Despite current supply challenges, KPIT Technologies is constantly investing in new technologies and exploring new frontiers. In this interview, Priya Hardikar, Senior Vice President and Head of Finance and Corporate Governance, explains the company’s growth strategy
How has the global automotive software technology space evolved in the post-pandemic world?
We are currently witnessing the most transformative period in the automotive industry. Over the past two to three decades, this industry has gone through a period of high voltage transformation. Connected Car Shared Electrification (CASE) is driving this change. Since the pandemic, we’ve been seeing this phenomenon called software-defined vehicle as a very fast way for our customers to move forward. Software continues to transform the mobility industry with CASE, forcing it to move to a new vehicle architecture, i.e. from a distributed architecture to a central architecture. Currently, they are moving towards a centralized architecture and then they will want to own this software unlike the previous situation.
So, during the pandemic years, we have seen our customers accelerate to move to software-defined vehicles. It’s like a computer inside the car or the car around the computer. It’s like an intelligent vehicle in very simplistic language. All OEMs are now dedicated to ISVs and their teams are also dedicated to software. The software-defined vehicle will be the market leader in the near future. Therefore, industry leaders like Stellantis, Mercedes and Volkswagen have pledged to make significant investments on this front. The next 5-7 years will be transformative years for OEMs and the industry will continue to invest in new software-led technologies.
KPIT Technologies has recorded seven consecutive quarters of healthy growth and steady margin expansion. Can you shed some light on the key drivers that have helped you consistently outperform?
First, let me point out that our net cash has steadily increased over the past 12 quarters. We went from Rs 90 crore to Rs 12,000 crore over a period of 12 quarters, which represents significantly higher cash generation and a strengthening of our balance sheet. After our split in this automotive business which was a strategic action on our part, we believe that this industry is also useful. Its size is also growing for us to reap the benefits and there is no problem from the demand side. We are also seeing a shift to a newer vehicle architecture, as mentioned earlier.
Despite the current supply difficulties, we continue to invest in new technologies. The way we work with our customers, associating them with our products and platforms and therefore with technology areas such as virtualization, middleware and cloud connectivity, accelerates our service delivery to our customers, which helps us improve our margins beyond operating efficiencies otherwise. Also, over the last 7-8 quarters we have been able to move some of our work to offshore locations and so there is additional volume growth there. This volume growth is also helping us reap margin benefits.
In FY22, KPIT Technologies’ revenue from commercial vehicles grew 33%, while passenger car revenue grew only 15%. Do you expect this trend to continue?
Currently, the turnover of commercial vehicles as a percentage of total turnover is around 25%, while that of passenger vehicles is around 75%. Since the base of commercial vehicles is smaller, you will see that the growth is faster than that of passenger vehicles. That said, yes, we expect the utility vehicle segment to do well in the coming years. We see this traction as CASE technologies are rapidly adopted. We expect growth to be comprehensive and widespread.
What measures are being implemented to address the challenges posed by high attrition rates?
High attrition is an industry-wide phenomenon and is expected to continue. We have learned that we will continue to grow despite this situation. We did it last year and we will continue to do so this year. The advice we have given takes this situation into account and we have planned accordingly. We are looking at several ways to address the challenges posed by high attrition rates. We are looking for ways to start global centers near the coasts while looking at local, i.e. geographically diverse centers in India. We also plan to hire new graduates – approximately 2,000 – in FY23 and train them quickly.
This will help engage them a little faster in advance. We are also working on diverse staff governance to account for lifestyle changes at different stages of our employees’ lives. We also leverage our alumni network. The alumni network is something that will strengthen our workforce. We are also finding ways to strengthen our referral programs and a lot of work is being done on this. We continue to focus on automation and better process management that will maintain retention faster and better. We believe that this new paradigm shift that is happening on the supply side will continue and we are also making progress to achieve this shift.
Do you have any acquisition plans for FY23?
We will make technology-focused acquisitions, like those we have made in the past. We have a capital allocation strategy and based on this strategy, we are moving forward to make technology-focused niche acquisitions. However, we do not feel the need to make acquisitions for growth purposes as we believe there is strong demand in the market and will look for suitable assets or strengths that can move us forward faster through technology synergies. . We are quite cautious on our acquisition path. We look forward to acquiring only such assets with niche technology that will be useful to customers for future technologies. Typically, these would be high quality companies. If and when such opportunities arise, we will assess wisely to ensure the synergies match, and then we will invest.
Can you share your revenue outlook for FY23?
For FY23, we expect constant currency revenue growth of approximately 18-21%. This would be broad-based growth across all of our practices and strategic clients. We are again focused on volume growth of around 25%, mainly driven by offshore. EBITDA margins will be in the range of 18-19% due to the revenue mix which favors offshore. We will continue to focus on improving productivity. Because we want to stay at the top of our positioning with our customers, we will invest in research and development focused on technology and this would represent between 2 and 3% of our income. We have done it in the past and it will be the same. Attrition would continue to be higher, but we’ll fight our way through. The focus for the current year would be primarily on acquiring talent, developing it and retaining it. Incremental promotions will be similar to what we did last year and therefore will be higher as our revenue and EBITDA plan includes the same.