Q3 19/20

Jan 30, 2020

Ladies and gentlemen, good day, and welcome to the KPIT Technologies Limited Q3 FY 2020 Earnings Conference Call hosted by Dollard 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. Tar 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 Dollard Capital. Thank you, and over to you, sir. Thank you, Faizan. Good evening, everyone. On behalf of Dollard Capital, I would like to thank KPIC Technologies for giving us the opportunity to hold this call. And now I would like to handle this conference over to Mr. Sunil Svan Seltzer, 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 the earnings conference call of the Purity Technologies Limited. Today on the call, we have Mr. Kishore Kati, CEO and MD, Sachin Pekker, President and Board Member and Limik Peddesai, CFO. As always, we will have the opening remarks Mr. Tishore Patel on the performance of the company and the outlook. And then we will have it open for all of you to ask questions. So a very warm welcome once again, and I will hand this over to Surma. Thank you. So good afternoon. I'm very happy to welcome you on the 1st 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 1 year. We are very happy to take you through what we achieved during this period. So for the year 2019 2020, YKD till December for 9 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 1.56 per quarter, 6.25 annualized on fully diluted basis. The net cash position has really improved. I think our DSO has consistently come down quarter on quarter. We are at 64 days, the lowest till now. All short term debt have been paid. And with this, based on the back of this consistent performance over these quarters, We decided to declare interim dividend of 55 per day as against 75 per day for the full year last night. The another important, very important part when we started To focus on mobility is we have to be a net talent creator. We are one of the largest player in the mobility in the new technology areas. And that's why it is very important for us to really focus on building of the talent and building the competence of the talent in the new technology Because there are not many companies from where we can hire. Very happy with the overall engagement with the people. We have our attrition continues to go down and we are one of the lowest in the industry And our attrition is very low double digit. There are few things I believe we could have Better than what we did. Even though our growth has been, I guess, is the leading growth in the industry, We could have done better. I think in some of the practice areas where there is a very high demand, We did extremely well. And there are some other areas where also the environment is good. I think we could have grown better in some of these areas. We are putting together our overall system so that we can achieve that growth because very well we are very well positioning these areas as well. And there is a significant demand in the industry for this matter 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 accounts, One was the high increments we gave to the in the to our people. And it was I must say that it was more than what we had budgeted initially. And we did that In order to really make sure that we retain the talent and build the talent to the next level. And the second thing we Invested was really into certain building of certain capabilities and that too mainly outside India, some of these areas. And I think we could have we could have posted a higher profit, But for this investment, but we are very sure that this investment can be leveraged very in a better manner over next year. Overall, looking at the environment, I think there are opportunities across the practices, there are opportunities across the vertical, whether it is a apps car, commercial car or new mobility. Across the geos, It is in Europe, it is in Asia, it is in U. S. Overall, there are also large deals opportunities which we are getting from which are in the pipeline. What we are very focused on For as a company is on the profitability. We want to ensure that we really deliver higher profitability in next year years to come. And that's why we are very focused on closure of this deal. We want to ensure bring our focus in closure of this deal, but We also want to ensure that we win and execute this business profit and gain. So this is in short what where we are after a year the company. And we would like to thank you for your support and would be very happy to take your questions. Ladies and gentlemen, we will wait for a moment while the question queue the the first question is from the line of Vedik Sarkar from Unify Capital. Please go ahead. Gentlemen, congrats on a good show. Thanks for the opportunity. Broadly two questions. First, Citi will 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 this has been having over the last? And secondly, if you could please set the context the sequential decline we've witnessed in U. S. And Asia. Are these structural client level weaknesses or will it product situation? Yes. So let me take the first I think as a company, what we have decided these 2 While we have IP revenues across the practices, we have decided that we are positioned to be a software integrator for the end customer. And the go to market for us is to go with the full solution and with 2 specific goals of value proposition. One is quick to market. So we can bring the customer's product to the market quicker. And second will be production ready. We are one of the very few companies who have delivered a large complex production release projects. So in a very little bit of In a way, we are not focusing on IP per se, But we are focusing on IP as a means to deliver the projects with us 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 Yes, Bharat. If you take a view on whole geographies, I think Asia, the year on year growth is very healthy. U. S. Also slightly on the lower side, but U. S. Growth has been on the lower side compared to Europe and Asia. We don't see any issues that would 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 over the question of that. But Our view is that if you take a year on year view, that's the right view of looking at it. And we believe that that trend needs to continue going forward. Sure. Last question before I get back to you. Is your visibility for the next, say, 15, 18 months demonstrated on the basis of firm committed executable order book? Or is it or are you hopping on the back of relationships, which led you to believe that project that new projects will eventually come up. I'm just trying to understand what gives you the visibility of growth here over the next 15 to 18 months? The visibility of growth comes from 2 factors. One is we are sharply focused on T25 as customers, And we have very deep relations across and we continue to engage with them and we are working on their production programs, which are multiyear. That is Point number 1. And point number 2 is the overall opportunities we are pursuing at this point of time, the sizes of opportunities, I think that is the point number 2. Based on this, we have this confidence overall of positive demand environment. Thank you. Thank you. The next question is from the line of Nitin Padmanathan from Investec. Please go ahead. Hi. Thanks for taking my question. A decent quarter. This you spoke about large deals in the pipeline and opportunities there. When you look at those deals, what would be the rough sizes of these deals? Some, any context in terms of how one should think about the size and size of these deals? Okay. So these sizes typically are 4 to 5 year kind of Heinz, right? And they are double digit $1,000,000 Okay. Sure. The second one was So this year, you did highlight that this is an industry where we are a net talent creator and we actually had a higher compensation increase in the context of that. And considering the scale that we have, wouldn't that also be the case going forward? In that context, if you think about it, compensation increases, considering that everyone will be vying for the talent, we might need to have high level of compensation increases. But do you think we'll be able to get an equivalent in terms of pricing increases from clients to Cover. Are we seeing some sense in the market that clients are willing to pay more to basically cover up for wage inflation? I think this is something we are really going into details in terms of every offering. Every offering is a bit different. And wherever we have these production programs or where the customers Depending on on us to deliver a product to his customers, 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. Sarkhan, if you look at it more and more, we are running more and more programs. And as Mr. Patil mentioned earlier on, Our focus is to sort of help accelerate time to market. For that, we are using our At the same time, creating larger value for our customers. True. But do you think in terms of where the productivity is something that We have always done reasonably well. On the, what you call, pricing side, do you think it will start we should see some benefits starting to flow in going forward versus what we have seen this year? Actually, I must say that our pricing is pretty 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 and it takes some time to get an optimal In line with our investments, one both from the people perspective as well as some of the practices we investor outside India. But I would say frankly that it's a different rate which we are getting. Sure. Great. Just 2 data point questions, if I may. One is, should we assume the current tax rate to go as a standard going forward? And 2, also into the next year? And 2, the depreciation seems to be inching up consistently. How should we think about a depreciation overall for us and what's driving this uptick? Okay. So on the taxation front, you can look at our effective And from a depreciation perspective, you look at it, we as we mentioned, our overall CapEx investment is in the range of 2% to 3% of our annual revenue. You have to look at the depreciation also now includes the impact on account of the changes made on account of the 1 more fix which got in fact effective in Q1 2019. So there is a certain component of that depreciation as we take more and more infrastructure on these, There will be a certain impact coming up on point. Sure. It's just that over the last two quarters, we have seen the Q1 reset, but even the last two quarters seems to be growing ahead of revenue growth. So that's why I asked how should Yes. And listen, also keep in mind that we are relatively a new company. Yes, just 2 years old, our entire infrastructure growth from a digital and IT perspective, we have made all the investments in the last 2 years. So compared to the competition, You'll always see that for the 1st 3 years, we'll be now psyche on a higher side. Sure. Fair enough. Thank you so much and all the best. Thank you. Thank you. Thank you. The question. The next question is from the line of Madhu Babu from Central Broking. Please go ahead. Yes. Hi, sir. On the on-site investments, could you give us, I mean, how many are currently in Germany and how many in North America? What is the local headcount in those regions? And what is the plan for the next 2 years in terms of on-site hiring? So I just want to Explain on this. It is not discussed. So we have actually resources across. We have multiple development 1 is in Germany, there are a couple of in U. S, 1 in Brazil, 1 in Southeast Asia, outside Germany in UK and there are 1 in Sweden, in China, In Japan. So we have multiple development centers across. There are in the normal course of time normal course of business, people work with the customers from these offices. That is fine. But basically, when we are building the new competencies. We made a decision to build certain practices from Germany, Specifically in Germany. And that's where we made a significant investment about and I think we have built in now and it's a time for us to leverage across the world. But just to give you some number. I think now we are in excess of 700, closer to 800 people there. And out of which, I would say Not many of them, maybe 1 fourth of them may be working on the customer projects Directly at the client side, everything everybody else wants. So at least 50% of the investment out of that is on technology development, which we, of course, leverage for projects to be delivered across the globe. So one fourth will be working on the client premises and the other 3 fourth will be working on delivery centers on on various client projects? Including assets and including technology development. So if I'm right, some of the newer technologies on Radhais, especially and all, so How is the client comfort in sending it to offshore? Or is it predominantly the clients are asking for a high cost? Yes. So far for last 12 months to 18 months, that was the issue because customers were not very comfortable sending it to offshore. Basically because this is a new technology, they wanted it to be very close to that. But now they are getting comfortable in moving the projects and we have moved many of these projects option. Okay. And another one on the broader capital allocation, sir, I mean, just on a strategic perspective. So we are one of the few companies on the single vertical focus, though the technology refresh has been highest in the automotive space. So considering the steady cash accumulation on the balance sheet, would you look to acquire another vertical in any 1.5, 2 year perspective as a part of diversification We feel that even in mobility, we are in 3 areas, so PASCAR, commercial And New Mobility. And apart from that, there are other areas of Mobility, whether it is railways and there are some other I think there are a lot of things to be explored and there is enough diversity in terms of businesses within this vertical. But to your point, over the period, once we believe that we have clearly achieved a direction for our market potential in this vertical, Then we will look at it, but I don't see it in the foreseeable future. And last one on 4Q, do you expect the growth to come back on a strong I mean, this officially, we had a furlough impact this quarter. And on the margins, do we expect a good recovery in 4Q? Thanks. I think we mentioned that overall demand environment is good and this is that and we have our outlook. So I think We should be. I mean, while we will be at the lower end of the outlook, we understand that. And yes, that's what I expect. We had opportunity to do better. And But we will be at the lower end of our Q3. Yes. Thanks and all the best. Thank you. Thank you. The next question is from the line of Dipesh Mehta from SBI Cap Securities. Please go ahead. Thanks for the opportunity. A couple of questions. First, about the segment performance. I think Europe has sold recovery Margin proponents. So considering the German investment which we earlier also alluded, how one should look at considering the revenue Which is visible in Europe. So do we expect now it is sustainable double digit kind of margin coming back In Europe, which can help overall performance in terms of margin for us? That is question 1. 2nd question is about the Understanding seasonality of the business, now if one look at the segment which we report practices, so some of the practices as well as some of the verticals which we report. We have seen significant weakness. Now if you can help us understand seasonality of the business because I think it is relatively new business. So if you can provide some perspective there. Thank you. On the first side, as I said, as I mentioned, I think we made those investments and of course, we will see a better profitability In Europe, specifically on the back of 2 things. 1 is the leveraging the investments we have made globally To be leveraged globally, the second is in terms of offshoring, which, of course, there is a potential to do more now. So I think based on this, you will see that. I think I would strongly suggest that Mr. Tikhita mentioned to look at all our numbers on a yearly basis There is always certain disruptions quarter to quarter for some specific project customers. So I would say our trends on a cumulative ARPU 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 teams at the beginning of year. Now we are slipping closer to high single digit kind of thing. Similarly, if one look at performance in, let's say, some of the other segments also, we have seen those Changes. So that's why I tried to get some sense about if you can forward some perspective or it is client specific and which led to some kind of weakness in, let's say, I think PACCAR will continue to lead the growth in the near future, and it will be followed by growth On commercial, so these 2 and new mobility, we see a portion of it, but the size is small. So that's why I'm not Particularly commenting on that. It's still an area which is new to the for us and also for us. So we did see growth for sure, but it's on a smaller base. But If you see all growth in all the T25 customers, we see a good environment for us to grow. It is more dominated by Pac Man and then followed by Commercial. Yes. Because if one look at last year Q3, Seasonality impact was not to the extent which we are seeing this quarter. So is there anything specific which played out this quarter And which also led to our expectation also coming to closer to lower end of the guidance. So is there any change in the demand kind of thing, which let's say from the beginning of quarter? There's not much on demand side. There are some specific things like some projects moving To offshore the project that is coming, it is like that. So I think, see, even if we move more offshore, I think Hopefully, it improves the profit a bit, but sometimes it can impact the revenue in shorter term. The next question is from the line of Rahul Jain from Dolla Capital. Please go ahead. Thank you for the opportunity. First question is more about the macro Question, 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. So right now, there is not much nothing different. Whatever The risk that we're there in terms of geopolitical risk, I don't think We have probably gone down a little bit rather than going up. So that part we have not no significant difference In our conversations with our clients. I think I was more referring to the European market, Which was which happened a couple of weeks ago where I think existing 2.5% import duty was Said to be going to 20%, that's what that said was. But I know is there anything on that as well? No, I think frankly, I need to check on this specifically, but we haven't heard anything from the one of the customers. Okay, okay. Secondly, on the business side, on the couple of deals that we 1, if you could share a bit more in terms of the scope, scale of some of the major deals that you announced, which one of them Which one of these are Heizabel? And any more flavor you want to give on that? Yes. The first one is about Japanese OEM. This is we've been working with that OEM in the area of For several years now, even in connected vehicle side. What we have won is a large infotainment program for this OEM. So the relationship is very strong. And obviously, it's a multi year, As Mr. Barkin described, a large deal as a deal which goes across 5 years in double digit $1,000,000 So this is one of those deals. And we believe that with this particular OE, we have displaced an existing partner In this area. So we are very hopeful of having significant growth, Not only in the infotainment area but in some of the other areas. So that was about The Japanese OEM. The European OEM in the ADAS area, It's a start first deal with this OEM. So we it's a good start. But as you know, I mean, over the next 1 year, we really have to figure out how this pans out. The potential is significant It's the relationship works out really well. So this was one of the pursuits that we had during the course of the year, and we are happy to close that deal. Sir, in general, all of these all 5 of them are There are 3 of them that are what we call large deals. And then the other 2 are essentially net new pursuits that we had during the course And we'll see how things unfold with them over the next few quarters. Right. That's it from my side. Just one more input. I think this is important that you added a new client because Given our deep penetration already, we would appreciate if you could share which deals are new client for you going forward in your presentation. So during this period, actually we added core strategic client to our customer leads. So we have a T25 strategy and we used to report on T17. I think We will soon start reporting on T21. And we have added 4 static 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 1 at this time. The next question is from the line of Kunal Pangohi from Aditya Birlasan Life. Please go ahead. Yes. Hi, sir. My question is with regards to Profitability. We have during the analyst Investor Meet also, we had highlighted that our profitability growth is going to be much better than the revenue growth going forward. And given the industry trend where there is a 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? So I think That I mentioned to you, I think, in my commentary that a couple of areas we could have done better. And one of the reason I I think We did a little bit investment ahead in terms of people. I think we made the increments and the investments which were made outside. I think as 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. And the platform and the IPs and all other things become a part of this. So that's how We decided because finally the proposition is what the customer is looking for. And most of the customers are looking for adopting this new technology quicker. They want to bring their products and new models and platform quicker. So we changed our proposition in this direction And many of these technologies are new. So there are a lot of issues which come in the production Michael. And they need a very dependable partner who can take them through. So that's why we moved in this direction. To your point, I think we will you will see the I mean, I did say that for the next year outlook when I gave that the profit and this is our number one goal. And it has taken a little more time than what we thought, but we will focus next year on that. Sure. But given that currently we are, say, at around 8.5% or 8.2 percent EBIT margins. Do you think business has the potential to deliver 11% or 12% EBIT margins over the next 2 to 3 years? Yes, it has. Okay. And are we as in we should be able to achieve that also? No, totally, yes. So given the kind of drivers are there in terms of You're seeing that platform getting adopted because platform generally should at least yield a much better margin profile. See, I agree with you. And I think that's why I mentioned about all the challenges and what we will do. I think we are confident to improve the Probably that's hitting. It has taken more time than we acknowledged, but we are confident we can achieve. Sure. All right. Thank you. Thank you. Thank you. The next question. The next question is from the line of Apoorva Prasad from HDFC Securities. Please go ahead. Thanks for taking my question. It's just wanted to check again on the previous question. You talked about margin expansion. What do you think would be drivers here of this 200 basis points, 300 basis points expansion that you're targeting. I mean, if you can split out that, how much of it can be in the SG and A leverage and how much the gross? I think it is both, but I think we are looking at improving more gross margin. And any SG and A leverage that you see? Of course, they will get that leverage, but yes, see from an SG and A perspective, if you look at it, One of the advantage that we have of focusing on this 1 industry and top 25 strategy Is that we already have our account management and sales function very well established. As we go deep within these clients, it's strongly going to be incrementally beneficial for us. We are not required to meet that incremental investments on the SG and A part of it. Right. And would any form of Tail rationalization be part of that strategy. I see the active base seems to be reducing, been flat this quarter. So will that also be part of that? Every quarter, I think we are evaluating and profitability is engaging 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. So We have every quarter we have identified few customers and this is the latest. Right. And lastly, any comments that you can make in terms of how the deal durations would have changed over the past year? Any do you see that sort of increasing with sort of more larger deals coming in? In general, yes, the trend is that also it's our effort, right? When you talk about strategic relationships, it's about having more visibility into all of their programs and aligning our practices and our deliveries to those programs. So as we continue to build these strategic relationships that will also the duration will also be longer. That has been the trend for the last couple of years and we believe that I mean 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 and or the TCV, how would that have trended? Usually we take a 3 to 5 year view, right. Any production program you take at least a 3 year view. Okay. Thanks. Thank you. Thank you. The next question is from the line of Madhu Babu from Centrum Broking. Please go ahead. Yes. So just a question on your engagement with captives, if Let us say some of the companies like Bosch and all have a sizable capital, even Mercedes and all in India. So I mean, do we I mean, how much of our business is from Getting2 Captives and how are we working with them and how do we see that relationship? The way we look at our relationship is always take a global perspective. The top 25, these are all global relationships. Now some of them happen to have centers in India or in China or in Eastern Europe. And it's all part of the strategy. There is a clear thing that our customers do with their capital centers. There are specific things that they do with us. So with most of these captives, we actually coexist In a synergy sort of way. So it's hard to define how much business is actually from Capital, because we never take a view of any customer that we just engage with them from a capital perspective. Okay. And just Does that provide a good answer? Clarity? I was meaning, let us say, Bosch India Captive directly engages us with for some kind of work. Just an example of BOS not naming the client, but Yes, it's very, very little, if any. These are global programs with our global customers. Some of the work we may do in collaboration Local capital centers or technology centers. Some work we may do directly with them because they may not have the capability of certain programs that they are executing. So it really depends, but direct work purely with captives is very small part of our business. So adding to what Sachin mentioned, I think with the global programs, which are in new areas, new technology areas, We do sometimes work with the captives, but it is a more of a global program. I mean, so we need some part which is delivered yearly. Okay. And just one more on the BMW, we have announced it officially that we are working on that Thunder platform, Midas platform. But if you see BMW last one and a half year, they talked about substantial China investments in the R and D and offshore captives in China. So is that work even being done by the BMW's captain in China, the same platform where we are working? So The first thing is that platform is across many OEMs. It is not even BMW. Daimler is adopting it, FCA is adopting and a few others who are adopting it. The second thing is this work As much API key in terms of the work which is done by, if I could say, a software specialist, we have a large share of. But of course, the individual companies, the OEMs do their own work. And they do it, however, mostly in Europe. Okay, okay, sir. Thanks a lot. Thank you. Thank you. The next question is from the line of Shyamal Joot from Aditya Birla Sun Life Insurance. Please go ahead. Sushamal. Your line is in talk mode. Please go ahead. Hello. Yes. Yes. So my question is more mainly on the outlook So while we have declared few of the wins in this quarter, but we don't have any like revenue like Quantification or the timeline of the deal. So being an outsider growth parameters, we should look to See that whether we are on the right path of getting the double digit growth or let's say, interested in 12%, 15% growth, both parameter we should look. And similarly on the margin, like you had mentioned that you had to build some capabilities and that's why the Century hikes have been higher than what you had anticipated. So what parameters on the margin point we should look at we are now done with the Investment Phys 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 more specifics when we talk to you Next year, that is in April. Because we don't have the order book number or the TCV win during the quarter or the backlog over the next 12 months. So then it becomes a little bit difficult to like So that's why we talked about overall environment. We will continue to give a number directionally numbers in April. But we talked about the overall environment where the opportunities are higher and long term opportunities are also there. So I I think we covered that in our overall environment department. Okay. Thanks. That's it from my side and all the best for coming quarters. Thank you. Reminder to the participants, anyone who wishes to ask a question may press star and 1 at this time. As there are no further questions, I would now like to hand the conference over to the management for closing comments. So thank you everyone for participating in the call. And if you have any other after thoughts, please get in touch with me anytime. Thank you