KPIT Technologies Limited (KPITTECH) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to KPIT Technologies Q1 FY '27 Earnings Conference Call hosted by Dolat Capital Markets Private Limited. [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, Nithya. 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. Good evening, and a warm welcome to all on the Q1 FY '27 earnings call of KPIT Technologies. On the call today, we have Mr. Kishor Patil, Co-Founder, CEO and MD; Mr. Sachin Tikekar, Co-Founder and Joint MD; Mr. Chinmay Pandit, Board Member and Head of Americas; Mrs. Priyamvada Hardikar, CFO; and your Sunil from IR. As we always do, we'll have the opening remarks by Mr. Kishor Patil on the performance during the quarter and the outlook for the remainder of the year, and then we'll have this open for questions. So, once again, a very warm welcome to all. And now I will hand this over to Mr. Kishor Patil. Thank you.

Good evening. I will take you through our results for quarter 1. Automotive industry has been for some time, facing some challenges globally, especially on account of extreme competition from China. It was accentuated by certain geopolitical situations, whether it is tariff or other parts in different parts of the world. The last one, which was the war, which was probably the most unexpected by many companies. It also had a significant impact in terms of their supply chain and the cost -- input costs. With all this, specifically for European players have been the most impacted, both because they had impact in China market as well as the Chinese competition getting into their own market, which is in Europe. And last but not the least, having a restricted U.S. market because of the tariff or uncertainty because of that. And last, but input cost because of the war. With all that, I think the profitability had a significant impact apart from the drop in the number of cars sold. And this specifically impacted European players, also Japanese players, but European players significantly impacted. And with that, you could see that there have been many job cuts, many profit warnings, many pay cuts, ongoing restructuring, significant write-offs, et cetera. On the back of this, after some of this, one month back, we made a disclosure to the stock market about the impact on KPIT in the -- for this year. And we talked about how it may pan out to some extent. And specifically for the quarter 1, we talked about that year-on-year, it would have a degrowth of about 1% and quarter-on-quarter about 5% drop in terms of revenue and more than disproportionate impact on profitability. On the back of this, for this quarter, year-on-year revenue we had CC revenue growth of 0.1%, year-on-year revenue decline of 0.6%, quarter-on-quarter CC revenue decline of 3.6%. In terms of profits, the EBITDA at 17.2%, EBIT at 12.3% and PAT at INR 1.17 billion. So, this is where we're in terms of the actual numbers and the profit, basically the PAT got impacted both on two other accounts, which was one is the ForEx loss and also loss of share, loss of -- share of loss from ForEx, which, again, in some way was an impact of postponement of certain revenues, specifically in the Europe region. And that had a further impact on that. On the back of that, what was still good was KPIT could -- we could do USD 257 million worth wins during the year -- during the quarter, which was across the world, but mainly driven through connected cars then after sales transformation and autonomous. So these were some of the few leading areas which help us to get these revenues. Now while we reach there, I think the two things which we have mentioned about is this, of course, is not where we have been in the past, and we would like to come back to the growth. During the outlook, we have just mentioned that H2 will be better than H1, and we will return to growth in H2 by Q4, driven by the Q4 performance and our profitability will return when the revenues -- largely when the revenues come, of course, there are other levers we will use before that. So this is where we are. Now the point is how we will do it. And we have talked about some multiple areas which could help us getting there. Now I may say that this is not a response to this situation. We have been working at it for the last many months, even in during the last year. Now the issue is about how quickly we can do that. I think the drop in the revenue was quicker than we got the revenues out of some of these areas, which we have been talking about. So, first thing is, overall, I would say that we have been trying to broad base the revenues in multiple ways. The first thing is on the existing OEMs. In the existing OEM, apart from focusing on increasing our wallet share in the areas in which we work by getting a larger responsibility of the programs and through multiple ways. We have also added many areas of practice or offerings, which we provide to the client, which will help us. So, for example, in the existing areas where we are trying to really -- you remember, we have done an acquisition Caresoft some time back. And now we are leveraging that for cost reduction programs, and we will do that more actually. And that is one area which is absolutely essential for these OEMs at this point of time. The second, for example, is aftersales transformation, and that's some of the areas we are doing. So first is in the existing car OEMs. This is what we are doing. And we are seeing now good traction in these areas, a couple of these areas. These are some of the fast-growing areas which we are seeing. Then the second thing is new passenger car OEMs. There are some car OEMs, very stable and, I would say, successful OEMs in Japan, Korea and also in Europe, which we have not been working enough. Now these are some of the OEMs we have been engaging for the last few years. And now we see places where we could actually be in a position to accelerate their journey. So I think these are -- this is from the existing car OEMs or some new passenger car OEMs. The second is off-highway and trucks. We talked about it that we had started focusing on this some time back. There are new logos across U.S., Europe and Asia, which -- with whom we are engaging in. And as you know, like SDV, now SDM is what you look at like software-defined machines. This has a tailwind across the off-highway and trucks. Specifically, if you look at the off-highway, there has been a big success for some of these companies. You would know that some of the leading off-highway companies have a market cap which is bigger than most of the OEMs, and they are highly profitable, growing very well over last few years. So these are some of the clients we are engaged with, and we would like to -- with the -- and some of the new logos which we have got, we would like to really double down on this. The third thing is the products and solution. We have multiple products and solutions. Again, we have made multiple investments and development. One of the -- a few of the latest one is have been N-Dream. The second I talked about is aftersales transformation was the i-Dart. Technica products, which and the Cymotive, the cybersecurity. Now we have all -- what we have done is we have been putting together to integrate the whole story across the software development cycle and the vehicle development life cycle. And this is all been getting powered by the automotive intelligence platform -- I mean it's a Beacon, what we have done a partnership with Microsoft for a global go-to-market in automotive area. And that becomes the base for all this. So this should help us apart from -- so basically, Technica becomes like an infrastructure for -- in the validation, which is powered by Beacon. Then i-Dart becomes after sales powered by Beacon. And similarly, we are -- so validation is there, i-Dart is there. And similarly, we are looking at the overall product life cycle across which we can build autonomous where we have built the World Foundation Model. So across these areas of offering led powered by Beacon, we are providing the product. This is one area where product and solution is really helping us to grow, and this will be also margin accretive over the period. So this is where we are investing. And this is where we are seeing a good traction. And other adjacencies we are looking at -- one is the micro mobility, where we are already seeing a good traction. We are already have some wins, which is the last mile connectivity. And the second thing is about the deep tech, some of the opportunities we are looking at in the area of deep tech. So, with all this, we are trying to see that we improve wallet share expansion across all the practices and create offerings which are -- cross-practice offerings for these clients. This is how we are looking at to do this. Now this has been our places. This is where we have invested and we have been taking -- this is how we were furthering our strategy. Unfortunately, there has been some gap between the impact we had versus the revenue realization, but we do believe that this will be this will, of course, will be overall revenue accretive and we will return to growth. As we said, by the quarter end of H2, we will be -- by Q4, we will be back to the growth and hence, the reasonable margins which we have been used to. I would like to say that we are not very comfortable where we are. I think we have taken -- we believe that mobility overall as an area is very much there in multiple forms. It will expand its scope, and we will continue to have a balanced growth, broad-based growth across the clients, across the practices and across the adjacencies. Thank you.

Thank you very much. We'll now begin the question-and-answer session. [Operator Instructions] Question is from the line of Nitin Padmanabhan from Investec.

Congrats on the strong deal wins despite a tough quarter. I had a couple of questions. The first is by when do we think commercial vehicles will really come back to growth? If you could give some color on why we saw the weakness during this quarter there and because we have had reasonable deal wins and client additions in the off-highway and commercial vehicles. So that's the first question. The second is from a Europe perspective. Europe, we seem to have at least in the presentation, a reasonable number of deal wins in Europe despite the weakness that you spoke about. And also, it looks like some of the OEMs have a reasonable number of model launches or updates by end of next year, which is a large number. So, in that context, do you believe that this weakness can be sort of temporary? These were the two questions. And I just have one last question on margins, which I will sort of ask after.

So, Nitin, as I mentioned, this -- we, of course, don't think that these are the kind of permanent drops or anything. This is -- we enjoy a very healthy relationship with the clients, and we have also broadened our scope. And of course, many of them have to reinvent themselves. So they look at KPIT as a natural partner. So we are engaged with all the OEMs you are talking about. We are very -- that's the reason our pipeline is also strong. What we are not sure in the case of the current part is when these deals will realize. We are not at all worried in the sense whether we would get that our share of the business. It is about the timing. And that's why at least in the short term, we have discounted that part, at least for a few quarters. And that's why we have said what we have. On the commercial vehicle, we will be on for growth next quarter. Actually, this quarter also, there was one specific thing what has happened was a quarter before we had one significant revenue in a particular place. So that's why this looks like this, but I think you will see a growth next quarter.

Sure. Perfect. And lastly, on the margins. During the Analyst Day, you spoke about an aspiration of achieving 22% to 24% by FY '29. That aspiration can still hold? Or would you worry about it at the moment?

I would say the medium-term outlook remains good for two, three reasons. I will not just make a statement. There are two, three things. As I said, we believe that our product revenues will grow and the solutions revenue will grow exponentially. It will -- we still are -- I would say that we have a reasonable success. It is not that we have not started. We have already seen the success in some areas. In solutions, there are many solutions we have identified. Some of them are in the initial stages. They will also -- we believe in the next quarter or two, they will also be ready to be deployed. With this, we believe that our growth will be largely driven by products and solutions, and this will be margin accretive. So, in the medium term, we do believe that -- because some of this, we have also looked at outcome-based kind of business model. So, over the medium term, we do believe that this all will be -- we will be in a position to get where we have mentioned.

The next question is from the line of Karan Uppal from PhillipCapital India.

The first question is on the U.S. geography. It has done well this quarter. Can you unpack the growth between, let's say, OEMs and off-highway? And do you expect this momentum to sustain for the next few quarters? That's the first question.

Yes. So this is Chinmay. The growth in the geography is fairly well balanced across the entire portfolio. We have seen good growth on the commercial vehicle side and some of our long established relationships on the pass car side as well. I think we have a fairly good visibility for the upcoming quarters to have it continue in the same line.

Okay. Second is on the Europe, actually, the revenues didn't fall off versus what we were expecting. So can we expect the impact in Q2? And also if you can quantify the revenue impact for European geographies?

So, I think, there are two things. First is absolutely, optically, that looks like that. But there were two reasons. One is there were certain revenues we were expecting which did not come there. And so some of this, you will see that it will have some impact next quarter, as you will see. So I think we saw a reasonable impact in Europe, which was about 4% or sorry -- for the quarter, about 4% or so. And -- but we also see, as you would look at this impact will not be at a company level. I'm telling you at a geography level. This will be more than -- will be made up by U.S. as well as SIMA. And where this quarter, it shows a particular -- because of one transaction, there are multiple things look like that. But this quarter, it looks drop. And as you know, the revenues are less. So that's why that drop looks big. But we are seeing a significant growth in SIMA also. So I think with growth in U.S. and this, you will see, but the Europe impact, you will see next quarter.

Okay. Okay. And sir there were two SDV programs which were going to be ramped down. So are they in the base now? Or do you expect the impact to continue? If they are in the base, then should we expect the Japan, Korea and China geography to bottom out?

So one program from Europe is almost getting over now. We'll go to start of production, but that's been planned. The one in Japan is -- that was actually canceled at the last minute. So both these programs are coming to a natural kind of an end. So in terms of these specific programs, I think this is where we are.

And just to clarify, the program is the actual vehicle program was canceled.

Yes.

And that's the impact. So this is what has happened. But of course, we do have a pipeline from these clients. It is not that we don't have a pipeline from these clients. What we are not sure, again, is in the current situation, specifically this being from the Europe and Japan is the timing of when we will be in a position to get further revenue.

Got it. Just last question on the margins. So the other expenses were up significantly this quarter. So surprising to see expenses being up in this kind of a quarter. So are there any one-timers there? And how should we expect the margin trajectory from here on for like the next three quarters.

So, in terms of other expenses, there has been a certain impact because of the foreign exchange rate. As you know, these are consolidated accounts. So, secondly, there have been some provision because of the acquisitions that we did and some subcontracting cost in European region that incurred for our clients. Nothing out of the way. These are operational.

So, going forward, the way we see is the margins will improve, but it will improve incrementally, not significantly until our revenue go back. So revenue will be the major driver. We will be in a position to optimize cost but only incrementally. So that is point number one. The second is the loss, which we said, I think it will continue for at least next quarter or two that we believe that how it will be. So mainly the driver will be the revenue coming back.

The next question is from the line of Chandramouli from Goldman Sachs.

My first question is just around one of the prepared remarks that Kishor you had made. So, over the past 18 months, I think the European OEMs have found going a little harder in China because of the higher luxury taxes there. And also on the other side of the coin, the Chinese OEMs have been taking market share in Europe from European OEMs in a lot of the market. KPIT has, for the past 2.5 years, been trying to seed businesses in China and try to see how we can contribute to Chinese OEMs who are now making a bigger impact in the global EV market. Just want to understand over the past three to six months, has there been any developments there? Anything changing there, which might enable KPIT to participate more in this trend, which at this stage seems to be a little more structural.

So first thing is absolutely we -- and we -- I have also said that we will be very patient with China, but we will continue to grow and invest in China. And so we have engaged with two OEMs. And at least one of that we are about to get to a meaningful engagement in that case. We do believe that the third thing I must say that we have found a reasonable traction for our products and solutions in China. So these all the three things are working. The scale will happen because now, as you know, the China -- also their volumes have gone down and there also the industry has taken a beating. So the impact is basically most of the companies are aware that they will be in a position to really grow only outside -- meaningfully outside China profitably. And I think that is where they see a very good KPIT as a partner, which has been in China as well as has a very strong both client relationships as well as ecosystem play in outside China. So we do believe and we absolutely believe in our efforts and strategy for China. And apart from that, as I mentioned earlier, we want to be very broad-based. So multiple areas I talked about. The third thing I would say is China is a place where we want and we are also learning. But as important is, as you know, many global OEMs are having forming partnerships in China. We believe that, that also we can leverage significantly going forward.

Got it. That's helpful. Second question is just around, I think, in the past, at the start of the year, you have provided some color on how you think the first half versus the second half can progress. And this year as well, I think you've given clarity that the first half, two quarters might be sort of similar. But I just want to understand the back half, I think you seem to have visibility that things will improve in the back half. Just want to understand what are the key drivers of that? And also relative to, I think at the Investor Day after 4Q results, the initial thought process was that there could be possibility for organic double-digit growth Y-o-Y. Is that a run rate that you think is feasible for the back half of the year once the first half sort of headwinds are cycled.

So I think we have mentioned that, of course, we had -- see our -- I would think you would appreciate our clarity or if I would say, transparency and we share whatever happens at the earliest. So when we were of the opinion that in the first half because of some of the reduction of cancellation of SDV programs, our revenues would go down and it would impact the first half. We had this Investor Day after that and where we explained what would be the impact on KPIT and what we would be doing to growth. And we talked about the strategy. I have not told you anything different, much different than what we have said that, and we would make up for it. Now after that, there were major changes in the European ecosystem and many European OEMs had an impact on their results and the subsequent actions post that. Because of that, we had to come back and talk to you about that. And that created a lot of uncertainty because it takes time for people to figure it out and understand what they will do. And that is the impact. And frankly, because of that, we have been saying what we have been saying. And beyond this to give -- I mean, we have talked about two things. One is H2 will be better than H1. And by Q4, we will have a meaningful growth. That is what we have mentioned. And we also believe in our medium term and next year, year after growth strategy because of the multiple actions we have taken. And I must say that the impact we had is in a couple of clients, which is significant, but the growth has been more broad-based and across multiple clients. And we do believe that in the -- by the end of the year and the next year, these accounts will bring a meaningful growth.

Got it. That's helpful. Completely appreciate all the clarity and transparency. And just last question, I think over the past two to three quarters, becoming more and more visible that your fixed price contracting is increasing 600 to 700 basis points versus where we might have been last year. So I just want to understand from a margin standpoint in this kind of environment, how that needs to be come through. You've also made the point around you had multiple months of working with many AI tools, the Beacon AI projects and so on and how that can also add productivity efficiency in. So I just want to understand how to put these two points together to try to figure out what the range of profitability could be for the company in this sort of newly constituted business model in a steady state environment.

See, the first thing we felt that any change in the business model, the basic thing is move to the fixed price business model. Once we do that, then we have multiple options. Number one, of course, the usage of AI. Again, I must tell you, it takes some time to move towards completely AI-based delivery because depending upon which -- how the infrastructure is set up, how much they allow our tools to be used on their infrastructure versus our infrastructure, it takes some time, and there is some buying and that process. The second thing is also the solutions which we bring in as a part of the fixed price delivery, which are margin -- have better margins. And the third is the products. So, for example, Beacon itself has two business models. One is as a product or a platform which is basically subscription based. And then the second, of course, we use for delivering to the client. With all these combinations, flexibility and is available to us to drive with the clients to maximize. So that's what we are doing. To answer your questions, indirect questions probably is we believe it has two meanings. One is we are in a position to improve our margins for where we are signing the contracts. First is they are always meaningful. We are typically continue to hold some premium against the competition that I always talk about. And secondly, there, even in the geographies where it is very competitive in a certain amount of time, we can move towards a better reasonable margin, have a better margin. So I think this is what we are -- this is how I would describe this.

The next question is from the line of CA Garvit Goyal from Serene Alpha.

Sir, my first question, like when we say Q4 will be stronger in the terms of growth I just wanted to understand how are you seeing European OEM in that particular quarter onwards? Are you seeing them start using KPIT solution to compete against the Chinese competition? Or do you think the current situation will be there for those quarters as well, but you will get from the other geographies? I'm asking this because in order to return to our earlier growth trajectory of 20%, 25% organic growth and the kind of margins that we did earlier, I think we need to have a decent contribution from existing European OEMs as well. So where we are on that.

Okay. Let me take that question, and thanks for setting the expectations as well from a growth perspective. No, I think let's talk about European OEMs. What is happening to them, as Kishor talked about earlier, there are three forces at play. Their share in China, which used to be the highest, that has gone down and it continues to go down. Number two, in their own home turf territory, Chinese are gaining market share. And because of the tariffs, they are becoming not so competitive in the U.S. So they are under tremendous pressure. Having said that, they are also -- they also realize that it means structural change. This is not something that gets over, right? So they are rethinking their strategies. That's the fact, and this is where all the European OEMs are. So now what does that mean to KPIT perspective? We still believe that all of these OEMs, they've been around and they're going to be around. They just have to figure out how they're going to be around and viable going forward. In their journey, given our relationship with them, the conversation has shifted towards how does KPIT help these OEMs reduce the cost of their product by at least 30% to 40%. And secondly, how do we help them reduce the cost of their production. If they are able to bring these price points down by 30% to 40%, they become competitive again. And that -- so our conversations have actually shifted towards these two topics for the European OEMs. This will take time as they are sort of rebaselining what does it mean to them and where they really want to spend money. But these conversations are already being initiated. And we believe that once we get over this hump over the next couple of quarters, some of these cost reduction initiatives will yield revenues to KPIT. This is point number one. Point number two, our current business is more than 50% comes from Europe, absolutely. But the effort over the last six quarters has been to have a broader-based growth. That means how do we have balanced growth across Europe, Americas, SIMA, which we call Southeast Asia, India, Middle East and Africa. This is a new sort of region for us and JKC. So we need to have balanced growth, a, across the four geographies. Number two, within that, how do we get more business and wallet share from our existing clients in passenger cars. Number two, the clients that we never worked with, we have started engaging with them. An OEM in Korea, one OEM in Europe, two OEMs -- one OEM in the U.S. and one in Japan. We have started doing this. This is step number one to have broad-based growth. Number two, we have opened seven different OEMs in off-highway segment. And we have started working with four different OEMs in trucks and bus business. So the composition of our revenue is going to be broad-based as compared to what it has been over the last three or four years. And this is a transformation that we are also going through. And I think we are going through it as we speak. And once this transformation happens, I think we believe that we can go back to our growing ways. It's just that there are certain obstacles that come our way. So what we are trying to do is to sort of build a more resilient company that can withstand some of these shocks and still grow in spite of these shocks. So this is -- in a nutshell, this is what our effort has been. And I think the learning from the recent challenges with Japan and Germany is, I think we just need to have a lot more intensity and we have to run faster. That's what it means. Yes. So a long answer to your question, but I do hope that it helps to understand what we've been doing and how this transformation is taking place in our company.

Understood. Basically, what I'm understanding is from the timing perspective there are uncertainties but we're -- okay OEMs are basically considering this evolution.

Absolutely.

Okay. And secondly on the deep tech side, you mentioned in the slide. I just wanted to understand more on what are these areas because in the past we were speaking about sodium-ion technologies and then hydrogen fuel technologies. But in the last few quarters we're not sharing anything on that. So I just want to understand what are we exactly thinking in this stage.

So, I think two, three things I would say that -- so for example, in other parts, I think we continue to work on the hydrogen tech, but meaningful revenues will take some time though we currently the government is pushing hydrogen specifically in view of multiple controversies, they do believe that hydrogen may be a viable option. But some of these things will be careful in terms of factoring into our growth. But I think the point we are looking at is some of the areas in which we are working in the practices, they are very adjacent to some other parts of the mobility, whether it is you're talking about drones or whether you're looking at a few other areas humanoid or few other areas, whether it is on the production floor or otherwise the client ones. So I think these are some of the areas which we are exploring right now. Also some other areas where we are looking at and we see an opportunity. Again, these are some initial efforts, but we believe there is the opportunity is big. And we are not factoring any significant growth right now, but we believe these are the good opportunity which we should be in a position to capture and we are in the process of putting together the overall plan. The second is the data center opportunity where some of our clients like Cummins or some other clients are engaged meaningfully. So we can probably take these offerings to many more clients in that sector. This is what we are doing. We are putting together our story, and we believe that we will be in a position to grow in these areas, which are again, the areas where we already have an experience, we already have the offerings and we are already working in a few clients. We have not yet taken the holistic view yet or made any organizational focus fully on that, which we are exploring and we would do that.

Okay, sir. And sir, about sodium-ion technologies, how is it going right now? Because I think it is more than two years now, right? So what are that based on that side?