Ladies and gentlemen, good day, and welcome to the KPIT Technologies Ltd Q3 FY 2020 earnings conference call 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 touch-tone 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, Faizan. Good evening, everyone. On behalf of Dolat Capital, I would like to thank KPIT Technologies for giving us the opportunity to hold this call. Now I would like to hand this conference over to Mr. Sunil Phansalkar, who is AVP and Head IR at KPIT, to do the management introduction. Over to you.
Thanks, Rahul. A very warm welcome to everybody and good evening. Welcome to the Q3 FY 2020 earnings conference call of KPIT Technologies Ltd. Today on the call we have Mr. Kishor Patil, CEO and MD, Sachin Tikekar, President and Board Member, and Vinit Teredesai, CFO. As always, we will have the opening remarks by Mr. Kishor Patil on the performance of the company and the outlook, then we'll have it open for all of you to ask questions. A very warm welcome once again, I will hand this over to Kishor now. Thank you.
Good afternoon. I'm very happy to welcome you on the first anniversary of the new KPIT. Post the incarnation of the KPIT, when we decided to focus only on the mobility software, it has been exactly one year. We are very happy to take you through what we achieved during this period. For the year 2019/2020, YTD till December for nine months, we had 15.5% constant currency growth year on year. The EBITDA has been stable at 13.5%. Apart from other things, I think one important thing we achieved is the effective tax rate has come down. With that, the EPS is at INR 1.56 per quarter, INR 6.25 annualized on fully diluted basis. The net cash position has really improved. I think our DSO has consistently come down quarter on quarter. We are at 64 days, the lowest till now. All short-term debts have been paid.
With this, based on the back of this consistent performance over these quarters, we decided to declare interim dividend of INR 55 as against INR 75 for the full year last time. The other very important part when we started to focus on mobility is we had to be a net talent creator. We are one of the largest player in the mobility in the new technology areas, that's why it is very important for us to really focus on building up the talent and building the competence of the talent in the new technology, because there are not many companies from where we can hire. Very happy with the overall engagement with the people. Our attrition continues to go down, we are one of the lowest in the industry, our attrition is on a very low double digit.
There are few things I believe we could have done better than what we did. Even though our growth has been, I guess is the leading growth in the industry, still we could have done better. I think in some of the practice areas where there is a very high demand, we did extremely well. There are some other areas where also the environment is good. I think we could have grown better in some of these areas. We are putting together our overall system so that we can achieve that growth because we are very well positioned in these areas as well. There is a significant demand in the industry for these practices also. Second thing we could have done better is also on the profitability.
While we will be in the range what we mentioned, but I think the important part is during this period on couple of counts, one was the high increments we gave to our people, and I must say that it was more than what we had budgeted initially. We did that in order to really make sure that we retain the talent and build the talent to the next level. The second thing we invested was really into certain building of certain capabilities and that too mainly outside India, some of these areas. I think we could have posted a higher profit for this investment, but we are very sure that this investment can deliver it in a better manner over next year. Overall, looking at the environment, I think there are opportunities across the practices.
There are opportunities across the vertical, whether it is a mass car, commercial car or new mobility. Across the geos, it is in Europe, it is in Asia, it is in U.S. Overall, there are also large deals opportunities which we are getting from or which are in the pipeline. What we are very focused on as a company is on the profitability. We want to ensure that we really deliver higher profitability in next year and years to come. That's why we are very focused on closure of these deals. We want to bring our focus in closure of these deals. We also want to ensure that we win and execute these deals profitably. This is in short where we are after a year, after since we formed the company.
I would like to thank you for your support and would be very happy to take your questions.
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 their touch-tone telephone. 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 Baidik Sarkar from Unifi Capital. Please go ahead.
Gentlemen, congrats on a good show. Thanks for the opportunity. Broadly two questions. Firstly, if you could help us understand how your IP revenues performed this year. If you could quantify the absolute number and trends in growth, and how much of a margin impact they've been having over the last. Secondly, if you could please set the context for the sequential decline we've witnessed in the U.S. and Asia. Are these structural client-level weaknesses or were they product situation?
The first question was on IP revenue.
Yes.
On top line. Let me take the first question, IP revenue. I think, as a company, what we have decided is while we have IP revenues across the practices, we have decided that our position is to be a software integrator for the end customer. The go-to-market for us is to go with a full solution and with two specific value proposition. One is quick to market, so we can bring the customer's product to the market quicker. Second will be production-ready, because we are one of the very few companies who have delivered a large, complex production-ready projects. In a way, we are not focusing on IP per se, but we are focusing on IP as a means to deliver the projects quicker to the customer. That's the change we have made consciously.
Of course, there are certain products in some areas we do have specific IP revenues, but that's what has been a change in our go-to-market approach. The second question was U.S. and Asia decline maybe, Tikekar on that.
Yes. If you take a view on both geographies, I think Asia, the year-on-year growth is very healthy. U.S. also is slightly on the lower side. U.S. growth has been on the lower side compared to Europe and Asia. We don't see any issues that will stop us from continuing to have growth in U.S. as well as in Asia going forward. It's just some of the programs getting started or getting over. It was a question of that. Our view is that if you take a year-on-year view, that's the right way of looking at it. We believe that that trend needs to continue going forward.
Sure. Last question before I get back. Is your visibility for the next, say, 15, 18 months demonstrated on the basis of a firm, committed executable order book? Or are you hopping on the back of relationships which lead you to believe that new projects will eventually come up? I'm just trying to understand what gives you the visibility of growth over the next 15-18 months.
The visibility of growth comes from two factors. One is we are sharply focused on T25 as customers. We have very deep relations across, and we continue to engage with them, and we are working on their production programs, which are multi-year. That is point number one. Point number two is the overall opportunities we are pursuing at this point of time, the sizes of the opportunities. I think that is the point number two. Based on this, we have this confidence overall of a positive demand environment.
Sure. Thank you.
Thank you.
Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.
Hi. Thanks for taking my question. A decent quarter. You spoke about large deals in the pipeline and opportunities there. When you look at those deals, what would be the rough sizes of these deals? Any context in terms of how one should think about the size of these deals?
Okay. These sizes typically are four to five-year kind of timeframe, and they are double-digit million dollars.
Okay. Sure. The second one was, this year, you did highlight that this is an industry where we are a net talent creator. We actually had a higher compensation increase in the context of that. Considering the scale that we have, wouldn't that also be the case going forward? In that context, if you think about it, compensation increases, considering that everyone will be vying for the talent, we might need to have high level of compensation increases. Do you think we'll be able to get an equivalent in terms of pricing increases from clients to sort of cover that? Are we seeing some sense in the market that clients are willing to pay more to basically cover up for wage inflation?
I think this is something we are really going into details in terms of every offering. Every offering is a bit different. Wherever we have these production programs or where the customers depending on us to deliver a product to his customer, I think we are in a position to have a decent premium. In all other cases, our focus is to have a better productivity into services and building the tools and having a better productivity.
Sure. If you look at it, we are running more and more programs and as Mr. Patil mentioned earlier on, our focus is to sort of help accelerate time to market. For that, we are using our tools and accelerators to do that. That also helps us to continue to improve on the profitability side. At the same time, creating larger value for our customers.
True. Do you think Well, the productivity is something that we have always done reasonably well. On the pricing side, do you think we should see some benefits starting to flow in going forward versus what we have seen this year?
Actually, I must say that our pricing is pretty decent actually, as compared to competitive pricing. I think as I mentioned, our profitability impact is more on account of couple of things we did this year specifically, it takes some time to get an optimal cost in line with our investments, both from the people perspective as well as some of the practices we invested outside India. I would say frankly, that it's a decent rate which we are getting.
Sure. Great. Just two data point questions, if I may. One is, should we assume the current tax rate to go as a standard going forward also into the next year? Two, the depreciation seems to be inching up consistently. How should we think about depreciation overall for us and what's driving this uptick?
On the taxation front, you can look at our effective taxation rate for the next couple of years to be below 20%. That's the number you can take. From a depreciation perspective, look at it, as we mentioned, our overall CapEx investment is in the range of 2%-3% of our annual revenue. You have to look at the depreciation also now includes the impact on account of the changes made on account of the Ind AS 116 which got effective April 1, 2019. There is a certain component of that depreciation as we take more and more infrastructure. There will be a certain impact coming up on that.
Sure. It's just that over the last two quarters, we have seen the first quarter reset, but even the last two quarters seems to be growing ahead of revenue growth. That's why I asked how should we.
Yeah. Also keep in mind that we are relatively a new company. We are just two years old. Our entire infrastructure, both from a physical and IT perspective, we have made all the investments in the last two years. Compared to the competition, you'll always see that for the first few years we'll be slightly on a higher side.
Sure. Fair enough. Thank you so much, and all the best.
Thank you.
Thank you.
Thank you. Reminder to the participants, anyone who wishes to ask a question may press star and one at this time. The next question is from the line of Madhu Babu from Centrum Broking. Please go ahead.
Yeah. Hi, sir. On the on-site investments, could you give us, how many are currently in Germany and how many in North America? What is the local headcount in those regions, and what is the plan for the next two years in terms of on-site hiring?
I just want to explain on this. We have actually resources across. We have multiple development centers. One is in Germany, there are a couple of in U.S., one in Brazil, one in Southeast Asia, outside Germany in U.K., and there are one in Sweden, in China, in Japan. We have multiple development centers across. In the normal course of business, people work with the customers from these offices. That is fine. Basically, when we are building the new competencies, we made a decision to build certain practices from Germany, specifically in Germany. That's where we made a significant investment. I think we have built this now, and it's a time for us to leverage across the world. Just to give you some number, I think now we are in excess of 700, closer to 800 people there.
I would say, not many of them, maybe 1/4 of them may be working on the customer projects directly at the client site. Everything, everybody else works. At least 50% of the investment out of that is on technology development, which we of course leverage for projects to be delivered across the globe.
One-fourth will be working on the client premises, and the other 3/4 will be working on delivery centers onsite on various client projects.
Including practices, including technology development.
If I'm right, some of the newer technologies on the radar, especially and also how is the client comfort in sending it to offshore or is it predominantly the clients are asking for a high-?
Yeah. For last 12 months to 18 months, that was the issue because customers were not very comfortable sending it to offshore. Basically because these were new technology, they wanted it to be very close to them. Now they're getting comfortable in moving the project and we have moved many of these projects offshore.
Okay. Another one on the broader capital allocation, sir, I mean, just from a strategic perspective. We are one of the few companies on the single vertical focus, though the technology refresh has been highest in the automotive space. Considering the steady cash accumulation on the balance sheet, would you look to acquire another vertical in maybe one and a half, two-year perspective as a part of diversification strategy?
We feel that even in mobility, we are in three areas. mass car, commercial, and new mobility. Apart from that, there are other areas of mobility, whether it is railways and there are some other terms. I think there are a lot of things to be explored and there is enough diversity in terms of the businesses within this vertical. To your point, over the period, once we believe that we have clearly achieved a leadership or a market potential in these verticals, then we will look at it. I don't see it in the foreseeable future.
Last one on the fourth quarter, do you expect the growth to come back on a strong footing? I mean, this officially we had a furlough impact this quarter. On the margins, do we expect a good recovery in Q4? Thanks.
I think we mentioned that overall demand environment is good and this is that. We have our outlook. I think we should be, I mean, while we will be at the lower end of the outlook, we understand that and yeah, that's what I expect. We had opportunity to do better. We will be at the lower end of the outlook we are giving.
Yeah. Thanks on all of this.
Thank you.
Thank you. Reminder to the participants, anyone who wishes to ask a question may press star and one at this time. The next question is from the line of Dipesh Mehta from SBICAP Securities. Please go ahead.
Yeah. Thanks for the opportunity. A couple of questions. First, about the segmental performance. I think Europe has shown recovery in margin performance. Considering the Germany investment which we earlier also alluded, how one should look at considering the revenue uptick which is visible in Europe. Should we expect now it is sustainable or double-digit kind of margin coming back in Europe, which can help overall performance in terms of margin for us? That is question one. Second question is about this understanding seasonality of the business. Now, if one look at the segment which we report practices. Some of the practices as well as some of the vertical which we report have seen significant weakness. Now, if you can help us understand seasonality of the business, because I think it is relatively new business. If you can provide some perspective there. Thank you.
On the first side, let me say that as I mentioned, I think we made those investments and of course we will see a better profitability in Europe, specifically on the back of two things. One is the leveraging the investments we have made globally, to be leveraged globally. The second is in terms of offshoring, which of course there's a potential to do more now. I think based on this you will see that. I think I would strongly suggest that Mr. Tikekar mentioned to look at all our numbers on a yearly basis because there is always certain disruptions quarter to quarter for some specific project customer. I would say our trends on a cumulative yearly basis are pretty consistent and in line with what we see coming future.
If one look at on YoY performance, your passenger car YoY growth was in mid-teens at the beginning of year. Now we are slipping closer to high single digit kind of thing. If one look at performance in, let's say, some of the other segments also we have seen those changes. That's why I try to get some sense about if you can provide some perspective or it is client specific and which led to some kind of weakness in, let's say, passenger cars.
I think pas car will continue to lead the growth in the near future, and it will be followed by growth on commercial. These two. New mobility, we see a positive but the size is small, that's why I'm not particularly commenting on that. It's still an area which is new for us and also for them. We will see growth for sure, but it's on a smaller base. If we see all growth in all the T25 customers, we see a good environment for us to grow. It is more dominated by pas car and then followed by commercial.
Yeah. If one look at last year Q3, seasonality impact was not to the extent which we are seeing this quarter. Is there anything specific which played out this quarter and which also led to our expectation also coming closer to lower end of the guidance? Is there any change in the demand kind of thing, which let's say from the beginning of quarter?
There is not much on demand side. There are some specific things like some projects moving to offshore. It is like that. I think, even if we move more work offshore, I think hopefully it improves the profitability, but sometimes it can impact the revenue in a shorter term.
Okay. Thank you.
Thank you.
Thank you. Reminder to the participants, anyone who wishes to ask a question, may press star and one at this time. The next question is from the line of Rahul Jain from Dolat Capital. Please go ahead.
Thank you for the opportunity. First question is more about the macro situation, given the lot of tariff imposition kind of a news flow that we heard during the quarter. Do you see in your client conversation any threat related to that?
No, we have not seen any direct impact, in any of our conversations yet. I think, it is yet to be seen. There are multiple conversations that are going on across the countries, especially between U.S. and China and so forth. Right now, there is nothing different. Whatever risks that were there in terms of geopolitical risks, I don't think they've probably gone down a little bit rather than going up. No significant difference in our conversations with our clients.
I think I was more referring to the European market, which happened couple of weeks ago, where I think existing 2.5% import duty was said to be going to 20%. That's what the threat was. I know, if there's anything on that as well.
No, I think, frankly, I need to check on this specifically, but we haven't heard anything from the customer side.
Okay. Secondly, on the business side, on the couple of deals that we won, if you could share a bit more in terms of the scope scale of some of the major deal that you announced, which one of these are sizable, and any more flavor you want to give on that?
Yes. The first one is about a Japanese OEM. We've been working with that OEM in the area of ADAS for several years now, even in connected vehicle side. What we have won is a large infotainment program for this OEM. The relationship is very strong and, obviously, it's a multi-year, as Mr. Patil described, a large deal as a deal which goes across five years, in double-digit million dollars. This is one of those deals. We believe that, with this particular OE, we have displaced an existing partner in this area. We are very hopeful of having significant growth, not only in the infotainment area, but in some of the other areas. That was about the Japanese OE. The European OEM in the ADAS area, it's our first deal with this OEM, so it's a good start.
As you know, over the next one year, we really have to figure out how this pans out. The potential is significant, if the relationship works out really well. This was one of the pursuits that we had during the course of the year, and we are happy to close that deal. In general, all of these deals, all five of them, there are three of them that are what we call large deals. The other two are essentially net new pursuits that we had during the course of the year. We'll see how things unfold with them over the next few quarters.
Right. That's it from my side. Just one more input. I think, this is important that you added a new client because given our deep penetration already, we would appreciate if you could share which deals are new client for you going forward, in your presentation, that would be helpful.
During this period, actually, we added four strategic client to our customer base. We have a T25 strategy, and we used to report on T17. I think, we will soon start reporting on T21. And we have added four strategic customers to the list.
Congratulations for that. Thank you. That's it from my side.
Thank you.
Thank you. Reminder to the participants, anyone who wishes to ask a question may press star and one at this time. The next question is from the line of Kunal Sangoi from Aditya Birla Sun Life. Please go ahead.
Yeah. Hi, sir. My question is with regards to the profitability. During the analyst investor meet also, we had highlighted that our profitability growth will certainly be much better than the revenue growth going forward. Given the industry trend where there is more platforms. For us, it is a platform strategy and more platforms are getting adopted and which we expect it to increase for across verticals. How should we look at the overall gross profit, gross margin for us?
I think that I mentioned to you, I think, in my commentary that a couple of areas we could have done better. One of the reason I did say profitability, we could have improved more. I think, we did a little bit investment ahead, in terms of people. I think we made the increments and the investments which we made outside. As we mentioned, I think our proposition to the customers currently is more on the first to market, quick to market, and the second is the production ready. The platform and the IPs and all other things become a part of this. That's how we decided, because finally the proposition is what the customer is looking for. Most of the customers are looking for adopting this new technology quicker. They want to bring their products and new models and platform quicker.
We change our proposition in this direction specifically. Many of these technologies are new. There are a lot of issues which come in the production cycle, and they need a very dependable partner who can take them through. That's why we moved in this direction. To your point, I think you will see the I did say that for the next year outlook when I gave that the profitability is our number one goal. It has taken a little more time than what we thought, but we will focus next year on that.
Sure. Given that currently we are, say, at around 8.5% or 8.2% EBIT margins, do you think business has the potential to deliver 11% or a 12% EBIT margins over the next two to three years?
Yes, it has.
Okay. Are we, as in, we should be able to achieve that also?
Of course.
No, just generally. Yeah.
Yeah.
Given the kind of drivers are there.
Yeah.
In terms of, you seeing a platform getting adopted, because platforms generally should at least yield a much better margin profile.
See, I agree with you. I think that's why I mentioned about all the challenges and what we will do. I think we are confident to improve the profit and earning. It has taken more time, that we acknowledge. We are confident we can achieve.
Sure. All right. Thank you.
Thank you.
Thank you. Reminder to the participants, anyone who wishes to ask a question may press star and one at this time. The next question is from the line of Apurva Prasad from HDFC Securities. Please go ahead.
Thanks for taking my question. Just wanted to check again on the previous question. I talked about margin expansion. What do you think would be drivers here of this 200, 300 basis points expansion that you're targeting? If you can split out at how much of it can be in the SG&A leverage and how much the gross?
I think it is both, but I think we are looking at improving more gross margin.
Any SG&A leverage that you see-
Of course, we will get that leverage. See, from an SG&A perspective, to look at it, one of the advantage that we have of focusing on this one industry and top vertical strategy is that we already have our account management and sales function very well established. As we go deep within these clients, this probably is going to be incrementally beneficial for us. We are not required to make that incremental investment from the SG&A part.
Right. Would any form of tail rationalization be part of that strategy? I see the active base seems to be reducing, been flat this quarter. Will that also be part of that?
Every quarter, I think, we are evaluating and probably disengaging with few customers, which we believe, both, they do not see us as strategic, and we do not see them as strategic, and we don't see in line with our roadmap. Every quarter we have identified few customers and this tail is reducing.
Lastly, any comments that you can make in terms of how the deal durations would have changed over the past year? Do you see that sort of increasing with sort of more larger deals coming in?
In general, yes, the trend is that also is our effort. When you talk about strategic relationships, it's about having more visibility into all of their programs and aligning our practices and our deliveries to those programs. As we continue to build these strategic relationships, the duration will also be longer. That has been the trend for the last couple of years, and that's the whole purpose of building these strategic relationships, so that we have a direct line of sight in terms of what is happening with our key customers and what are the programs in which we are involved, and so forth.
Right. Anything can you quantify in that in terms of duration, how much, or the TCV, how would that have trended?
Usually, we take a three -to- five-year view. Any production program, you take at least a three-year view.
Okay, thanks.
Thank you.
Thank you. The next question is from the line of Madhu Babu from Centrum Broking. Please go ahead.
Yeah. Sir, just a question on your engagement with captives, if any. Let us say some of the companies like Bosch and all have a sizable captive, even Mercedes-Benz and all in India. How much of our business is from getting through captives and how are we working with them and how do we see that relationship?
The way we look at our relationship is always take a global perspective. The Top 25, these are all global relationships. Some of them happen to have centers in India or in China or in Eastern Europe. It's all part of the strategy. There is a clear thing that our customers do with their captive centers. There are specific things that they do with us. With most of these captives, we actually coexist in a synergy sort of a way. It's hard to define how much business is actually from a captive, because we never take a view of any customer that we just engage with them from a captive perspective.
Okay.
Does that provide a good answer? Clarity?
No, I was meaning, let us say Bosch India captive directly engages us with some kind of work. Just an example of Bosch, not naming the client, but.
Yeah. It's very little, if any.
Okay.
Usually, these are global programs with our global customers. Some of the work we may do in collaboration with the local captive centers or technology centers. Some work we may do directly with them because they may not have the capability of certain programs that they're executing. It really depends. Direct work purely with captives is a very small part of our business.
Adding to what Sachin mentioned, I think with the global programs which are in new technology areas, we do sometimes work with the captive, but it is a more global program, and it's only some part which is delivered in India.
Okay. Just one more. On the BMW, we have announced it officially that we are working on that thunder platform, ADAS platform. If you see BMW last one and a half year, they have talked of substantial China investments in the R&D and offshore captives in China. Is that work even being done by the BMW's captive in China, the same platform where we are working?
The first thing is that platform is across many OEMs. It is not only BMW. Daimler is adopting it, FCA is adopting, and there are a few others who are adopting it. The second thing is, this work, as much KPIT does in terms of the work which is done by, if I was to say, a software specialist, we have a large share of. Of course, the individual companies, the OEMs do their own work, and they do it however, mostly in Europe.
Okay. Okay, sir. Thanks a lot.
Thank you.
Thank you. Reminder to the participants, anyone who wishes to ask a question may press star and one at this time. The next question is from the line of Shamal Dhruv from Aditya Birla Sun Life Insurance. Please go ahead. Mr. Shamal, your line is in talk mode. Please go ahead.
Hello.
Yeah.
Yeah. My question is mainly on the outlook front. While we have a declared few of the deal wins in this quarter, but we don't have any revenue quantification or the timeline of that deal. Being an outsider, what parameters we should look to see that whether we are on the right path of getting the double-digit growth or let's say industry-leading 12%, 15% growth, what parameter we should look? Similarly, on the margin, you had mentioned that you had to build some capabilities and that's why the salary hikes have been higher than what you had anticipated. What parameters on the margin point we should look that we are now done with the investment phase and now the incremental revenue would directly flow into the margin part?
I think we give a better outlook for the next year in the end of the year. I think we give a more specific when we talk to you next year.
Because we don't have the order book number or the TCV win during the quarter or the order backlog for next 12 months. It becomes little bit difficult.
That's why we talked about overall environment, and we'll continue to give directionally numbers in April. We talked about the overall environment, where the opportunities are higher and long-term opportunities are also there. I think we covered that in our overall environment part.
Okay, thanks. That's it from my side, and all the best for coming quarters.
Thank you.
Thank you. Reminder to the participants, anyone who wishes to ask a question may press star and one at this time. Participants, to ask a question, you may press star and one now. Reminder to the participants, anyone who wishes to ask a question may press star and one at this time. As there are no further questions, I would now like to hand the conference over to the management for closing comments.
Thank you everyone for participating in the call. If you have any afterthoughts, please get in touch with me anytime. Thank you, and have a good day.
Thank you very much.
Thank you. Thanks.
Thank you. On behalf of Dolat Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.