In Conversation with Kishor Patil, CEO and Managing Director, KPIT Technologies Limited
We Have Grown in Terms of Our Software Capabilities
KPIT Technologies has clocked decent revenue and profit growths in Q2FY23. The organic growth outlook for FY23 has grown from 18 per cent and 21 per cent to 23 per cent. What are the key drivers in improving the organic growth outlook?
Well, it is a combination of a few things. First, we are focusing on our T25 clients where we see that spending on softwaredefined vehicles is continuing, if not accelerating. The second is the number of deals that we have won so far and even that has a healthy pipeline with a couple of mega engagements set to close soon. And that is also helping us to really get better visibility and where we will be. Lastly, it is the business we have already added and the rest which we will have soon. Therefore, taking into account all these factors, we have raised our FY23 growth outlook.
For the recent quarter, KPIT Technologies recorded aggressive deal wins of USD 142 million. So how would you expect these deal wins to contribute to the company’s future growth?
There are 2-3 reasons how it will affect our growth. One is about the nature of the deal. Some work or wins we do are based on certain projects. Then we are also working closely with our customers on programs and even at the platform level. So, the overall quality of the program is increasing. The second is over what period these deals are won, whether for 3-4 years or even if they are for a few months or smaller deals, we have to take a view accordingly. As I mentioned, our outlook has increased based on current and future engagements, and these are all projects that we have started working on. And typically, when we report a deal, most likely we either have started or will start the work in the week or in the quarter immediately.
Currently, one of the major factors that are affecting the companies in the IT sector is the weakening of the rupee against the dollar. The attrition rates are also very volatile. So, what is your outlook regarding these two issues over the second half of FY22-23?
The weakening of the rupee certainly hurts us, but a dynamic is taking hold and that is the weakening of the euro. Compared to many other companies, we also have a very strong Europe presence. So, it’s not like that the US is huge for us. We do have a balanced revenue mix of approximately 40:40:20 where the contribution of Europe and America is 40 per cent, respectively, and 20 per cent in the rest of Asia. Thus, in practice, it is hurting us even more because the euro is not doing well. In the meantime, we are adopting a strategy where we are looking at the currency for the next two quarters to be in balance between the euro and the dollar. We are hopeful that things will get better soon.
With regards to attrition rates, what do you expect?
I think we feel much better about the attrition aspect as our attrition has been going down for the last 3-4 months and we expect it to go down even further. We can’t say exactly how much for the near future because we don’t have clarity on what that future might look like, but I think we expect it to continue downwards over the next quarter and beyond. We have already begun a downward trend in attrition and comparatively we are better positioned than most companies. And two and a half years ago, before this craziness started, our attrition was in the single digits. I don’t know whether we will get there or not. But we have come so far without much damage at about 17-18 per cent
You have talked about the revenue mix. Based on geography-wise revenue mix, have you set a target for revenue that you would like to achieve over the next 3-5 years?
Yes, we want to have a more balanced mix across geographies, and if you were to look at Europe, it is growing for us. Considering that we have made some acquisitions there, Europe will remain a bit dominant for the time being but we expect the US and Asia to grow faster and pick up the pace. We are expecting Asia to reach 25-30 per cent in the next 2-3 years, but again we have to see how the market conditions hold. Europe and America will definitely have higher numbers for the next 2-3 years.
Could you elaborate about the recent acquisition of Technica Group by KPIT Technologies?
And can you also elucidate the synergistic benefits you expect to accrue from these acquisitions? Technica is a very high-quality company and very specialised. I would just like to point out that because of its legal structure it is seen as four companies but in reality it is one. Since Technica is headquartered in Munich, it has development centres in Spain, Tunisia and the US. Therefore, they have these structures mainly outside Germany, but otherwise, it is one company in practice. The advantage we see with Technica is that our two major customers are also their core clients. First, they are working in departments where we are not present and that works as a complementary factor. But what is more important is that they bring in specific skills, high-level architecture skills and high-level systems skills across domains. Even though KPIT Technologies has extensive domain expertise and superior integration scale, this acquisition will be a complete solution for all our clients.
That is because we will now be able to provide the tools with the combined offering that we believe will help us truly grow. Secondly, KPIT Technologies was looking for near shore centres in Europe and therefore from the development centre strategy, this acquisition will help us attract talent and meet customer needs in a timely manner. We were also specifically looking for French-speaking talent because we have some business in France that can now be overlooked. So, it’s going to complement us in many ways. The third benefit is beyond Key 25 we will be able to work with a new generation of OEMs that work closely with Technica and this will create an opportunity to work with disruptors as well. All this will provide synergy to grow and scale up the business.
KPIT Technologies has reported consistent growth over the last nine quarters in terms of revenue and profits. Moving on, can you highlight the key milestones you have achieved over these nine quarters? How has the journey been with such high growth?
The first thing we have to see is that we are doing lesser things, but we are doing better. And with this change in our position we were very clear that these are the T25 customers that we want to work with and will only focus on. So, the main milestone is that there are a number of USD 50 million customers that we are approaching and the whole idea is to help them scale up. If we are able to take our relationship from USD 50 million to USD 200 million, it gives us a better market. Over the past three years, KPIT Technologies’ position as a leader in the industry has changed drastically. We have grown in terms of our software capabilities, especially in software defined vehicles (SDV) and emerging technologies more than anyone else. This is very well understood by our customers and has been appreciated.
Our capability to scale has led to strategic partnerships with our clients where we are not only working on certain projects and programs but are now working at a platform level and even architecture level. Our engagements have actually increased which gives us better visibility in terms of size and longer-term deals. In some cases, we have even observed that very valuable or important customers within known brands become the single source for many of these technologies, thereby increasing our deal size because of this. Even in my latest investor update, I mentioned about mega deals being in the pipeline. The other part is that we have got scale. We have located our centres globally and strategically to map each customer and serve them accordingly.
So we are growing not only in America, Europe, Asia and the main market but also in Latin America with a centre in Brazil, the Middle East with a centre in Egypt and even in India with a new development in Kochi. Hence, we have broadened our talent base and we can get talent and scale at a reasonable cost by staying in time zones to better serve our clients. This makes it risk-free for the customers and also an opportunity for us to acquire high-level skills. Before I conclude, I would also like to add that the work we are doing in software-defined vehicles is basically going to dominate the automotive industry over the next 5-7 years. Therefore, there will be plenty of opportunities to grow and flourish.