Ladies and gentlemen, good day and welcome to KPIT Technologies Q2 FY 2027 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 touchtone phone. Please note this conference is being recorded. I now hand the conference over to Mr. Rahul Jain. Thank you, and over to you, sir.
Thank you, Nazneen. Good evening, everyone. On behalf of Dolat Capital, I would like to thank KPIT Technologies for giving us the opportunity to host this earnings call. I would like to hand the conference over to Mr. Sunil Phansalkar, who is Vice President CF&G and Head of IR at KPIT, to do the management introductions. Over to you, Sunil.
Thank you, Rahul. A warm welcome to all on the KPIT Q2 FY 2027 Post-Earnings Conference Call. I would like to take this opportunity to wish all of you in advance a very happy Diwali and a prosperous New Year. On the call today, we have Mr. Kishor Patil, Co-founder, CEO, and MD; Mr. Sachin Tikekar, President and Joint MD; Anup Sable, Board Member and COO; Chinmay Pandit, Board Member and Head Americas; Priyamvada Hardikar, CFO; and yours truly from IR. As we do always, we will have the opening remarks by Mr. Kishor Patil on the performance of the quarter and the way we look the year ahead, and then we will have it open for questions. Once again, a very warm welcome to you all, and I will hand this over to Mr. Kishor Patil.
Good evening and thank you for joining the call. Welcome to Quarter Two Earning Call. Some time back, we had given how KPIT growth will pan out, and in terms of specifically how the Q2 will look like. We are happy that we are in line with our expectation. We can see some of the results of the strategy we have put in place. In order to really understand this, let's go into details. Overall growth has been 6.5% year-on-year in rupee terms, 1% in terms of quarter-on-quarter. We were expecting more flattish. In terms of CC terms, again, it is 0.5% quarter-on-quarter and 0.2% year-on-year. Looking at this, if you go one level below, off-highway and commercial has grown 27% year-on-year, and 17.6% quarter-on-quarter.
As we had mentioned, this is one of the growth drivers for now and future we are looking at. The pass car, if you really look at, we are down by about 7% year-on-year and 4% sequentially. I would like to mention here that while pass car looks like this, if we take out our two top accounts, the impact we have, the sharp decline we had due to cancellation of their programs or cutting of their expense is 13% of the total revenue. What this means is we have been in a position to make up that drop due to our growth in off-highway commercial and also the products. This is how we have been in a position to make up. The pipeline is healthy. We have got reasonable wins and now 89% of the wins, it's a very active pipeline.
We see that while it is taking some time for realization, it's an active pipeline, and we feel much more comfortable with some of the opportunities on hand. I would like to come back to the products. The products revenue, which we have talked about, and we will talk about this more later in the year, maybe early next year, in more detail how we intend to do. But we have a 5% growth quarter-on-quarter during the quarter and 25% year-on-year. Overall services revenue has been flattish, but the product has grown 5% quarter-on-quarter and 25% year-on-year. In terms of profitability, our EBITDA has grown from 17.2% to 17.8%. It's 600 basis points. Largely it is because of the business mix, as the products' contributions are higher as compared to the services part and solutions part.
We have continued to make investments in terms of technology. Even during this quarter, our investments into R&D has gone up by a couple of million dollars. Cash is about INR 6.2 billion. It has come down a bit, basically for two, three reasons. One is that there was a dividend payment of INR 1.4 billion. There was an acquisition payment of Cymotive, in the sense the initial payment of Cymotive, about INR 1 billion. The DSO has increased from 51 days- 53 days. The wins, I talked about the wins, but the wins have been mainly in terms of autonomy, connected, and ADAS. In terms of AI, if you really look at, we continue to make good strides in that. We believe that this will be for now and in medium-term, a very significant differentiator. The Beacon product has been received very well.
Almost all our products, the Beacon is the basis for that, while we also will take the Beacon to market in due course. This is how in case of AI. In services and solutions, of course, on all our deliveries, many of our deliveries, we have started using this. There are more than 9,000 users of the AI platform, overall AI product. We have more than 5 million transactions, I would say, which has happened during the quarter. 12,000 engineering agents have been built. This is a significant change which we have made, and it is quite well appreciated by the clients. Roughly around 9% of the revenues come from the, what we call AI first projects. As I said, it's very normal now to use AI in almost Everybody uses AI in every project and product.
This 9% is where we say that the solution is based on AI and it makes a significant differentiation, and we use it to go to markets. This is the progress we have made, and we expect this to go up significantly. On the people side, sorry. The fixed price projects have moved to about 70%, which is significant. It is very important because as we move towards AI more and more, I think these are the projects where we can get both the productivity or we can move in terms of differentiation. That is very important. People attrition was a bit higher during this quarter. It was mid-teens. As we predict the next quarter, it is coming down substantially. We have done our increments during the quarter for certain grades, initial grade between A to E grades.
We have made the increments and some other increments will get done during this quarter and some in the last quarter. That is why we do believe the attrition will come down reasonably. Because we have in advance, we understand the attrition for the next quarter, this will come very close to what we have earlier. I wanted to also talk about in terms of adjacencies. We believe that overall need for software will keep on increasing in the mobility part. There is a significant opportunity, even though right now there are certain headwinds in the market. The content of the software is going to go up in the car and, this software-defined vehicle is important, for most of the OEMs.
It will transition to AIDV, where KPIT with Beacon as well as few other products will be in a prime position to take the opportunity as it has done in the SDVs part. We believe we are excited about the opportunity including in pass car into certain segments. However, we believe that we can extend some of this expertise into some of the adjacencies as we have been talking about. Over the period, this will allow us to have a more addressable market with using our assets, technology products, which we have built and the domain. One thing is we are talking about energy tech, where some of our clients already have, for example, Cummins does work into energy tech area, and we can take it to another 15, 20 clients and similarly in the deep tech area.
These are the two areas where we are now creating specific offerings which we have are packaging for these specific verticals. We will be going into these adjacencies in due course. It will take time for us to. Even though we believe that early successes will come in two quarters to three quarters, but it will take time to have a meaningful impact. This is what we have already initiated. We do believe that we are really excited on the AI native deliveries, AI products which we have, the overall products chain, the way we have done from the architecture to after sales, the solutions we are building around the products and adjacencies. While our performance is, as I said, in line, but muted to some extent, we believe remain confident about in the midterm growth and excited about the opportunity we have in front of us.
Thank you.
We can open it for questions now.
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 touchtone 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 Rishabh Rathi from Goldman Sachs. Please go ahead.
Hi. Good evening, and thank you for the opportunity. My question is around the geography where you said and we had talked about the two major customers winding down. If I can just see, Europe actually we've seen a sequential decline, but Asia has picked up in 2Q versus 1Q. If you could just give some color whether going forward we can see more sequential decline, and is there some positive development in Asia ex of the customer decline?
Hi, Rishabh. This is Sachin Tikekar. The two clients where we have seen a sharp decline, one happens to be in Japan, which is part of JKC, and the other one is in Europe. It is primarily because of these two clients you see degrowth in the two respective geographies. There is growth in Americas, as you can see, in the U.S., quarter-on-quarter, year-on-year. SEIMA, which we split from Asia. Asia has two parts. One is JKC, Japan, Korea, China. The other part is Southeast Asia, India, Middle East. That is where we again see growth, primarily driven by fairly well-rounded growth, primarily driven by India in SEIMA. The way to look at the split is, the issue is actually with these two OEMs where the revenue has gone down by more than 13%.
We do believe that in the next couple of quarters that both these clients will bottom out. Till that time, there is an opportunity for us to bring broad-based, more resilient growth. What we mean by that is the growth will happen, A, in existing clients of pass cars, in new clients that we have picked up in pass cars. B, more clients in off-highway. One is, last quarter we announced one software-defined machine, kind of an engagement with one OEM. Now there are two consulting engagement in SDM, two additional ones. Usually consulting one ongoing well, they lead to actual SDM programs. Positive development on off-highway as well. The truck market, if you really see, it has been kind of very sluggish for the last several quarters. Finally, in the U.S. it is showing signs of growth.
We believe that trucks, both in Europe as well as in America, specifically in the U.S., will see some growth. On the other side, besides the two clients where we have seen a sharp decline, there are headwinds in Europe when it comes to pass car OEMs. They continue to struggle. However, from KPIT's perspective, except for the one where we have seen sharp decline, there is an opportunity in the other OEMs, because they are struggling and we have an increasing footprint there. We have an opportunity to really do consolidation and create efficiencies for them. That is how actually we see all these opportunities unfolding for us going forward.
Got it. Just to follow up on that, when you mentioned, since the European pass car OEMs are struggling and we see an opportunity here, is there a changing trend wherein the OEMs are starting to spend back again or are they still in a wait and watch period, trying to decide on their strategy before finalizing their next steps? If any update you can give on that.
Yeah. Actually, all the pass car OEMs in Europe are looking to further cut their costs dramatically, as their margins continue to drop, as they drop their wallet share, market share, specifically in China. But that is also an opportunity. They have many partners that are actually in Europe and some other partners where things are just not viable or efficient. Given our solutions and Kishor talked about AI-led transformation, we believe that there is an opportunity for us to disrupt the current economics and create value for them in spite of declining spend.
Got it, sir. And just one last question. Since you talked about the changing strategy around products, increasing wallet share, providing more solutions, we have seen our fixed price contracts also go up to 71% now, R&D spend also increasing. Are there any metrics we can track or the company is internally tracking with respect to the successful transition towards this strategy? Any updates you can give around that?
Yes. I think right now we will talk about revenues in something of these parts which I shared with you, what are the revenues. But by Q4, for sure, when we talk about next year, we will give you clearly the parameters which we will track internally and we are driving internally. So it will give us two, three quarters to look at them.
So going forward, in a nutshell, what will be critical to our strategy is the vertical-wise growth, pass car, trucks, and off-highway. This is something that we are watching very carefully. The product revenues and product revenues, solution revenues, and last but not the least, what Kishor talked about is AI-led transformation program.
Got it. Great. Thank you so much, and all the best.
Thank you.
Thank you. Next question is from the line of Ravi from Axis Capital. Please go ahead.
Hi, thanks for the opportunity and congrats on a pretty good show in the U.S. Two questions here. One, it will be good, it is more a suggestion than a question, really. It will be good if you could start sharing product revenue every quarter, given that this is now starting to be a meaningful part of your revenue and affects our margins. So that would help us. Secondly, in the U.S., I guess that the segmental margins have gone up significantly because of product revenue. Is that right?
What was the first one?
No. The first question was.
Suggestion, saying will you be able to share product revenues going forward?
Yeah. So product revenues, we will be in a position to share. As I said, maybe next year we can come out with more detailed reporting on that. But for U.S., I think overall, the margins have gone up overall. But Chinmay Pandit, you can basically talk about it.
Yeah. You are right, the margins have definitely gone up across the existing engagement as well as some of the newer engagements which Mr. Tikekar referred to.
Yeah. Overall in the U.S., there is a broad-based growth. We see that growth coming from all three verticals. Pass cars are growing. Off-highway is growing. We believe trucks will also grow. Of course, there is the product sales. Yeah, it's a broad-based, resilient growth that we are having in the U.S.
Overall, pass car market has not been that impacted because it's still a protected market. I think that is another part, I would say.
Thank you. Yeah. Cash flow seems to have gone down a bit in the first half. Compared to last year when we were doing, I think between 75%-80% over the first half. This time it's about 57%. I'm talking pre-tax operating cash flow, EBITDA. What's led to this?
There are a couple of reasons. I think we've mentioned in our investor deck. There have been cash outflows on account of dividend, some acquisition payment that we did for Cymotive, and others. As you can see, our DSOs have gone up by a couple of days. That also has impacted the working capital cycle.
Ma'am, only the DSO would impact the OCF. The other factor that you mentioned will actually not be in the operating cash flow, right?
Yes. But the fundamental reason is the working capital cycle that has gone up because of increase in DSOs.
All right. Okay. Thank you. I'll get back in queue.
Thank you.
Thank you. Next question is from the line of Karan from PhillipCapital India. Please go ahead.
Yeah. Thanks for the opportunity. Just wanted to check in terms of the growth outlook for next few quarters, given that the headwinds will continue in two of our largest clients. But you are also positive on the pipeline. So how should we think about the growth from next few quarters perspective?
I think we have mentioned last time that H2 will be better than H1. I think that we will maintain and we also feel confident that we will make up for the drop from these clients with the broad-based growth strategy which we have. So these are the two things I can say. So there will be a growth, and this is as big. Both things which we have mentioned are there, I would like to reiterate.
Okay. Last time, sir, you had mentioned that you should see some rebound from Q4 onwards. Is that outlook intact?
We expect growth, and we will not be in a position to put any numbers now, but we expect growth in that quarter.
Got it. Second question is on the CV. The CV segment has been growing quite strongly for us for last four - five quarters. Is the growth broad-based in this segment, or it is concentrated in one or two large accounts? Also, is the growth sustainable over the medium term within this segment?
Yeah. When we look at CV, we look at it in two verticals. One is off-highway, mostly construction mining, and second is trucks. Off-highway is somewhat new to us. We already have three clients, and we are adding two more. Right now, of course, it is concentrated at the beginning on the back of three clients, but it is becoming more broad-based. We believe that there is going to be growth, there is going to be increasing revenue over the midterm in off-highway. Absolutely no two ways about it. The second part is on trucks. We have been in trucks a little bit longer. The market is also coming back in terms of, especially in North America. We believe that the business in trucks will also pick up in the immediate quarters to follow.
And that should also give us reasonable growth over a period of time. Both are not going to be one-off things that are only there for a year or 2. We believe that they are going to be contributing to our top line and bottom line increasingly going forward.
Especially, they are going through the change or transformation, which pass car went four years back, I think. That is why we believe their spend will go up as Mr. D. K. mentioned. And we have that opportunity because, one, we have, as you know, the SDV, we probably have the maximum experience which they are looking for, plus now the transformation to AIDV. I think we will be in a better position to address that.
Okay. Thanks. Just last question on the margins front. As the growth accelerates by H2, do you expect margins to go back to, let us say, 20%-21% range, EBITDA, which we used to operate at? And what would be the headwinds and tailwinds you foresee?
I can only say right now it will go up to some extent every quarter, but it will be early next year when we get there.
Okay, thanks. Thanks a lot, sir, and all of you.
Thank you.
Thank you. Next question is from the line of Nitin from Investec. Please go ahead.
Yeah. Hi, good evening. Thank you for the opportunity. So two things, Thomas. The first is it fair to say that the incremental drag from these two customers should be significantly lower in H2 versus H1? Second, as you move beyond it, do you think that these customers can start aiding growth or they will continue to remain some sort of a drag on growth?
Nitin, you are putting us on the spot by saying that. But, in all fairness,
Yeah
in all fairness, I think we'll see quite a bit of decline in these two OEMs over the next couple of quarters, but they will flatten out, bottom out rather, in the next couple of quarters. Specifically talking about these two accounts, while we are de-growing substantially because the large programs got canceled, there are shoots where we are actually engaging and we are increasing our footprint. To answer your question, of course, there will be some growth that is taking place, and there will be growth that will come back in early part of next year. It's just that after what they've been through right now, it's going to be gradual. I hope that answers your first question. What was the second part of the question?
The second part was, do you believe that once they have sort of bottomed out, those same customers, do you think they can start growing or do you think they will continue to be a drag on growth for a while?
They are two of our largest clients. We have deep relationships. There is tremendous amount of trust, and we are actually expanding our footprint there beyond just one or maybe two or three offerings. We are really making it broad-based growth going forward, Nitin.
Got it. That's very helpful. Apart from that, just wanted some context to the Vietnam subsidiary that you have put up and which markets is it looking to serve? Any incremental context you could give to the incremental opportunity you're seeing in Japan, Korea, China, and SEIMA, basically. What is it that you're seeing incrementally in those two?
Yeah. You're hitting all the opportunities of growth for us, Nitin. Let's start with Vietnam. There are two reasons why we are doubling down our investments in Vietnam. Number one, there is an OEM that we've been working with, and we think that our footprint with that OEM will grow in Vietnam. Number two, we are actually building a center along with one large Chinese Tier 1. It's a subsidiary of one of the largest OEMs in China. We are partnering with them to build a center in Vietnam that will deliver the China OEM's global program outside of China. That's another reason we are there. We'll see more and more of the Chinese OEMs setting up their manufacturing footprint in Vietnam, and they also create opportunities for us. One is the business development part.
We believe that there will be growth in terms of getting business from Vietnam. The second reason is the conducive business environment in Vietnam as well as the talent availability. Vietnam, over a period of time, will become our sort of hub for Southeast Asia because it's close enough to China to learn the technologies and take them out. But at the same time, there is a Chinese wall, so to speak, between China and Vietnam. That's about Vietnam. Second part, JKC. Three countries you talked about. We'll see growth coming from one pass car OEM. I'm talking about Korea first. One pass car OEM, we continue to grow, slow, gradual, but there is growth. Then, there is one off-highway OEM, with whom we have one consulting engagement for SDM, and they're committed to this SDM program being launched next year.
I think we'll be in a decent position to win that as well. That's about Korea, focus on two. Then there is the Korea ecosystem is also important. There is a chip maker and some Tier 1s with whom we can have partnerships in Korea. Midterm, we should see growth in Korea, number one. Number two, Japan. Japan, our growth is going to be broad-based. This will go beyond one OEM. That was one of our largest clients. We'll bring back small growth there. But there is another OEM with whom we are increasing our engagement. There is also a truck OEM with whom we have started conversations, and I think we'll figure out ways of getting into one to two off-highway players in Japan.
Over and above that, both for the large two pass car OEMs, they have a solid Tier 1 ecosystem with whom also we will have partnership. Then there is one Tier 1 that has been part of our T25 that continues to grow, especially in the digital cockpit space. Again, in Japan, what you will see is broad-based growth. It is not going to be driven by one account going forward. It will take time, but we will get there. China, three things about China. One, China for China. We have started working with one China OEM and two China Tier 1s in China as we speak. We continue to sell and increase our footprint of Technica products in China. These are the two things that we are doing in China.
Second part we are doing in China which I made a reference to when I talked about Vietnam, which is what do we do with Chinese OEMs and Tier 1 outside of China? The Vietnam center we talked about. Second is there are three OEMs in Europe, Chinese OEMs in Europe who want to increase their footprint, initial conversations with them. One thing that we are really proud of is Zeekr, which is part of Geely group. We have put our N-Dream in-car gaming in there. Again, that is for the global market. Happy to see that win coming. These are the two main levers, and third lever is to learn from China and apply those learnings globally.
You will see more and more influence on our solutions coming from China going forward, especially solutions that we will build for SEIMA, Southeast Asia, India, and Middle East market, right? Possibly beyond that. That makes our China strategy clear. That is about JKC. Last but not the least is SEIMA, Southeast Asia, India, and Middle East. India is our growth market. Bulk of the growth that you have seen year-on-year, quarter-on-quarter has come from India, from pass car, trucks, and off-highway. Some are Indian OEMs, some are global OEMs who are increasing their footprint in India, right? India is a very broad-based, robust growth. It will continue to grow. Southeast Asia is primarily Vietnam that we talked about. In Middle East, there are two OEMs. One has just launched one car.
We hope to start some engagement with at least one in the next one to two quarters, and maybe the second one will also come on board. We do believe that SEIMA offers the largest opportunity for growth for us. That is one of the reasons why we decided to separate SEIMA from all of Asia. Yeah?
Also adjacencies, I think this will be the market we go first. I think from that perspective, that will also accelerate our growth in this region, SEIMA region.
Sure. Very useful, and thank you for the broad answer. I just had two more quick ones, if I may. One is, do you believe that in the context of whatever you said initially on Europe, do you believe next year will be the year where we see a lot of vendor consolidations close in Europe? Two, just your thoughts on when do you think the losses from Qorix sort of bottom out and start showing up? That's all from my end.
I believe about by the end of first quarter next year the consolidation process will be meaningfully concluded is what I think. It has started to some extent, and it will get some time to conclude for different players accordingly. Yes, next year it will see some impact. On the Qorix side, I must say that the programs which were supposed to come have been, as you know, that has been pushed out by a couple of years. From that perspective, we are looking at a few other adjacencies where what we can do. Also some of the other small products we have, how we can get revenues till that time. We do believe that strategically, it will make significant sense in the medium term. That's why we'll continue to really see some investments in some way in the product.
Anup, you want to add something?
The main reason is most of the programs which were what they call as Gen 4 for most of the OEMs were supposed to happen in 2028. Those are mostly scheduled to happen by 2029, 2030 now. The mainstream market for the main product for Qorix, which is largely a performance product that goes into middleware, the timeline has just shifted.
Sure. That's super helpful. Thank you so much everyone, and all the very best.
Thank you.
Thank you, Nitin.
Thank you. Next question is from the line of Ankur from IIFL. Please go ahead.
Hi, thank you for taking my question. My first question is around the fact that last quarter we had seen some large OEMs and we had an impact because of certain actions from them, on the back of profitability warnings that they issued. Are we behind that phase now, where the only headwind is probably because of the larger clients and that sudden impact is not something that you have seen in 2Q? That's my first question.
Ankur, we covered this part. The two OEMs, there is continued impact from them. We'll see that for the next couple of quarters. At the end of that, they will bottom out. At the same time, we are also seeing initial green shoots of growth in other areas with these OEMs. They continue to be our strategic clients, and we'll rebuild the relationship one step at a time. Yeah, they will bottom out in next couple of quarters and we'll have little bit of growth coming from them.
But in the meantime, what we mentioned is we'll be in a position to more than make up during this time from the broad-based growth strategy we talked about.
Yeah. Thank you. My second question is on the strong momentum in the CV segment. This quarter we have seen very strong growth and to sustain growth on the overall front, we need to at least have double-digit growth from this segment. Do we have the visibility for having that kind of a double-digit growth in the CV segment through the rest of the year?
Yeah. I think the way to look at it, Ankur, we talked about it, right? We believe that off-highway and trucks both are important. We are adding new clients. We are getting into more meaningful engagements with them, as Mr. Patil mentioned earlier on. Both the off-highway and truck segments are embarking on their first SDM, SDV programs, and KPIT is in a great place to run these programs for them to create value for them. We will see continued growth from trucks and off-highway, hopefully for years to come in future. Right. We cannot really comment specifically on how much growth there will be, but it will be healthier growth.
Just reiterating, you do expect growth in both 3Q and 4Q on the headline basis. That was the comment, right?
No. What we have said earlier is what we reiterate, and we continue that. We have said that H2 is going to be better than H1, and that is what we maintain.
Sure. Thank you so much. All the best.
Thank you.
Thank you. Next question is from the line of CA Garvit from Serene Alpha. Please go ahead.
Hi, good evening, and thanks for the opportunity. I just wanted to understand our exact strategy on when we say we will still be creating the value for the existing European OEM, particularly when you are seeing that those OEMs are significantly cutting off the costs even now. So in the declining budget, how we are expecting to get the business from them?
See, there are two, three things. First, I think I mentioned in my opening comments. First is, the technology spent is not a discretionary for the OEMs beyond a point. I mean, they have to do it. How they do it is the only option they have. As we see European OEMs, they had their European ecosystem. They are looking to move towards India, almost all the OEMs. That is one. The second important part, it is not just the cost play. It is about the technology which you have, the solutions you have, and AI native part of the nature. These are the three very important parts, and I think these three things will help them to reduce costs and have more, I would say, differentiated solution. While their overall spend will go down, it could substantially increase our footprint in these clients.
That is basically the reason what we talked about.
Got it, sir. That is it from my side, sir. Thank you. All the best for the future.
Thank you.
Thank you. Next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.
Yeah, thanks. Most of the questions have been answered. Just one question. If you look at Europe as a market within pass car vehicle, apart from the top OEM which we have defined may take two more quarters to bottom out, is there any other similar risk in any of the other clients are we foreseeing? Just update on the same. Yeah.
No, I think it's a valid question, Sandeep. Our footprint in other OEMs, pass car OEMs in Europe, is growing. While we believe that there are probably ways for us to grow, I think our strategy essentially, going by our experience with the top two OEMs, is defend and grow. First, what we are doing is we are making sure that we strengthen our own business. We are actually disrupting our own business to create more value so that we don't get disrupted by them, and then secondly, then figure out ways to increase our wallet share. This is our strategy when it comes to other pass car OEMs in Europe. We have engagements with all of them. That's the good thing. We believe that there could be added opportunities where we have less of a footprint. Some of these are new to us.
We believe that there could be, as Mr. Patil talked about, as the supplier consolidation and value creation comes out on the back of AI-led transformation, there is an opportunity for us to disrupt their existing model and create a lot of value for them. This is something that we are working on now, but you'll see the actual impact of it in H1 of next year.
Okay. Thanks and all the best.
Thank you.
Thank you, Sandeep.
Thank you. Next question is from the line of Rahul Jain from Dolat Capital. Please go ahead.
Yeah. Hi. Thanks for the opportunity. Just wanted to understand, we understand the challenges in general that you have highlighted, but are there any important trends that are changing in the industry, which some compulsive spend from these companies around AI, like a conversational in-car AI is one trend, and maybe on the battery efficiency side, like we saw with what Tesla recently announced and all that. So are there any where the spends might get revised faster because of some of the industry compulsion that might play out?
Yeah. So are you talking? You are breaking up in between.
His question is, are there any major industry trends?
Yes
Which may accelerate growth in some of them?
Of course. See, I think we have to understand, in Europe, the spend will continue to go down because they really have to figure out their costing. But they will prioritize the spend. We know that the spend in digital cockpit continues to be high, comparatively speaking. In diagnostics, over-the-air updates, after-sales transformation, there is spend. Ongoing threats with cybersecurity, there will be added focus on cybersecurity. These are the areas, and of course, if you look at the broader trend of autonomous driving, it kind of went on a back burner right after COVID for two or three years, but now it's rebounded substantially. NOA, navigational autonomy, has become a standard in China, will become somewhat of a standard in Europe as well as in the U.S. And then there are added investments by some of the new companies into robotaxis, right? So there is that spend.
These are the areas where there is, whatever budget they have, more budget is being allocated to these areas. Fortunately for us, we have footprint in all of these areas, so we look forward to capitalizing on our strengths to increase our wallet share.
I think there is one area which we talked about is the products, where specifically in the area of validation, which is a very important part, both from the quality perspective as well as reduced time. And overall, many of our products are in that line. So overall, the product portfolio is one area which may accelerate capturing that spend.
Yeah, I understand. Of course, you guys have been talking about it, but it's a very mission-critical decision. Probably that may take more time in the thought process. But thanks for that color. Secondly, we, of course, are talking about that growth might start turning better starting Q4. But from the current base of cost that we have, do we see there is some room of optimization? Because probably this company was designed for a much higher growth, and we will go back to that kind of number. But in the interim, do we see a need of some correction in some of the aspect in our current cost base?
Absolutely, there is such opportunity, and mainly because of the change. First, what we want to do is basically with AI and the products. The second thing is what the customers are looking for. As we mentioned, the European players also are looking at doing more work remotely than on-site, which they have been used to. Certainly, our mix may change in terms of our capacity, which has been in certain different centers, to high cost to low cost kind of centers. More on the capability side and expectations. We'll never optimize our technology investments and the teams which we have. But the client engagement team, the mix may change depending upon what the clients are looking for. So that's something we have started optimizing and will optimize.
Sure. Lastly, on the comment that we mentioned on the losses in the Qorix business. Is there a way we are thinking about it, where it could stabilize on an annualized basis or any other color that you could give on that?
It will take some time, for sure. It is not something we can fix. But there are few other ways we are looking at. We are in the exploration stage, as I said. One is the adjacencies, where it's something like robotics or some of these areas where this operating system may be adopted, but we still need some time to explore that and ensure that that's how it will happen. The second thing is we can look at some more partners in that area to see to drive the growth in a more strategic manner. These are a couple of options we'll explore, but that we will know in the course of time.
Sure. Thanks for those insights. Those are the questions.
Thank you.
Thank you. Next question is from the line of Vaibhav Yadav from Trade Nest. Please go ahead.
Good evening, and thank you for the opportunity. My question relates to the recovery outlook. Given the persistent weakness in the European automotive market, does management anticipate any change to its previously indicated recovery timeline, or is there a possibility that the recovery could be delayed further? Thank you.
All right. Here is the thing. There are two aspects, right? When you say recovery, there is recovery for KPIT and then there is recovery for European pass car.
Recovery for both, sir.
Let me talk about both. First, we will talk about the industry. It is going to be a very long drawn recovery for European auto OEMs. There is continued pressure, and it is going to go on for a while. Like I mentioned earlier on, while it is going to take some time, they will prioritize investments in certain areas, and we called out those investments, and that is where we see opportunities for KPIT.
So, A, in pass car, there is going to be a long-drawn recovery for European OEMs. In trucks and off-highway, that is not the case. We are seeing trucks coming back slowly. Off-highway continued to do reasonably well. This is the industry outlook in Europe. What it means to KPIT, we have taken a big haircut in Europe, especially for one client in the recent past, and that will bottom out in the next couple of quarters.
After that, as Mr. Patil mentioned, there are enough opportunities for KPIT to grow within passenger cars market, given that they will have to do everything cheaper, better, faster. Given our products, given our AI-led transformation, we believe that as the consolidation kicks in towards the end of the year, that will materialize in H1 of next year. That creates opportunities for KPIT to grow in European passenger car market.
Thank you, sir.
Does that answer your question?
Thank you. Next question is from the line of Gokul from BTH Capital. Please go ahead.
Hi, am I audible?
Yes.
Hi. Thanks for taking my question. I just wanted to understand firstly on the off-highway segment that you mentioned, in the beginning of the call also, that this is a new segment for us and we have just started signing new clients here. Just want to understand how different is this in terms of scope of work from the passenger vehicle where we have our expertise and any other nuances that you can share with respect to what kind of margins we have here or the addressable market, how sticky are the revenues. Any color that you can share in this segment that would help us understand the sustainability of this vertical better, that would help.
If you look at what transformation this particular industry is looking forward, is exactly following on the lines of what pass car went through in terms of the SDV change. The language used is different. It is called software-defined machines rather than software-defined vehicle. But the fundamental technology is the same. And in fact, we stand at a very strong position here because not only we have the experience that we have from SDV in the vehicles, but we also have fairly advanced solutions and whatever work we have done through AI now to accelerate these programs. And that is the reason why we stand as the most favorite partner to do these transformations.
Right. And in terms of your segment where you classify it as feature development and integration, architecture, cloud-based, et cetera, any mix that you can give us within commercial for that?
It is exactly the same thing. I think there will be few things that may not be relevant. For example, the cockpit experience for an off-highway vehicle may be slightly different. But from a technology perspective, it doesn't make any difference right now. Most of the head unit or cockpit experience is built upon Android. Most of the other things are built upon body electronics. Most of the architecture is central zonal. So all the elements on technology remain the same. So we are very comfortable, and we can actually demonstrate a great value to the customer, bringing in all the technology.
So we'll see growth in all three segments.
Yeah.
The architecture, feature development, and after.
Integration and aftermarket.
Aftermarket. Diagnostics and aftermarket. There is opportunity in all three.
Got it. Secondly, wanted to understand your employee base. I understand in the last couple of years has been stagnant, if I am not wrong. Just want to understand, going forward also, given that our revenue share from fixed price is also increasing, do we expect there to be some operating leverage here? Whenever this recovery happens in Europe and the rest of our geographies, we will see employee costs not rise up in proportion to our revenues. Do we expect to add meaningfully the headcount going forward?
That, for sure, will happen for the products and solution. As we talked about our fixed-price projects, I think there is AI leverage. I think these are the three things which we have in terms of increasing revenues per person, leverage. It won't be for all the customers, because it also depends upon the adaptability of the clients for certain technology and ability to manage those engagements.
Right. One other thing, you mentioned two new adjacencies. One was energy. What was the other one?
Energy tech and deep tech.
Deep tech. Okay. Thank you.
Okay. Thank you.
Thank you. That was the last question for today. I now hand the conference over to the management for closing comments.
Thank you everyone for your active participation, and have a great evening ahead. Bye.
Thank you, everyone.
Thank you. Bye-bye.
Thank you. On behalf of Dolat Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.