KPIT Technologies Limited (KPITTECH.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to KPIT Technologies Q2 FY '26 Earnings Conference Call hosted by Dolat Capital. [Operator Instructions] 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, Shifa. Good evening, everyone. On behalf of Dolat Capital, I would like to thank KPIT Technologies Limited for giving us the opportunity to host this earnings call. And now 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 very warm welcome to everybody on the Q2 FY '26 Post Earnings Conference Call of KPIT Technologies Limited. I hope you all had a great Diwali and have a great year ahead. On the call today, we have Mr. Kishor Patil, Co-Founder, CEO and MD; we have Mr. Sachin Tikekar, President and Joint MD; we have Mr. Anup Sable, CTO and Board member; Priya Hardikar, CFO; and Sunil from IR. So as you always do, we'll have the opening remarks made by Mr. Kishor Patil, and then we will have the floor open for your questions. Thank you once again for joining a very warm welcome to you, and I will hand this over to Mr. Kishor Patil.

Good evening, everyone. Very happy to take you through the quarter 2 results for FY '26. As you might have seen, the overall year-on-year dollar revenue grew 4.4% and CC 0.4%. Quarter-on-quarter growth has been 1.8% in terms of dollars and CC 0.3%. Organic growth has been 0.8% in terms of dollars -- has been a degrowth of 0.8% and CC 2.3% negative. So the EBITDA remains at 21.1%. To give some color to the growth, I wanted to take some point and -- some time and explain you something because there has been some questions about the wins we continue to have, actually, that has been the issue in the industry also. The wins we have and then why it is not reflected in the growth. So I would take a moment to explain that. See, there are -- if you look at the time, if you take it out, I think I want to bring that out that there has been a reduction in the $65 million revenue in this time and it has 2 compositions. One is the $45 million -- roughly about $45 million, which is basically when the customers deprioritize their spend, and from the old programs or moving to the products or some of those kind of movement of -- moment of their spend either because of discontinuity or dealing of certain programs or certain moving towards using something what they already have. If you really look at this $45 million looks like the reduction in the revenue includes autonomous -- includes, sorry, electrical, middleware mainly. And in the area of geography wise, it has happened in mainly U.S.A., Asia and a little bit in Europe. So this has been basically the part where the companies actually reduce their spending overall in -- on engineering. The about $20 million kind of a revenue, which got cannibalized mainly because we came out with a different solution and provided a more holistic solution to the client and where the revenues dropped because we gave a more holistic solution, but our revenues will get reflected in future because these are mainly AI-based and other solutions, which -- the holistic solution will take some time to really materialize. So overall, we have $65 million, which got lost in terms of revenues, which, of course, has been compensated by the wins from our pipeline. And that is the question we -- I thought I would address this properly. And that has happened because of the wins we had. And generally, the wins we had, had been in digital cockpit area, validation, after sales diagnostics. These are the areas in which the wins have been more and also the products we have in the validation, et cetera, technical products. So they have largely compensated this drop. And that's why sometimes the question is why the pipeline could not get reflected into the revenue. So we have actually absorbed this and actually have been in a position to maintain the revenue. The second part is about the key point I would like to bring out is as a company, we believe that the client choices are changing. And we want to make sure that we continue to add value and continue to lead the client engagements and have a higher share and maintain our leadership with the clients. So we have been moving our overall services to the solution part. And when we talk about solution, it means that we take a holistic view and give an end-to-end solution to the client and take the full ownership. This kind of revenue, we have more than doubled in the last year to 18%. And that has also helped us in improving the profitability. And that's why we have been in a position to maintain our profitability. Coming back to the profitability. Our EBITDA is slightly higher than the last time, it is 21.1%. And we are very confident that what we have talked about that 21% EBITDA, we will be in a position to maintain during the year. That would be considering the fact that we will be giving increments, some in next quarter and some quarter after. So giving that -- after giving that, I think this is -- we will be in a position to maintain that. In terms of people part on this side, we have a net addition of 300 people. It has 2 parts to it. One is we have in the overall -- in line with the movement from services to solution as well as also the AI readiness. We have -- we continue to relook at our talent. And wherever we believe that those kind of competencies cannot be achieved by a certain set of people. Also, we are making sure that all our people, including project management as well as the front-ending people are technical, where that is not -- we are not in a position to have that kind of a team. We have a reduction of about 500 people head count in the current business. At the same time, we have 800 people from the inorganic Caresoft acquisition. With that, our net addition is about 300 people. So this is also a part of how we have been in a position to keep the efficiency and productivity. Overall, our profits actually from the fully owned business has increased from INR 177 crores to INR 191.8 crores. So there is a substantial increase in the profit. The net profit reduction is on account of our share of -- share from QORIX as well as N-Dream. In both the cases, in case of QORIX actually, the revenues have been good in some quarters and not so great. So next quarter, we'll see again some revenues. So it is -- these are a little fluctuation, fluctuating revenue being the start-ups. And if there is no license revenue, then it impacts the profitability. One thing, if you go back and I explained to you that the reduction in the revenues was also on account of middleware -- and middleware and operating system, I think that part. So the middleware part actually that also most of the OEMs have moving their rearchitecture of middleware to the next for some time and that's what I explained last year also -- the last quarter also. And because of that, there will be certain delay in actually realization of reviewing some of these areas. But of course, still, there are certain revenues based on the current business in QORIX. On N-Dream, also, we have increased loss -- share of loss during the quarter, mainly on account of -- as we acquire, we are moving the accounting base to as compared to our accounting standards. And we have written off certain expenses such as stock options, et cetera, and that has really impacted. But all this is largely -- will come down significantly in next quarter and the quarter after. The other part is about the cash and the DSOs. Our DSOs are 49 days. KPIT DSOs has been 43 days last quarter. It is 44 days this quarter. The increase in the DSOs is on account of Caresoft acquisition, where their DSOs are at a higher level. It will take us some time to really get them into the same system as we have. And over the period, this DSO will come down. The overall cash is INR 10.5 billion. Now this is after -- during the quarter, there has been, as always, INR 160 crores plus cash generation, which has been pretty strong. However, we had the payouts in terms of Caresoft acquisition, investment into health and of course, the dividend payment. So with this, the cash is about INR 10.5 billion. If you really look at the future, we see that the clients' discussions and is turning positive. I think they see a little bit more stability on account of tariffs and geopolitical issues to the extent where it is. I mean, I'm not saying it is 100%, but it is much better than where it was. And we can see that positive discussions happening. And of course, very specific conversations with the client on a specific opportunity. So that we can see that happening. And in that, we see the good discussion happening on autonomous. Also, we see that after -- aftersales diagnostics, cybersecurity commercial vehicles. Europe, of course, continue to see a good traction, India, China. We do believe that in U.S., commercial vehicles, et cetera, will have a positive growth, and that will drive that. Also, we believe that -- I do believe that the large deals which we have -- which includes a significant deal win from a European OEM, which is a multi-year multi-domain kind of a win, which is over 3 years, which will help us to really accelerate certain revenues. We do believe that from the last 2 quarters, we have a constant currency degrowth, reported revenue have been growing. We believe that in the quarter 3, we will be in a position to have a positive CC growth -- flattish to positive CC growth. And we'll absorb the -- while absorbing the expenses like increments, et cetera, will be still around the similar EBITDA margins and profitability. In terms of quarter 4, we believe that -- we do believe that there will be a meaningful growth, which will be coming in and we believe that it will be only on account of the areas which I mentioned earlier. So this is where we see this -- we believe that in medium term, we would like to really -- we are making investments already. We are expanding the verticals, as we have mentioned about, one is, of course, off-highway commercial, which we believe will bring some growth. The second part, we are exploring industrial or manufacturing as you can see. That is the same. Third thing we are exploring verticals such as micro mobility. We are also exploring defense to see where is our sweet spot and where we can actually lead as we have led in the automotive world. We see some very interesting areas where we believe that the investments we have made in the technology will help us to get there. Again, I also believe that the investments which we made in the last year or so, again, whether it is in terms of Helm, whether it is in the base of Caresoft, which helps us to reduce the cost of the vehicle as well as the manufacturing cost and Helm. These are all very, very related technologies, which will really improve us to increase our wallet share in the existing plant as well as will be very meaningful propositions in some of these expanded areas. I may say that we are still in the process of going deeper into it and exploring where we can grow. But I feel reasonably confident that based on our initial assessment, we will have reasonable growth prospect in medium term. Thank you.

[Operator Instructions] The first question is from the line of Sucrit D. Patil from Eyesight Fintrade Private Limited.

I have 2 questions. My first question is to Mr. Patil. As more tech players enter the software space, what is KPIT doing to build a strong edge, not just through client wins or platform launches but something deeper like a way of working or thinking that grows over the time and makes it hard for your competitors to copy?

I think the point you mentioned, I think -- we believe that there are 2, 3 points I have. One is the new -- the basically software-defined vehicles, which a lot of people use the word, but KPIT had been pioneer in that and has the largest number of programs. I still believe it is a meaningful part where clients have multiple years to get there. Not only that, it has become more important because of the introduction of AI and multiple technologies, specifically in autonomous area. And with some of these investments, we believe that we'll be in a position to maintain our leadership. The second area, I believe, which is very, very important is the architecture of the vehicle, which I think the next programs which clients will come up, I think they will look at the one who has the highest experience in this area. Where naturally, we are building a very, very core expertise and a core team to really build a comprehensive solution for the next level of architecture, which will certainly help us to really get involved at a very early stage in the program. The second part, I would say that AI is a major area of focus for us. And AI, we have invested for a long time already. We are doing not only pilot, but some production programs also with OEMs. And the feedback, which we have from the clients is this is the best-in-class solution they have seen in this area. With that, we believe that some of the -- we can significantly reduce their time to production programs and improve the quality, which I believe will be sustainable advantage both in automotive and expanded mobility world.

My second question is to Mr. Hardikar. I believe he also on the call today.

Yes, as I am. Tell me.

My question -- it's a forward-looking one again. I just want to understand when growth slows -- when growth slows down or costs go up, how do you manage to keep the profitability stable? And are there any smart ways you're building into your system like delivery design or automation or any other kind of things that will help you stay efficient without cutting any corners or taking any pressure?

I think I will answer that question. I think we talked about it. I think first is the approach we are taking on the solutioning. That allows us to really improve our realization. That is the most important part. The second is I think the -- we always like to be on a cutting edge of the technology and the solution. That improves our -- that also improves our realization. And I talked about AI, which will really improve the productivity and efficiency, not only in the software development, but for the client. And with all these 3 things, we will continue to do that. And as you have seen that, we are probably one of the only companies who have been in a position to manage this kind of margins in this uncertain world.

Next question is from Nitin from Investec.

So you gave a very detailed color on the revenue impact. Just wanted your thought process on how do you see this -- when do you see this reprioritization sort of impact sort of reducing? I understand because of obviously, all these trade tariffs and all of that, it would have meaningfully changed priorities. Do you think a lot of the impact has already happened and we should start seeing that come off? How should we think about it broadly? How are you thinking?

Yes. So thanks, Nitin. I think one thing I had mentioned that from next quarter, we'll see the -- at least you will start seeing that on CC part also, we will be marginally growing and Q4 as meaningful growth. I do believe that there will be a certain cannibalization, which may continue to happen next year as well. But I think our revenue growth based on the solutions will be higher than that. That's how I would put it. Because it is not about just reducing by the plant of the spend, which may, if you ask me, may really get more stabilized in the next couple of quarters. But the AI-led solutions which we are ourselves bringing it to the plant. We believe that it will give us an edge to take a higher share of the client or the wallet share as well as give a more holistic ownership of the programs that will improve the revenues. So I would believe that there will be certain cannibalization, which will continue to happen, but we will -- and that is because of the efficiency and what we bring to the table. But at the same time, I think it will also account for higher revenues.

Got it. So obviously, you did mention next quarter should be higher growth in CC flattish or some growth. That is on an organic basis that you were alluding to, right?

Yes, yes. Flattish. Yes, yes.

And see, you did mention that the reprioritization is a bigger chunk, almost $45 million...

Of the last year -- of the last year.

Yes. Of the last year and cannibalization is around $20 million. Cannibalization is understandable because obviously, it should lead to higher velocity of business for you because clients save more, they will spend more with you. But on the deprioritization of spend, that should be on a declining trajectory or more or less...

That is correct. That is correct.

Yes. Fair enough. The other thing I wanted to understand was, if you look at the geography, obviously, this quarter, you have Caresoft as well, which has come through. So it's not very clear. But at least looks like Europe has done exceedingly well this quarter. U.S., there is some marginal decline. But obviously, I am assuming there would be some Caresoft delta there. I just wanted your thoughts on, one, how should we read these geographies this quarter? And two, how are you seeing the opportunity set across these geographies on a going-forward basis?

So overall, the way I put it is the initial thing also that basically the -- we saw growth more in Europe overall and then we saw a little bit growth in Asia. And we believe that U.S.A. growth will come back on back of off-highway and commercial in a quarter or two, that's how we see it. And -- in Asia, basically, we see a growth in immediate -- over a time, we see all the regions growing in Asia. But in the immediate future, we'll see a little more traction from India and China. We believe that in the next 6 months, we'll see some more revenues coming from this apart from our general Japan, Korea. This will also -- Japan, Korea, we may see some new engagements coming, et cetera, a little down the line, and that should give us a further fillip to our growth.

Perfect. And one last question. On Caresoft, we reduced the consideration we are paying them because the revenues came in lower. Do you think they have broadly stabilized and growth should start coming through? And the second part of that is -- okay. Perfect. And any joint wins or initiatives that's sort of already sort of showing up for you?

Yes, absolutely.

So there is a reasonable pipeline, and we are seeing the conversion of some of them in the initial phase.

Next question is from Bhavik Mehta from JPMorgan.

So first question is, Kishor, you did speak that the client conversations are moving in a positive direction. But when you think about the pace of the recovery over the next few quarters, how do we think because 3Q could be flattish over to you, 4Q you said could be like a very good growth quarter, but does that growth momentum continue going into next year? Or will it be more like a gradual recovery we should expect over the next 12 months?

I would be cautious right now, but I will give you more color on this end of Q4 only because I think by that time, I think some of the uncertainties would be less. But I would not look at -- I mean, I would see that it will be a meaningful growth recovery, but it won't be a hockey stick recovery in the year.

Okay. Got it. The second question is on the large deal engagement, what you've announced with the European OEM. Any color in terms of what could be the size of this engagement when they start? When does it start to ramp up? When does it reach peak revenues?

So we have started actually the projects I've mentioned in the current wins also, there is some part of it. And naturally, the deal offers certain size comes in phases. It's something in excess of 3 digits. And of course potential we have to really maximize this. But right now, I would say, put it as a 3-digit number over 3 years.

Next question is from Aman Soni from Nvest Analytics.

I am audible?

Yes.

Sir, my first question is on our initiative on the sodium ion technology with Trentar. So how is it going on, sir? And also on the hydrogen cell side, what are the latest updates? So we are seeing like various things are happening in these areas, particularly the staff are getting shifted and hirings have been done. I just wanted to understand where are we at present? And then can we expect these areas to start contributing to our top line in a material way, sir? So that's my first question.

See the -- basically, when we had talked about the battery and sodium, we have licensed them, if you remember, their investment will be substantial. In phases, they will reach up to $250 million, not in the first phase, but in the phases over the next 2 to 3 years. That's what the investment it will make. So the meaningful production will start after 2 years. And that's when we start getting the royalties. I think I had explained that when we had made that investment. I would say the hydrogen and some of these are at early stages. We do have certain pilots and those kind of projects may come in. But it is not something which will scale up in terms of an opportunity for us in the next few years because the production programs -- for new production program to kick in, it will take time. But naturally, our all efforts are in terms of maturing the technology, building the ecosystem, building the pilots and that's what we are doing with our clients.

Got it. Got it, sir. And sir, regarding our deal with MG, so how is the execution going on? Last time you said second half, we will be doing the good execution. So what is the progress on that, sir?

So first, I have not mentioned that company, I mean, it is all assumed, so that may not be true. But at the same time, I would say that we will be in a position to start the project in the Q4 and then scale up in the next year.

Got it, sir. And just a bookkeeping question. There is some big jump on the other expense line item. So can you tell us the reason for the same, sir?

I think in this quarter, Caresoft, 2 months expenses are also consolidated. So that's primarily the main reason. And there are some other expenses that keep -- which are not linearly similar, but mainly, it is the consolidation that has impacted, the absolute value that you are pointing out.

Next question is from Chandramouli from Goldman Sachs.

My first question is just around the share of profit and loss from associates. So you did explain that there are some onetime expenses there, which has caused the number to be higher than normal. So the usual sort of share of loss from associates we see is around INR 4 crores to INR 5 crores per quarter. This quarter seems to be close to INR 23 crores. So I just want to understand if you could size out for that. How much of that is one-off and onetime? And then how much of that sort of goes away -- what the potential sustainable run rate could be there going forward on a quarterly basis?

I think we have mentioned that it is onetime is about INR 4 crores, INR 5 crores. And this time, there was no revenue in the QORIX book, which got postponed to the next quarter to some extent. And there is a cyclical nature. See, one thing I must -- I want to tell you that the investments which we are making in some of these companies, I think this will really move the company from services to solutions to products. And that transformation will make -- while we believe that we have been in a position to do a good job, there is certain investments in the initial phases, and the revenues can be a little -- I would say intermittent. And from that perspective, some of these impacts can come to us. But in this case, specifically, I think there were 2 things. One is, as I said, the revenues got postponed. I think if that would not have happened, we would have been at a similar stage as last quarter.

Got it. That's helpful. And just related to that, so I think the QORIX JV, we've invested over the past 18 to 24 months. This is a pretty large middleware opportunity, as you mentioned, more holistic solutions, you might get more integration business also out of this opportunity set. Just want to understand, I think we have said that initially, we expected December quarter 2025 to be a quarter where we start seeing more visible business from QORIX, but maybe the macro has changed. So I just want to understand what your thoughts are on QORIX and when the potential inflection in opportunities that might happen there based on the discussions you're having with customers around this unique solution.

There are a couple of customers where we have a strong discussion happening. But as I mentioned in the early days -- earlier in the time, that middleware and the architecture for many of these programs have been postponed by many people, most of the OEMs to a later date because they -- first, they are not in a position to deliver on the existing programs and there we see a huge opportunity in terms of validation and taking the full ownership. However, on the architecture and middleware time, they have postponed some of these programs to a later date. So the architecture and opportunity comes at the beginning of a program. So however, it has become more strategic to us. QORIX has become more strategic to us, because as I mentioned, some of the very strong differentiator we are building is about building a more efficient architecture, which will reduce the time of a vehicle production program to less than 2 years. And one of the key part in that is the architecture part. And we are building many solutions and QORIX would be one part of that solution. And so that's why I think in the medium term, this will become a very -- more strategic than what we thought in the earlier stage.

Got it. That's helpful. My second question is just around the macro environment. So we've seen the U.S. has signed trade deals already with Japan, with the U.K. very close to signing a trade deal with Europe and Korea and these 4 regions are possibly most important auto manufacturing regions globally apart from China. So in this environment where we're getting closer to trade deals and clarity on the macro front, that potentially means more clarity for the auto OEMs as well, in terms of their capital allocation and investment plans. I just want to understand how your core customers are thinking about potentially reopening the tap on automotive R&D spending, I think in your comments on the presentation you did mention that you're expecting more meaningful pickup in FY '27. So any qualitative comment you are able to share around tariff negotiations coming to a close and what that might mean for the macro for your customers?

I think I would say that due to the way things have happened in the last year, people are -- most of the places, for example, I will just -- without -- many clients in the Southeast Asia business earlier were looking at making investments in U.S. in manufacturing, but they are very ready, but they are still taking time to see whether -- which would be the best way to do it. Some people were going to make investment in Canada, but then they are evaluating that option while they have completely ready with many of those things. So I think it is -- still will take in my opinion a couple of quarters before things become very clear to them. At the same time, as I mentioned to you, the current -- I believe, next 2 to 3 years demand -- 2 years demand for us will come out of current production programs, which are in a, I would say, not in the best of the health for many clients for multiple reasons, and that's where they are reaching out to KPIT, even the clients which are not currently, we are engaged with. So that will be one opportunity. The second is the innovation opportunity, which is -- I talked about a couple of areas. Innovative solution on autonomous, innovative, et cetera. The third thing, as you have seen the cybersecurity issue, which happened with JLR and some of those. I think -- so these are some of the areas which creates opportunities currently. There is one market -- there are a couple of markets and especially, I would say, India market, which is positive and will provide more opportunities to us, which is innovation led. That is the same case we believe in Southeast Asian market. So some of that will really help us in this time.

Got it. That's helpful. And just last question is just a clarification on the comments you had made earlier on the call. So it looks like this quarter, there was close to 2.3% benefit from half a quarter sort of consolidation of the Caresoft asset. Next quarter as well, I think you will get maybe a month, 1.5 months additional benefit from Caresoft. So the constant currency flat to sort of low single digit you mentioned for 3Q, does that include that 1 to 1.5 months benefit next quarter also, as you might get [indiscernible] from Caresoft?

No, no, that doesn't include. I said organically, we will be flat to positive.

Next question is from Vimal Jamnadas from Alchemy Capital.

Sir. I just wanted to check on -- or double down on the clients in China. Any movement there when you could possibly see some small -- even a small contribution from there in terms of our revenues? That's point number one. The second point is a question in terms of the industry in general. We've seen General Motors do away with Android and Apple CarPlay in the infotainment system and move towards their own platform, which is called Ultifi. Do you see some of these OEMs moving towards similar trend? This is, of course, because of privacy concerns, data security, et cetera. And if at all OEMs move towards a similar trend, so how does KPIT benefit from that?

So let me just answer the first question on China. I think we are making good progress. And as I mentioned, we are looking at China in 2, 3 ways. One is really learning from them and investing into technologies proactively, which you are seeing. That's exactly what we are doing. The second thing is engaging with the clients, which are global clients in China and Chinese -- Chinese, Chinese client. We are seeing progress in all these 3, and we believe small revenues will occur in quarter 4. On the technology side, I would request Anup to -- our CTO to take.

Yes. The question about like GM has done away with the support of Android Auto and CarPlay and whether it's a generic move by the OEMs. The answer is no, we don't see this as a generic activity. The logical explanation for that could be GM has a very captive audience in terms of its customer base. So they can probably afford to do that. Others may have thought that it's better to stick to the flexibility that consumers may get through Android Auto or CarPlay. In any case, either one of these, when it is Android Auto or CarPlay, or whether it is a proprietary solution implemented by the OEM, we do stand in terms of our advantage of being the best in that particular area to gain the market share. So it doesn't really affect us whatever decision the OEMs takes.

Sir, just to clarify, what you're saying is if at all, the OEM moves towards an internal architecture, a centralized architecture, we don't -- it doesn't really impact us. And if it is not...

There is no negative impact. In fact, if at all, there is a positive impact on us.

I wanted to understand which -- where in the value chain of building that architecture does KPIT participate with the OEM?

So right from the top of the value chain, right? So in terms of engaging in definition of the architecture to defining the proof of concepts of architectural concepts to actually doing all the platform software, the validation of that and then subsequently developing domain software, integrating that. So the whole value chain is our involvement. Of course, that gets further enhanced by our ability to give solutions in some of these places now.

Understood. And just -- sorry to harp on the demand environment question, if you would were to compare the uncertainty levels when we started the year, maybe in Q4 of FY '20 -- in Q4 of last year versus now, incrementally, how much of an improvement are you observing? Or is it the same?

It has improved substantially. I don't have a barometer to look at it, but it is -- certainly, I think I would say uncertainty has gone down, and in many parts. It has -- I mean, people have because people learn to cope up, right? I think from that perspective, they are making their priorities. And as I mentioned to you, in either case, we have basically a big opportunity on the -- where they are. So I would say more than 50% uncertainty is gone, if not more.

Next question is from Ankur Pant from IIFL.