. I think it is good to look at it. Because otherwise quarter-to-quarter things change, and I will not be in a position to answer and analyze. We keep track year-on-year, and we keep an internal track month-to-month. I think I would say that passenger cars, most of these areas will be pronounced spending in the passenger cars. We also believe the commercial cars will follow very quickly actually. In some areas like autonomous commercial cars, commercial vehicles will come very strongly soon. Overall, that is the trend we are seeing.
I think it can change, you know, I mean, one way to look at it, how the commercial vehicles have grown faster. Second way is to think why can't the commercial passenger vehicles grow as well. I think I would just request you to keep it to year- on- year.
Sure, sir. Thank you. Thank you very much. I'll fall back in the queue, sir. Thank you.
Thank you.
Thank you. The next question is from the line of Kshitij Saraf from Tusk Investments. Please go ahead. Kshitij Saraf, your line has been unmuted. Please go ahead with your question.
Yeah. Hi. Sorry. Thank you for taking my question. Congratulations on the performance. My question is with regards to the client concentration of KPIT. Given that, we plan to focus on the top 25 clients, what would be the incremental, sort of scope of work?
Going forward, because KPIT is focusing on these clients, just wanted some sort of an idea of the size of the market that KPIT is trying to address as we go forward.
Let me give you two parts. One is I talked about how we are expanding our offerings to existing clients to increase the addressable market. We are firmly taking where the priority of the client is and where they are trying to transform themselves. We are adding couple of offerings or services in this area. Naturally, within these focus areas, we would like to expand our offerings. But to answer your question, I think. I mean, most of the OEMs are typically, you know, around, say, $100 billion revenue, the larger ones, and then the most of them are spending even the smaller ones are spending significant amount on technology.
Every client has a reasonable potential of OEMs becoming INR 50 million-plus, a reasonable size OEM has a potential to become that. The tier ones are going through transformation now in that there are semiconductor companies who have been added. It's quite a reasonable and significant marketplace. I have no doubt we can grow three times with the same focus.
Got it. That's very helpful. Thank you so much.
Thank you.
Thank you. The next question is from the line of Mohit Jain from Anand Rathi. Please go ahead.
Hi, sir. Just two questions. One is any visibility that you can share on FY 2023 from the current backlogs, or now that you have signed a large deal, what kind of visibility can you share? That's one. Second, on this deal ramp-up, what kind of pipeline do we have currently for large deals? We initially had 2, I think 1 or 2 or 3 we signed last year, and then there was this gap of 2-3 quarters, and now we have started signing again. What should we expect on that front?
There are two points I want to talk about. I mentioned to you that all these T25 clients, we are trying to really put the deals which are the large ones. Let me put it like this. Sometimes you may not put it as a part of one engagement, which will be like a INR 50 million plus, but the program will deliver those kind of revenues once we are in, and that is the focus we have very deliberate. I think while I may not have exact number, but at least two-thirds of our revenues come from these kind of engagements. In some cases, we get a full engagement ownership, and we are in a position to say it is a large deal of a INR 50 million.
In some other cases, we are not in a position to say whether the revenues will be in the similar range over a period. I think to your point, I think, we are very comfortable on that front. Most of our engagements are moving in that direction. To answer your second question, I talked about medium-term outlook for the company, although let me put it, the market environment, we see a very positive market environment. Our pipeline is very high, and I may say that there are so many discussions happening which specifically in these areas I talked about, which will get concluded in next 4-5 months, to some extent, some of them, which will further improve our pipeline.
Overall, I see a very positive demand, and we give any specific guidance only at the end of the quarter four. We'll continue with the practice. I think we have been saying it that we see a very positive demand environment.
Just a follow-up on that two-thirds remark. Can we broadly assume 65%-66% of our revenues are sort of recurring in nature?
I mean, you can assume yourself, but I have a very
From an understanding point of view.
The way I look at it is that is how our repeat business, if you look at it, is more than 85%.
Right.
Right. Actually, maybe little more because 85% is largely from the T25. If you look at it may be 90% of our business will be a repeat business. Large part of this is, as I said, engagements or continuing engagements on the same programs.
Understood, sir. Thank you. That's all from my side.
Thank you.
Thank you. The next question is from the line of Anita Mittal from Nvest Research . Please go ahead.
Hello. Good evening, sir. My first question is, why there is no growth in profits from America, while profits from rest of the world is increasing. Can you give me some reasons for this decline as revenue from America is increasing, but there is degrowth in profits. Can you explain?
I would not encourage you to look at any revenue or profit according to the geos, because many of our clients are global. Our engagements span across different, if I have to say, different regions and actually now also across practices. I would like you to look at only consolidated profit.
Okay, sir. My next question is, when are you expecting the co-commercialization of strategic engagement with European car manufacturer in electrification segment? Can you tell me the time period for revenue generation from this deal?
I didn't understand your question, please.
The question is the large deal that you have announced.
Uh.
When does the revenue start coming in?
That should start during the quarter. I think in next month or two.
Sir, my last question is, regarding Future Mobility Solutions acquisition.
Can you validate the revenue share that you are expecting from the acquisition for next two year quarters or for next year?
Currently we have acquired only 25%.
Yes, sir.
of the company, and we expect that we will acquire the rest in next 18 months. It is based on milestone, that's why we had moved in that direction. Otherwise, we would generally acquire a majority immediately or otherwise. While we have that right, there are certain milestones which have been there, and they are not pure financial. It is based on certain financial plus qualitative this. I cannot give you a clear answer to your question how much it will create in next year or two. Roughly, any engagement we take, you know, anything less than $20-25 million over 2-3 years is not worthwhile for us to pursue.
Okay. Thank you, sir. This is from my side.
Thank you.
Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.
Yeah. Hi, good evening, everyone, and congrats on a great quarter.
Thank you.
Just a question on the demand obviously is pretty strong and, in terms of visibility and overall, thought process over medium to long term is pretty resilient. Completely understand that part of things. Now, where I wanted your help is in terms of trying to understand by when do you think we'll see growth to be pretty broad-based? The reason I ask this is, despite demand being so strong, it appears that if I just split either passenger vehicles or the top 25, it looks like growth relative to the overall business on the top 25 is lower than the overall company. Plus our connected, one of these always seems to be a headwind. By when do you think...
Is there anything in client behavior that you're seeing within our base that is sort of softer? Or do you think that this is just transient and things that you'll actually see starting broad-based as we go forward?
See, there are technological cycles also. As I mentioned to you, autonomy levels were initially level four and level five as they got the infrastructure so quickly. For example, if you look at any other areas, connectivity, there is a shift in the demand from conventional infotainment systems towards e-cockpit. There are technological cycles, there are prioritizations which happens based on client behavior. There are multiple angles to it. To your point, from our perspective, we see an opportunity in each of these domains significant. That's the only reason we do it, because it doesn't, you know.
Unless we see any area which could grow, you know, in a medium term up to INR 100 million, that doesn't really allow us to make investments and build separate practices. From that perspective, you know, all of these areas are very relevant from that perspective.
Sure, sir. Very helpful. Thank you so much and all the very best.
Thank you.
Thank you. Anyone who would like to ask a question, you may press star and one. The next question is from the line of Karan Uppal from PhillipCapital. Please go ahead.
Yeah. Thanks for the follow-up, sir. One is on the capital allocation. We have seen a very robust cash generation in last eight quarters. What are your plans in terms of deploying it? Are you preserving it for M&As or looking to pay out through buybacks or dividends? Two clarifications. One is on guidance. Guidance is excluding the PathPartner contribution. Secondly, what's your hiring target? Yeah, these are the three questions.
Yeah. I will go. The guidance is overall, but we have not integrated the PathPartner yet. It will have a very minimal impact of that, if I may say, during this year. The second,
Capital allocation.
Capital allocation, if we looked at multiple things. One is, you know, of course, dividend, we have revised our policy just last year. You know, in our opinion, whatever is the comparable companies, we have increased our dividend policy to that extent. We will get there as we with the improved performance, sooner than later, we will pay within that policy, we will follow the guidelines. On any other part, we felt that currently looking at the higher demand, it makes sense for us to really allocate the money more towards acquisition of talent and acquisition of expertise rather than anything else. We would allocate more resources for the acquisition side.
We are not going to go for any major acquisitions, but we want the really niche skills to come in in the organization, a very front-ended expertise to come in in certain areas, as well as basically talent and expertise in certain areas so that we can expand the new areas which we can offer to our existing client. In that way, increasing our landscape with our clients. That is how we have thought about capital allocation.
The question.
I didn't answer.
Yeah, last was on hiring targets for FY 2022.
We don't give our headcounts and hiring targets. Let me tell you that we have increased our capacity to hire by about two times what it was six months back, naturally both for addressing the attrition as well as looking at the growth. We have very significant in the last two or three years. If I look at it, this is the largest hiring we are doing, both from campus and off-campus.
Okay. Sir. Thanks. Thanks a lot.
Thank you.
Thank you. Anyone who would like to ask a question, you may press star and one. The next question is from the line of Vimal Gohil from Union AMC. Please go ahead.
Yes, sir. Thank you. Thank you for the opportunity again. My question was on the employee cost, the 6-odd% sequential growth that we've seen. Does that include the subcontracting costs or the subcontracting costs goes in the other expenses for us?
It goes in other expenses.
Other expenses, yes.
Okay. You highlighted that the subcontracting costs have come down, right?
Yes.
Okay. Fair enough. Would it be fair to say that I mean, I'm not asking for any guidance for hiring, but whatever incremental hiring that the company does, a large portion of it would be fresher in order to sort of broaden the pyramid and improve profitability?
There are two areas. One is certainly we hire people from freshers, not only in India, but even outside India. That is point number one. Point number two, we are adding to our high-end architectural capabilities. Though few in numbers, but very important from our growth as well as consulting where engagement with the clients.
Right. Whatever you have to backfill for your attrition, the replacements, are they coming at a fairly high cost right now?
No replacement largely comes through pushing the pyramid replacement. Of course, other than on the key areas like architectures.
Right. Okay. Fair enough. You're not finding it challenging to replace people at, but, and they are coming at a higher cost. That is not a challenge that you are currently facing.
It is not, as we talked about, we are a net talent creator. We have a internal way of building the talent because there are very few companies from where we can hire in these numbers.
No challenges on completing projects at this point in time because of talent.
I talked about we do not have any impact on CSAT. Actually, it has gone up during the quarter, but we are aware that we need to control the attrition. We have taken the firm steps.
Fair enough, sir. Thank you so much and all the best on tech.
Thank you.
Thank you. Anyone who would like to ask a question, you may press star and one. The next question is from the line of Rahul Jain from Dolat Capital. Please go ahead.
Yeah. Hi. Thanks for the opportunity. Any incremental inputs you would like to give on this future mobility transaction? What is the payout? What is the expected timeline and tranches on it? Key rationale of this transaction, given the minority allocation at this point.
I think, I'll give you the numbers because this is all, it's in public announcement, actually.
Yeah. See, I mean, if you look at it, we have said that we'll acquire 25% equity stake right now, and the balance 75% over a period of three years. That is what we will do. This is the basis, as Kishor explained earlier, on certain qualitative as well as quantitative targets that we have, and milestones that we have to achieve. The majority stake should happen anywhere in the next 12-15 months.
Thank you.
See, basically, we wanted to because it's a pretty young company, if I have to say. We wanted to ensure that there are two aspects we were looking at. One is naturally a specific engagement with one of the key OEMs in Europe, as well as some of the offerings we wanted to build for future. As long as they deliver on both these, we will be in a position to acquire the majority. That's how we have structured the transaction.
Right. Any overall view on M&A? You know, the reason of asking this is, you know, our past experiences has not been very exciting.
I would really question this. Basically, we acquired MicroFuzzy in about
20-17.
2017. The revenues have gone up by 5x, actually.
More than that, actually. Yeah.
Five times. You can look at it. The profitability has gone significantly higher. I don't know if you carry anything from the very old IT side. I don't remember. Actually, our overall experience has been very positive. There are two more important points for us. One is, we are not looking at any major acquisition, any too large an acquisition, number one. Number two, we are actually in all these cases, we have a very significant understanding, and the client segment is the same. We are not looking at increasing the client segment. We have a very good understanding of the clients where we are doing it.
Third thing is we have increased, and as you have seen in whether it is on the terms of cash or many other areas, we have really strengthened our processes internally, so that we can integrate such acquisitions. I think we are very confident.
Okay. Appreciate it. Thank you and best of luck.
Thank you.
Thank you. As there are no further questions from the participants, I now hand the conference over to the management for closing comments.
Thank you everybody for your participation on this call, and once again, wish you a very happy Diwali. Take care, stay safe. Bye.
Thank you. On behalf of Dolat Capital, that concludes this conference. Thank you for joining us, and you may now disconnect.