KPIT Technologies Ltd (KPITTECH) Q4 FY23 Earnings Concall Transcript

KPIT Technologies Ltd (NSE:KPITTECH) Q4 FY23 Earnings Concall dated Apr. 27, 2023.

Corporate Participants:

Sunil Phansalkar — Head Investor Relations & AVP Mergers & Acquisitions

Ravi Pandit — Co-founder and Chairman

Sachin Tikekar — President and Joint MD

Anup Sable — Whole-Time Director & CTO

Priya Hardikar — CFO

Kishor Patil — Co-founder, CEO and MD

Analysts:

Rahul Jain — Dolat Capital Market Private Ltd. — Analyst

Chandramouli Muthiah — Goldman Sachs — Analyst

Pratap Maliwal — Mount Intra Finance — Analyst

Vimal Gohil — Alchemy Capital Management Private Limited. — Analyst

Nitin Padmanabhan — Investec India — Analyst

Mohit Jain — Anand Rathi Group — Analyst

Deepak Rao — Quber Asset Advisors. — Analyst

Nitin Sharma — MCPro Research — Analyst

Deval Shah — RBSE Investment Managers. — Analyst

Saurabh Sadhwani — Sahasrar Capital. — Analyst

Akshay Ramnani — Axis Capital. — Analyst

Anika Mittal — Invest Research — Analyst

Niket Shah — Motilal Oswal AMC — Analyst

Bhavik Mehta — JP Morgan. — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the KPIT Technologies Q4 FY’23 Earnings Conference Call hosted by Dolat Capital Markets Private Limited.

[Operator Instructions]

I now hand the conference over to Mr. Rahul Jain from Dolat Capital Markets Private Limited. Thank you and over to you sir.

Rahul Jain — Dolat Capital Market Private Ltd. — Analyst

Thank you, Liz Anne. Good evening, everyone. On behalf of Dolat Capital, I would like to thank KPIT Technologies Limited for giving us this opportunity to host this earning call. And now, at this point. I would like to hand the conference over to Mr. Sunil Phansalkar, who is Head of IR at KPIT to do the management introductions. Over to you, Sunil.

Sunil Phansalkar — Head Investor Relations & AVP Mergers & Acquisitions

Thank you, Rahul. Good evening, and a warm welcome to everyone for the Q4 FY’23 Post Earnings Conference Call of KPIT Technologies Limited. On the call today, we have Mr. Ravi Pandit, Co-founder and Chairman; Mr. Kishor Patil, Co-founder, CEO and MD; Mr. Sachin Tikekar, President and Joint MD; Anup Sable, Whole-Time Director & CTO and Priya Hardikar, our CFO.

As we do always, we’ll have the opening remarks by Mr. Ravi Pandit on the year and the quarter gone by, and the way we look at the immediate future. And then, we’ll have it open for questions. So once again a very warm welcome to all of you and I hand it over to Mr. Pandit.

Ravi Pandit — Co-founder and Chairman

Good evening and welcome, and thank you for being present at our investor call. What I would like to do in my initial remarks is to give you a quick overview of the results and maybe address a couple of questions which are normally raised, which have been raised [indecipherable] context. And after that, I think we can start with the question-answer session.

I trust you have all received our investor release. As you would agree, it gives plenty information, so, I believe that between that — between the notes that you have got and the initial comments, many of your questions would be addressed. And I would incite you to ask any further questions that you may have.

So, as you would see that it has been a good quarter and a good year. The quarterly results showed a year-on-year growth of 50% in constant-currency. And the quarter-on-quarter growth of 8.5% in the constant currency. So the revenue has picked-up well. EBITDA, we have EBITDA of 19.1%, which is a 60% year-on-year growth. And net profit, which has grown 42% year-on-year. This is about our quarterly results. When you turn to the yearly results, the year-on-year growth in constant-currency has been 37%. The EBITDA for the year, had been 18.9%. This shows a 45% growth from last year. Net profit at INR3.8 billion shows a 39% growth over the last year.

So I trust you will agree that the topline as well as the bottom-line growth has been healthy. And we have been able to meet the expectations that we set, the outlook that we gave throughout the year.

We have also given outlook for the next year, where we believe that we could have a constant-currency growth of between 27% to 30% and our EBITDA margins would be between 19% to 21%. Questions have been asked about the genesis of this growth. 19% to 20%, I’m sorry.

So, I think it is important for us to dwell a bit on the growth that we had in the last year and the outlook that we are giving. And I think it is imperative to look at the underlying factors which I would look at as an intersection of — which is the industry change that is happening and secondly, our readiness to meet the needs of our clients in this period of change.

As we have said time and again, there is a basic transformation which is happening in the mobility industry, especially in the automobile sector. There is a change in the business model that our clients, mainly the ODMs are going through. The change is driven by multiples factors. There is a change in technology because of significant push towards electrification. And that is really in response to the climate change requirements. That is a key initiative for our clients and that’s a matter of passion for us, to really come up with solutions which are clean.

The second factor which is affecting is that there is a business model change that our clients are looking at. Till now, the source of income for the OEMs was [Indecipherable]. And now our clients are looking at potentially a stream of revenues coming from the scale that is being made. And they would like to give additional functionality over a period of time, they would like to stay in touch with the client throughout their lives and therefore, the requirement of being continuously in touch and therefore, a need for making a change in the basic architecture.

The third driver is also, of course, cost. Over the period, as the degree of electrification has increased, the number of ECUs in the vehicles have increased, and now, the OEMs are looking at consolidation of them. They are looking at domain controllers or centralized architecture, which would reduce the number of ECUs that made the overall software management far more easy. There have been multiple reports of industry analysts, which have talked about significant demand for software R&D work that the OEMs will do and the anticipation is that the OEMs will spend almost $40 billion every year over the next five, seven years to make this transformation. So that is really the condition of the industry that we face today.

We have been trying for the last few years to get-out as ready to meet this industry challenge. We look at ourselves as partners to this industry and we want to be responsible and trusted partners to our clients, and with that in mind, we have been working on a few of which, four major initiatives and we believe that it is that thinking that we have took in over the last few years that is beginning to show some results.

Our thinking is actually based on four broad areas where we need to really excel in our performance year-after year. The first is [indecipherable] into our clients, client relationships. As you all know that we have been wanting to focus not just on a single industry but also to focus on certain select clients within that industry. These are the clients which we call as strategy. To these clients, not only they are strategic to us, but we are also strategic to them. So we are a part of their thinking process, we are a part of their architecture development, we are a part of their problem-solving and we feel that it is our responsibility to ensure that the trust they repose on us is well guarded and is well-responded to. So our focus on a few clients and going deep into the requirements has been a main driver of our work of the last few years.

The second area is, of course, in the area of technology. This is an area industry in which technology is changing rapidly, our client needs our tech to get a good handle on the technology, our moto is to be a software company, which understands automotive better than any other company and to be a company which understands software better than any OEM. And with that in mind, we have been investing in understanding this technology, developing skills in that, developing tool, platform accelerator, which can help out clients do their work with speed, with low-cost and with absolute strong system [indecipherable]. So our second area of focus has been technology.

The third area of focus has become talent. And we have been investing a lot in building talent at all levels, not only at the technical talent at the bottom level, but also the managerial talent and the middle and the senior level and that’s an area of focus that we believe should help us over time to come.

The last and not the least important is our delivery excellence. Because the work that the –because of the engine that our clients deliver to their customers is so complex, and the reliance on them is so high, it is important for us to deliver a software which is completely error-free and therefore, how do we develop a system or a process which can develop error-free software in the right committed timeframe has been [indecipherable], and we have been working on that.

So — and we have been talking about this, these four key initiatives to you — with you for the last few quarters and we think that this is something that can put us in good stead. That is what we believe has helped us, our growth in the last year and that is what we had hoped that should help is in our current year — in the coming year. We also think that our mid term prospects in this context should be good.

We believe that in the current year, the growth may be a little front-ended. And so — so we feel that our first two quarters may be better as a part of this total overall growth. In this, in the investor note that we have presented, we have also talked about a collaboration, formation of a new company called Qorix. And I want to talk a bit about that in terms of the technology and the rationale of that. As I mentioned, in this new world of software-defined vehicle, the middleware the core software is becoming a very important thing. And we believe that there is a room for a very good sturdy core software that can be delivered to our clients. For this we have formed the partnership with a global well-known tier-I called ZF. We believe that together we can develop a good solution and deliver it to our clients. The company, Qorix, will be focused exclusively on the development on the software product. We will continue to render services around it. So this company, we will be making an initial contribution of $5 million. And over the next 12 to 18 months, we will make an extra contribution of $5 million. We have done currently an MoU and we are awaiting the final clearance from the regulatory authorities in Germany. Once that is done, we will be able to speak more about what will be the contribution that will come from ZF over a period of time.

We also think that it would be useful for us to add yet another partner that and we are in the process of conversation regarding it. And whenever that happens, we certainly come back to you.

So these are really some of the broad observation that I wanted to make. The normal observations regarding the staff and attrition etc, have been covered in the notes that we have given. So with that initial comment, I would like to now open this session to your questions.

Thank you very much again, for being with us this evening.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen we will now begin with the question-and-answer session.

[Operator instructions]

The first question is from the line of Chandramouli Muthiah from Goldman Sachs. Please go-ahead.

Chandramouli Muthiah — Goldman Sachs — Analyst

Hi, good evening and thank you for taking my questions. My first question is on the longer-term drivers around electric mobility. It appears that the European Union will implement Euro 7 norms in mid-2025 for cars, raising the CO2 noncompliance burden for some of your customers who are unable to comply. And the European Union also last month, has reiterated its commitment to ban ICE-vehicle sales starting in 2035, so in your experience working with the OEMs, how many years do you think it could take to develop an affordable mass-market EV in these developed markets? So just trying to understand the length of the ongoing electric vehicle R&D cycle. Is this a short-term investment cycle that could fissile away or is there a longer strategic focal OEMs at this point?

Ravi Pandit — Co-founder and Chairman

So thank you for the question. I think if you really look at — I mean, I’ll give you first the broad answer. I think first these — European Union was the first one to really go for the proper regulations and compliance on this. The US have adopted it and many of them will be adopting it. Then Japanese companies first have gone for more hybrid and then also electric as a combined focus. So there have been stages, so overall, the different markets will come up, maybe mature and will invest differently.

Important to that is also, you have to look at the commercial vehicle market, which is still in the early stages of electrification and if there are main technologies which are coming up, I mean, maturing, which will be fuel-cell, hydrogen, of course, the battery technologies, so I think there will be continuously an investment into this area.

Coming back to passenger cycle, what we see with our clients is, typically these are — I mean if you just look at basic Indian technology and Indians have been there for more than 100 years, and there is still new — new innovation happens every time. So actually, in electrification also there are many things which will happen. I mean, it will be on different components and also in terms of charging and other infrastructure. So we believe that it will be much longer cycle and at least, I would say the technologies will evolve at least for a decade, if not more.

Chandramouli Muthiah — Goldman Sachs — Analyst

Got it that’s helpful. My second question is on the cyclicality of R&D spending at the OEMs. Historically, automakers have invested in R&D projects throughout micro cycles as is visible from the annual filings over the sort of 10, 15 years. There is also a school of thought that R&D spending could be a discretionary spending item for these companies if they want to preserve margins in a down-cycle, so could you share your thoughts on [indecipherable]?

Ravi Pandit — Co-founder and Chairman

Yes. so there are basically two specific things in this area. First is, while it is called R&D, largely what we are focusing on is development and engineering, and this is actually a real production program, right, just because all the — note it is all about new technology and this is all about new architecture, many new technologies being introduced. And more importantly, integration of many of these domains. So while it is classified as R&D, it is largely a development engineering for a specific production program or development program.

As you know, all the — one of the most important for the OEM is their brand, and in their respective key areas of focus. And if — if OEMs, basically, the current concern is, if they do not come up with this architecture, as you know, there are already some companies who are quite — have already introduced that, they will lose the market-share. So this is not as much discretionary as people think. It is actually more of committed expenditure, there different budgets which have been taken out and I don’t — I think all the clients would like to introduce the product at the earliest, to gain a early — early-mover advantage or to get more market — market-share.

Chandramouli Muthiah — Goldman Sachs — Analyst

That’s helpful. Thank you very much and all the best.

Ravi Pandit — Co-founder and Chairman

Thank you.

Operator

Thank you. The next question is from the line of Pratap Maliwal from Mount Intra Finance Private Limited. Please go-ahead.

Pratap Maliwal — Mount Intra Finance — Analyst

Hi. Am I audible, please?

Ravi Pandit — Co-founder and Chairman

Yes.

Pratap Maliwal — Mount Intra Finance — Analyst

Hi, and congratulations on a good set of numbers and thank you for taking my question. I just wanted to ask around our margin guidance of 20%. So what margin levels do we have going ahead because with the mega deals that we’ve announced, they may initially have some kind of onsite presence that may be needed, so could you just help me understand some of the margin levels to get to that 20% mark going ahead now?

Ravi Pandit — Co-founder and Chairman

So there are — I would first say that we have given a range between 19% to 20%. And if you look at last many years, I think we have improved our margins generally quarter-on-quarter, but certainly year-on-year. And it has been a very sustainable growth in the margin. What we have been saying specifically is — we would of course, like to keep on improving the margin and we had given about a three-year window few back, that’s when we will exceed a 20% goal. So in next couple of years we should be over 20%.

The main thing what we are saying is, the way we operate is we have a certain margin, like once we get to 19% now, or a 20%, the additional investment we reinvest into the growth areas, whether this is into new technologies, as there are so many technologies coming up, proactively, to focus on that, so we continue to grow and remain at the forefront of our technology road-map of the clients or whether we invest into people or we invest into infrastructure. So that is how we make the decision. And as we get more comfortable around that, looking at our investment than the margins, so it is a cycle which is a combination of what we look at is the margin, plus the investments we make.

As you may be knowing that, probably, as a technology services company, we spent a fair amount of money into research and development, which we do report too. So, that is how we look at our margin and investments.

Pratap Maliwal — Mount Intra Finance — Analyst

Okay. Clear, sir. Thank you for that. Now just another question, if I heard correctly, that we believe that our growth in FY’24 maybe front-ended for the first two quarters. So could I just understand what would be driving this? Because our Technica acquisition — Technica seem to have positive seasonality in Q3 and Q4, the second-half, so why would our growth be front-ended now for FY’24 and if you could maybe help me with the Technica growth numbers, because I believe it overperformed some of our expectations. So if you could just call that out, please?

Ravi Pandit — Co-founder and Chairman

So there are two points I would like to consider — I would like to mention. The first about Technica, it’s — we do not give a because it is a fully-integrated entity, we would not give. The way it has performed better when we [indecipherable], it’s a seasonality and we thought we were expecting the revenues to go down, but it did not go down, which was [indecipherable]. So it is not that they have exceeded the performance from that quarter, they exceeded the performance from the expectation perspective. So they maintained what it is there. From the seasonality perspective, what we mentioned is our H1 will be stronger is what we mentioned, and it is on the back of the couple of large engagements, one, and what we would like to do as a company is we would like to ramp-up as quickly as possible and that’s what — and we would like to maximize that in the first part, that is what we meant. And that doesn’t mean what will be the H2, we will not have growth or anything, it is not that the point. We will have the normal growth, but I think if you look at the significant growth we had for a few quarters, I think what we are mentioning is H1 will be stronger from that perspective.

Pratap Maliwal — Mount Intra Finance — Analyst

Okay. Sure, sir. Thank you for taking my questions. I’ll get back-in the queue.

Ravi Pandit — Co-founder and Chairman

Thank you.

Operator

Thank you. The next question is from the line of Vimal Gohil from Alchemy Capital Management Private Limited. Please go-ahead.

Vimal Gohil — Alchemy Capital Management Private Limited. — Analyst

Yes, so my question is on EV. One of the — one of the questions on EV has been answered. I just wanted one bookkeeping question to be answered, which is, the contribution that you’ve had from FMS this quarter, I believe that we’ve started integrating the same. Just wanted to get a sense on how has it performed because it’s been quite some time since we acquired it, so vis-a-vis our expectations, how has it performed, how have their top clients performed, if you could give us some details there? Thank you.

Ravi Pandit — Co-founder and Chairman

So there isn’t no addition of FMS revenues into this quarter’s numbers, that will happen in Q1. So there is no change in ownership of FMS as of this quarter. Nothing has been added. The performance of that entity per se is in line with what we had expected when we had done the initial stake acquisition. But there is no revenue that is added this quarter, it will happen from next quarter.

Vimal Gohil — Alchemy Capital Management Private Limited. — Analyst

So in this quarter, so on a Q-on-Q basis, the entire 12% is completely organic?

Ravi Pandit — Co-founder and Chairman

That is correct, it is 100% organic.

Vimal Gohil — Alchemy Capital Management Private Limited. — Analyst

All right, thank you so much. All the best.

Ravi Pandit — Co-founder and Chairman

Thank you.

Operator

Thank you. We’ll move onto the next question that is from the line of Nitin Padmanabhan from Investec. Please go-ahead.

Nitin Padmanabhan — Investec India — Analyst

Yes, hi, good evening. Good quarter. I had a couple of questions. So one is, I think a few years ago I think you mentioned that $500 million is the target over the next couple of years. You seem to have already — on that — on that number. And you have possibly added capability through those years, through acquisitions or partnerships. Just wanted your thoughts on — in terms of capability set, when you looked at the broad set of competition that is out there, how would you compare in terms of the breadth of capabilities that you have with competition? And how many companies would have that kind of breadth?

The second question was that, when you look-forward in terms of the next leg of their journey, what is it that you will need to add in terms of capability and our — or do you think a significant part of that capability build-out is already in there, right? So those are the two questions.

And lastly, you mentioned that the initial half of the year will be stronger. As these deals ramp-up, do you think that there’ll be initially margin-dilutive to start with or it wouldn’t be? So those are the three questions. Thank you.

Ravi Pandit — Co-founder and Chairman

So I will — most of the questions I’ll remember. I’ll start — first, I will answer your third question which — let me put it that it will not be margin dilutive. The growth will not be margin-dilutive. Then the first, your question was about the competition. We look at competition in multiple ways, and I have said it again, but more importantly what these [indecipherable] that’s resonating with our clients is there are — we are in a very unique position currently, where — because of three things, one is a very strong focus on Automotive and Mobility. The second is real focus on integration and software integration, and the systems integration. And the third-part is the breadth of the domains across. So, in all these three things, I may say we are reasonably uniquely positioned on that. While we do expect that the competition will always be there, but we believe we have — we are — if I would say ahead in the curve and we’ll continue to invest and we will make that differentiation go further. That’s how I see it.

And the other part, what we are trying to do as you would say, that’d be six months, three months, six months, you will see that we are making some moves and which are again, uniquely [indecipherable], you can look at what we are doing right now. creating a independent company for productizing, which will create a lot of opportunity for LPIT by itself in terms of integration, but more in terms of standardization in the industry.

So, I think we believe very — very — we feel very good about it and I think the focus and the trusted partnerships we have with the client along with the capabilities which we have built, put us in a unique spot. What was your third question?

So capabilities, it is a very interesting question because I think the markets are moving very fast in terms of technology adoption. I think we have to be on our feet, and every month, two months, we see a few things which are coming up. So the way we look at it is in two buckets, one is, we keep on looking at technologies which are — will be here and now, which will get an adopted into the vehicles. The second, what we do as a part of the CTO organization and otherwise is work on technologies which will get adopted three years down the line. In both the part, we do see sometimes the new opportunities — i mean the new technologies coming up, there are areas where we will have to work on. Of course, while we have capabilities as autonomous or other areas are a very important part and areas of strength for us, but we do believe some of the areas in terms of cloud, AI analytics for this specific domain, not a generic field, for this specific domain, will be an area which we are investing internally, very significantly. And maybe maybe scale more in future.

Nitin Padmanabhan — Investec India — Analyst

Sure, that’s helpful. Thank you so much and all the best.

Ravi Pandit — Co-founder and Chairman

Thank you.

Operator

Thank you. The next question is from the line of Mohit Jain from Anand Rathi. Please go-ahead.

Mohit Jain — Anand Rathi Group — Analyst

First, two questions, one was on the deal pipeline, like the — this year, won few deals last year but how are things there? At the end of fourth-quarter versus say last year or last quarter?

And the second one is related to the sharp increase on the T&M side. So is it fair to say that some of these large deals and the ramp-ups that we have witnessed, they’re more on time and material side, and incrementally, we should see less of fixed-price? And therefore, despite having more CNS, we should still expect significant margin expansion ahead?

Sachin Tikekar — President and Joint MD

Hi, Mohit. This is Sachin Tikekar. In terms of the engagement and the pipeline, you may have noticed that over the last quarter, we have consistently shown growth and we believe that the trend will continue in the new year. Specifically, there are two types. So you heard of two specific announcement about Renault as well as Honda, similar kinds of things have been happening with many of our other OEM T25 clients over the year, that some of them have been happening incrementally and some of them have happened and we didn’t announce them or the client and want us to announce them. So from that perspective, I think they were unique situations when we specifically came out and talked specifically about Honda and Renault. The point that I’m trying to make is, our focus continues to be on these T25 clients and as Mr. Patil explained earlier on, the focus is to go deep and wide, as they’re — as they go through the transformation, as we engage with them deeper and wider, we are seeing more-and-more areas where they need help, and we are actually building capabilities to sort of provide help in different areas.

So one point is that, earlier, we were — it was about one practice, getting into it, now, there are collective practices going into it and so forth.

And the third-part is we are also, in order to solve some of their larger problems, we are also counting on some of our ecosystem alliances to provide larger solutions. I know it’s kind of a long answer to your short question, but I do hope that it throws some light on it.

Mohit Jain — Anand Rathi Group — Analyst

And if you could please add something on US side? Like we have been doing large deals across Europe, or Japan in this case, but what is happening on the US OEM side? Maybe [indecipherable], maybe something expected in ’24? Anything will help.

Ravi Pandit — Co-founder and Chairman

Absolutely. And then we’ll come back to your TNM question. Specifically, US, we had a reasonable growth in US during last year. This year also we expect robust growth from our existing clients. Especially the OEMs and they continue to go through transformation. As you know, electrification goals, US companies are also — OEMs have also set electrification goal. They also have their roadmap in terms of level of autonomy that they want to build and most importantly, in order to sort of change their model and engagement with their consumers, they’re also trying to build some models. So, along these lines, are we see more-and-more engagement with the existing clients that we have in the US. And on the West Coast, as you know, there are certainly new OEMs that are coming up, we are working with two or three of them. These are early days and we’ll, we’ll see how things unfold with them, but that’s the additional part in the US that we thought we should sort of bring to your notice.

But overall, net-net. You’d be able to see fairly balanced growth across the three geographies. Some geographies will do slightly better than the other, but we fairly robust growth across the three geographies. Now about your specific questions on the T&M side, you’re right that it has actually gone up. And the reason is, there are three or four transformational programs that we have started and especially, what you may call software-defined vehicles or software-defined mobility program. As you know, these are the programs that everybody is doing for the first time, so there is no precedent to it. And in order to define what needs to be done, we have to work very closely with the client in terms of what needs to get done and this process can take-up to a year. And during the course — so to us, T&M or fixed-price, it’s just a commercial understanding, please note that the the type of engagement remains the same, which is we are taking accountability for the work that we’re doing, right. So we are accountable for the work that we’re doing for them in the software-defined vehicle, it’s just that things are not defined. It’s more on T&M. As they get more defined, we can move some of that into fixed-price. But the nature of the engagement doesn’t change, Mohit.

Mohit Jain — Anand Rathi Group — Analyst

Understood. And sir, T&M also goes in-sync with higher on-site or it could be like T&M goes up, but my offshore also remains stable?

Ravi Pandit — Co-founder and Chairman

Not necessarily, fairly balanced. And even if it, it’s not very noticeable. As I mentioned, it takes about a year. So during the course of the year, it’s about the same, at the end of the day.

Mohit Jain — Anand Rathi Group — Analyst

Understood, sir. Thank you very much.

Ravi Pandit — Co-founder and Chairman

Thank you, Mohit.

Operator

Thank you. The next question is from the line of Deepak Rao from Quber Asset Advisors. Please go-ahead.

Deepak Rao — Quber Asset Advisors. — Analyst

Hi, congratulations, Ravi, Kishor, Sachin, Anup and the family. Awesome results now.

Ravi Pandit — Co-founder and Chairman

Thank you very much.

Deepak Rao — Quber Asset Advisors. — Analyst

Yes. My first question is, I think [indecipherable] on the CTO organization post, but my specific question is, what — in the areas of semiconductor, in the area of hydrogen fuel vehicles, in the area of transportation domains adjacent to your present sub-verticals, what’s been the competency development, what is the business development actions and essentially, what is the market saying and what are you — what are doing to address those things?

Anup Sable — Whole-Time Director & CTO

All right, so, I will take one-by-one. I think from a semicon perspective, we believe that our relationship with the semiconductor companies and our ability to interact with them, discuss with them and create solutions with them are very critical for our strategic customers, which are largely OEMs. So we are basically making sure that we are aware of the roadmap, we are aware of all the new developments that are happening in this space relevant to our industry and especially our strategic customer. So that is the from a semiconductor perspective.

From a hydrogen fuel perspective, I think it is — there are two elements of hydrogen fuel, hydrogen cell being used in combustion engines and hydrogen fuel being used and fuel cells. In both of these areas, we are in — very much in the technology, we understand the elements of what goes inside — we’ve experimented a lot with that and as this activity shape up with our customers, we are in a very good position to handle them.

As far as transformation into adjacencies, I presume you’re talking more about other relevant areas like electric vehicle [Multiple speakers] Vertical takeoff. We believe that in the current industry that we are operating and the current circumstances that we have, that means huge amount of changes happening, multiple dimensions of changes happening in the automotive space, the passenger car and commercial vehicle speeds that there is enough on the plate for next couple of years, so we are — we will focus on what our customer strategic customer requirements are, what are the technology gap that they have, what are the problems that they have and focus on the same.

Ravi Pandit — Co-founder and Chairman

So, I’ll just add to what Anup mentioned. So in all these three areas, we are already seeing the initial technologies like even in case of hydrogen or this — we are seeing early signs of integration business coming up at a vehicle [indecipherable] et-cetera. So even in semicon basically, it is about the integration of the [indecipherable] and at a lower level integration of the software and Silicon. So we see those opportunity. But coming back to your question on adjacencies. As we see a longer-term demand in — with our clients and our area of focus, we will initiate something during the year, end-of-the year or early next year, where we will start exploring adjacencies, but that we may not take it up as soon, but we’ll start maybe seeding certain technologies or maybe some efforts next year, in next couple of years.

Deepak Rao — Quber Asset Advisors. — Analyst

Yes, got it. Focus is good. The second question I have is the KPIT get a product and KPIT does the services part, [indecipherable] but what is your thought thought behind — if it’s a standardized product, how is your client, European client be able to differentiate between other car manufacturers if they’re using a standardized product?

Ravi Pandit — Co-founder and Chairman

Yes, so let me define what a middleware is from a definition perspective, right. So middleware is the essential component of software that sits between the application and the hardware, a very simple definition for it. This part of what software we’re talking about, the middleware has to make the life of the application development easier, but that means that the middleware is the most complex piece of software and it is like a fundamental infrastructure for the application software to run it. Now, when we basically talk about standardization on this piece of software, does not mean that it deprives the OEM to create a differentiation through the application software. So if we look at how each OEM will derive their strategy or drive their strategy in terms of differentiation, will be through application software and the calibration of application software. And that has really nothing to do with how the middleware is standardized. In fact, the standardization of middleware would make their life easier in terms of launching their application software faster into the [Indecipherable].

Deepak Rao — Quber Asset Advisors. — Analyst

Yes, thanks very much. It’s been a pleasure following our story and journey. And congratulations once again.

Ravi Pandit — Co-founder and Chairman

Thank you.

Operator

Thank you. The next question is from the line of Nitin Sharma from MC Pro Research, please go-ahead.

Nitin Sharma — MCPro Research — Analyst

Thanks for taking my question. Congratulation on good set of numbers. Two questions. What kind of employee addition you are looking for given the guidance of 27% to 30% in FY’24 and how do you see utilization levels to reach there?

Ravi Pandit — Co-founder and Chairman

So, the first thing is that, at a high-level, we do not — do not report on these parameters, basically because we give a very clear outlook for the revenue. We talked about the program, we talked about the flexibility in that, as long as we manage the revenues and the margins, I think that’s how we would like you to look at it.

But overall, at a company-level, just to give you a historical reference, last year, we were about 8,200, this year, we are 11,000 plus, so addition of about 35% or so. What we do is that, running two quarters, we do a very detailed — we have a revenue with [Indecipherable] and we do a detailed planning based on that, and that’s how we’re planning.

But coming back to your question, so, I think we see a very strong — strong requirement for the –for the talent and we basically address it through a couple of means. One is freshers we take and we have to keep on improving the quality in terms of different places in India and outside India. And that of course, it’s something which, we try to increase, but looking at the complexity of our programs, we are not in a position — we cannot absorb as much as some of the — our IT companies can do so. So I think that is one point.

The second point is the attrition, which has come down. Significantly. For last many quarters, we are at. Mid-teens and. And we expect that to continue, if not go down. So I think that also is a very important factor when we look at how many people we’ll hire and how we can — what we can do.

So based on these two we plan the — and we actually feel the environment is much better than the last year quarters to hire and have enough talent to deliver to our commitments.

Nitin Sharma — MCPro Research — Analyst

Understood. And one bookkeeping question. So your employee costs went up significantly in this quarter. So is there a one-time item or there is some shift towards higher wage cost going ahead?

Priya Hardikar — CFO

It is purely based on headcount addition for the growth — the employee cost. So quarter-on-quarter cost is what you referred, right?

Nitin Sharma — MCPro Research — Analyst

Yeah, so even if I look at per employee basis cost as well, it seems to have gone up around 8% q-on-q. So just trying to understand, something abnormal one-time item in there, or those new additions are at higher? Some color will be helpful.

Ravi Pandit — Co-founder and Chairman

So, there is, of course, there is a growth in the employee number and per employee understand more about per employee cost. So we have promotions, which are there every quarter and it more or less depends on that, and also on the mix of hiring. So there is nothing which is one-time or abnormal in this quarter, it is just a part of the regular promotion cycles and the lateral hirings that we have done during the quarter.

Nitin Sharma — MCPro Research — Analyst

Understood, thanks, sir.

Ravi Pandit — Co-founder and Chairman

Thank you.

Operator

Thank you. The next question is from the line of Deval Shah from RBSE Investment Managers. Please do ahead.

Deval Shah — RBSE Investment Managers. — Analyst

Hello, am I audible?

Ravi Pandit — Co-founder and Chairman

Yes, you are.

Deval Shah — RBSE Investment Managers. — Analyst

Yes, good evening, all. So, my question pertains to more on the competition. So I was just trying to understand [indecipherable] going so while I completely understand that next six-seven years, we have a — that which probably is unique in the industry. But that could be a chance that the OEM might, developing their our in-house capability like I read somewhere that [indecipherable] has created a company for vehicle OS by the name of [indecipherable] or so and they already have 6,000 employees employees working under that. So what — how this — so is there a chance the technology company would emerge from the OEM circle only? And at the same time, the follow-on question on that is that probably, like what Microsoft OS is very prominent in in the [Indecipherable], would there be a chance in future where there it would be a one vehicle OS product, which will be used by many of the OEMs in order to have a standardization and on-top of that this software would be built? So just wanted to understand your thought on this.

Ravi Pandit — Co-founder and Chairman

Deval, you’re absolutely, your observation is — you’re on the money. The competition landscape is changing. If you look at the ecosystem of the industry from chip to [Technical issue] and everybody in-between, everybody is trying to figure out what their role is given the disrupt started by software and now everybody is trying to get that little piece of software in there. So it’s an evolving trend and everybody is trying to figure out where they can create value and how they can make money.

Having said that, we are a software company and our — as you said, we do have a head-start and you’re saving five to seven years, we appreciate that, but we do believe that there is a head-start and we need to continue to hone our skills and get close to the OEMs as much as possible and that’s exactly what we’ve been doing. If you look at how OEMs perceive us, they see us as their software integrators. So we are closer to them, so that we can help them define their roadmap towards SDB and beyond. And sort of help them not only defined it but also execute it — where the bulk of the business actually comes.

So it’s an evolving landscape and to your point, in some ways to us, other than the OEMs, everybody is competitor or an alliance, correct? So it’s a — it will keep on evolving over a period of time and that’s why we made a very conscious decision to really focus more-and-more on the OEMs and work with them in a trusted partnership manner.

Your second question was on the OEMs building their own software capabilities and if you look at OEMs, still about three years ago did not have software capabilities, they actually got hardware and software bundled together from some of the large Tier-1. So they didn’t keep as much software with them and some of it is going to be a differentiator, as they desegregate software from hardware. It’s important that they core capabilities of their own in future and you’re seeing that, I mean, Carrier is one example, but if you look at most of the large OEMs, that’s the case with some of them. And some of these were actually software companies that became automotive companies on-top.

And this is like any other business, if that’s going to be a differentiator, you need to build core capabilities. It’s just that the work of software is going to be so much that they may not be able to do everything on their own. not now, not in future, because it may not make sense. What they will do is what’s going to be core to them and everything else, our guess is they’re going to trust their key partners to do for them. So that’s, that’s not just the trend for today that will continue to be the trend in future. So that’s about your question on the OEMs.

And the last part was about whether there is going to be — you gave an example of Microsoft, Operating system, which is — so essentially, whether anything is going to get commoditized, right, in some ways that’s what you’re referring to?

Deval Shah — RBSE Investment Managers. — Analyst

Not exactly commoditized. Sorry, sorry. Not exactly commoditized, it’s more about having the [Indecipherable] OS system which will have cornered the entire market, and upon which the entire PC industry was evolved. So in that sense I was coming.

Ravi Pandit — Co-founder and Chairman

So it’s an interesting question. The automotive OEM is a small world and in some areas that can happen and Mr. Sable, who is our CTO, who talked about Qorix in that regard when we talk about the middleware and architecture and some of the OEMs will go in that way. And having said that, that may happen. However, the application in the future, which continues to be a differentiator, that’s going to be the core work that OEMs will have to continue to do in future. And they may have to depend on partners like us to get that done.

Deval Shah — RBSE Investment Managers. — Analyst

Okay, and that is the reason even I’m excited to know more about your Qorix, so quarters — probably after two-three quarters you may want to give us some more insight on your Qorix. And just one thing, on the employee — so and just a very basic question, so when I look at your employee cost, I understand it’s quite higher than the — whatever the other industry player, it may not be your competitor, so is it because of that we are paying a higher amount for our niche talent or it’s more of a front loading kind of — we are — in building up the capability and probably in future, we have that operating leverage to [indecipherable]. So what is the scenario there?

Ravi Pandit — Co-founder and Chairman

No. I think there are two-three points in that. One is naturally, we have to — we have to be a net talent creator because of the size and the scale we have in this domain. And the growth we are having. So from that perspective, really for talent or other competition, we looked at it more from tier1, and some of the OEMs and some technology companies. So to some extent, they have to provide a very big growth quarter deserving candidates, so that is point number one. But the important point is, as I mentioned, the freshers, which we can invest into the overall ecosystem is probably lesser than many companies go, like 75%, 80%, while we are more towards 35%, 40% and maybe we have to do a better job on that, over the period, we will do that, but that also increases our cost. But our realization, our contribution per person and those ratios [Indecipherable].

Deval Shah — RBSE Investment Managers. — Analyst

Okay, thank you and all the best.

Ravi Pandit — Co-founder and Chairman

Thank you.

Operator

Thank you. The next question is from the line of Saurabh Sadhwani from Sahasrar Capital. Please go-ahead.

Saurabh Sadhwani — Sahasrar Capital. — Analyst

Just hello, good evening. So, our revenue per development employee for this quarter has jumped significantly and if I look at it historically, we have been at $50,000 and now it’s — we went down to around $41,000, and now we are at $48,000, so, I wanted to understand what happened in this quarter, was it higher volumes or was it a better pricing and what other factors do affect this number?

Ravi Pandit — Co-founder and Chairman

If you look at the movement of the per employee revenue, yes, it has moved in the range that you mentioned. So, we had said last year, if you look at it, there was a shift from onsite to offshore for some of the larger engagements we had earlier started and that was the reason why the revenue per employee went down. If you look at now, this quarter, and of course, last quarter also I think it was up from the earlier quarter. See the hirings is you look at the last year, at least the first two-three quarters, the hiring was very strong as compared to the growth. And now we are looking at improving what you can — we call utilization, but really the net realization that we have per person, which is a mix of our rates, our utilization ratios and also the amount of used assets that we can use in delivery and all of those things. So I think it’s a combination of these factors that has resulted in the increase in per person revenue.

Saurabh Sadhwani — Sahasrar Capital. — Analyst

Okay and then just a clarification, when you talked about the middleware, so the middleware is like a Linux kernel on which people build Ubuntu and Fedora desktop, so that the OEMs will build their Fedoras and Ubuntus on that, right? Is that what you’re trying to build?

Ravi Pandit — Co-founder and Chairman

Slightly maybe a little bit of technically deficient comparison. Ubuntu and Fedora are somewhat like a distribution of Linux. That means they are very specifically supported as Linux version. Whereas you could think about this as Microsoft Word or a PowerPoint on-top of Windows. So Windows is actually like a middleware and the office that you see on-top or any application, additional application on the top, is what we call the application — the OEM application. Did I answer your question?

Saurabh Sadhwani — Sahasrar Capital. — Analyst

Yes, thank you. Okay. Sir, just one more question, so I wanted to understand, right now, what is the situation on middleware, is it not standardized much, how are OEMs doing that right now?

Ravi Pandit — Co-founder and Chairman

See, in the past, there was no concept of middleware, for the reason that the architecture was a distributed architecture. And the way that the OEMs sourced electronics or software was primarily through sourcing a electronic control unit or a hardware, including software from a tier-1. In the — in the future, what is going to happen is the OEM, because it wants an integrated software or a integrated user experience inside the vehicle, and I can give you an example, is, for example, if you use a voice assist feature and you want to open your boot based on a voice command. So in the previous case, it was difficult because the boot controller used to come from a different tier-1 and the voice recognition device used to come from a different tier-1. So there was a lot of money that was — money and pain that was being spent on integrating these two together. Now in the new scheme of things, most of these application software that will open the boot, as well as, which will recognize the voice, will be an application developed by the OEMs themselves, so it will be easier for them to integrate this together to create a great experience for the user, and that is where the new architectures are moving, and that’s the main change that is happening in the industry.

Saurabh Sadhwani — Sahasrar Capital. — Analyst

Okay, thank you. Thank you. That’s very helpful. Thank you very much. Thank you.

Ravi Pandit — Co-founder and Chairman

Thank you. And since Anup’s time is very valuable and he’s given a very valuable comment. We’ll be sending the upgrade to you so. Sorry, on a lighter note.

Operator

Thank you. The next question is from the line of Akshay Ramnani from Axis Capital. Please go-ahead.

Akshay Ramnani — Axis Capital. — Analyst

Hi congratulations are a good quarter. So, sir, my first question is on the guidance. If I look at your guidance and try to tie it up with your commentary of a stronger front-ended growth led by the megadeal ramp-up, it looks like even at the top-end of the guidance, there is a significant slowdown in which the guidance is building in H2. So wanted to understand that, is the guidance conservative or is there an offshore shift which is anticipated in H2 just keeping that low or is there anything else to understand here? Yes. So the first thing is, if you think 30%, 27% to 30% is a conservative guidance, I will be surprised. And hopefully you appreciate what we have been always giving. So our philosophy is, we are giving the guidance, which certainly, we can live by and it is based on the current pipeline that which is pretty visible as well as of course, the current engagements we have. We do — we do also factor any risk at all in the — at all if they may come in during the year. More importantly, I think in last couple of calls, we also mentioned that we are also leaving some of the long-tail accounts on-table, I think to be ensuring that our focus is sharper, so — and of course, to your valid point, we will make some more shift towards offshore for sure. So with all the combination, this is what we get. I think which is we believe something pretty reasonable. I would not say it’s a very conservative versus it’s very aggressive. So it’s something a middle path, I would think. Got that. Got that. And second one was on the acquisitions. Over the past 18 months, you’ve done multiple acquisitions which are supposed to be acquired in tranches, so it would be good if you can share an update on that, how much of stake for these acquisitions you have acquired till now? And what is the type of payouts, which we are expecting in FY’23 and FY’24?

Ravi Pandit — Co-founder and Chairman

So if you look at the acquisitions that we’ve done, it is Technica, PathPartner, ZOMIT and FMS that we intend to do. As we have said that when we have done this, there would be payments that will happen basis performance. For Technica, for example, the total maximum payout can go to about EUR100-plus million — EUR10 million. We have — we have a fixed payment that will come up in this quarter, which will be roughly about EUR20 million and then earn-outs over the next two years, which can go up to EUR30 million at the max. So that’s the payouts that will happen for Technica. For FMS, the payouts for all 100% acquisition will happen this year and they would be in the range of about EUR50 million and for PathPartner, it could be in the range of about INR50 crore, INR50 crore to INR60 crores for the balance stake that we need to acquire, which will also happen in this year.

Akshay Ramnani — Axis Capital. — Analyst

Got that. that’s helpful. Those were my questions. Thank you and best of luck. Thank you, Akshay.

Operator

Thank you. The next question is from the line of Anika Mittal from Invest Research. Please go-ahead. Anika, your line is unmuted, please go-ahead.

Anika Mittal — Invest Research — Analyst

Hello, am I audible?

Operator

Yes, ma’am, please go ahead.

Anika Mittal — Invest Research — Analyst

My first question is on the new company which will be incorporated with ZF, Europe. Is the structure being planned and [Indecipherable]?

Anup Sable — Whole-Time Director & CTO

Structuring — it will be a basically, it’s a — currently, it’s a 100% subsidiary of KPIT. [Indecipherable].

Priya Hardikar — CFO

Yes, so Qorix right now, it is as a 100% subsidiary of KPIT. As Mr. Patil and Pandit explained, that the regulatory approval process in Germany will take a few months, and after that, additional share capital will be issued to ZF and independent company will be formed. Few more partners are also expected to join in later, but at present, it is our subsidiary.

Anika Mittal — Invest Research — Analyst

Okay. My next question is, can you provide some guidance uses by the CFO divided by EBIDTA ratio, which remained consistently at 100% in earlier years, has decreased to 73% in financial ’23?

Kishor Patil — Co-founder, CEO and MD

If I understood the question correctly, you’re asking for some guidance on the conversion, cash conversion and CFO as a percentage of EBITDA? As you rightly said that has been on the higher side, but we would not like to give — put any number. All we can say is that we’ll continue to have focus on cash conversion and that would be one of our important parameters to look at.

Anika Mittal — Invest Research — Analyst

Well, sir, can you provide the reasons why it has decreased in this year?

Ravi Pandit — Co-founder and Chairman

If you look at this year, I think we have said that there were some payouts that we have done already for the acquisition that we have made and there are dividend payouts in the capex. SoI think these are the reasons, there is nothing apart from these reasons that we have mentioned, every quarter we mention the CapEx numbers and the payout that we have done for acquisitions.

Anup Sable — Whole-Time Director & CTO

Also there were some long-term employee incentives which we would have paid during this quarter.

Anika Mittal — Invest Research — Analyst

Okay.

Operator

Thank you.

Ravi Pandit — Co-founder and Chairman

Thank you.

Operator

The next question is from the line of Niket Shah from Motilal Oswal AMC. Please go-ahead.

Niket Shah — Motilal Oswal AMC — Analyst

Yes, thanks for the opportunity and congrats on a very good set of numbers. I just have one question on the KPIT-ZF thing. I just wanted to understand what is the scope of work that KPIT and ZF. So what are each of these companies going to bring on-table. And the second question was, if you can just highlight as the size of opportunity which can get created from here over the longer-term? I do understand you don’t want to give near-term numbers or guidances, but maybe a little more medium-term view would be really helpful. Thank you.

Sachin Tikekar — President and Joint MD

I think, basically, both KPIT — basically, first, it is a KPIT subsidiary. So we will have some of the IPs which we have in this domain. We’ll move it to the subsidiary or as long — also — we are also — we signed an agreement with ZF for a common development last year, I mean 18 months back or so. So we have been developing certain software with a common roadmap, that will get moved. And in addition to that, as Mr. Pundit mentioned, we will invest about $5 million in cash during the next three to six months, three months, and rest, another $5 million in 18 months, that’s what we will do. Well, how much others will do we will announce once we have a firmer kind of — once we have announcements made by ZF and agreement is signed from their end.

Niket Shah — Motilal Oswal AMC — Analyst

And the second part of the question on the size of opportunity.

Sachin Tikekar — President and Joint MD

Yeah, so as I mentioned, it’s a new startup kind of condition, we are very-very excited about it because, I mean, we have since this opportunity from working with many clients and we along with — ZF along with some potential partners, we do believe this is an opportunity as the earlier discussion in terms of creating another industry-leader in this domain. That’s what we think. The opportunity, it’s very important because as you know the KPIT has been in the — as a software integration partner and services based place. Though we — continues to have IPs as well as accelerators as we call, so that we do continue to have. But it’s very hard to have a product company and a services company, both in terms of culture and it’s also to some extent, it’s also potential conflict in certain cases. So we do believe that the way we have set this up will be very — to capture the maximum share from the market and could be a potential leader, that’s what we believe.

And the KPIT will remain a systems software integrator and — for these areas and of course, we would have a natural advantage. Apart from the fact that it also gives us opportunity to work, which we continue to work, in any alternative products, if at all they come, or if the OEM chooses to develop their own. So that becomes a very clearer model to KPIT. So apart — so the first thing is, it really makes it a clearer separation between the product and the services business. It protects and potentially increases our opportunity in services significantly. And second, it puts us very significantly in a good phase, where the integrations could be easily between three to four times of the revenue of the independent company. Got the point, sir. Perfect. Thank you so much and I’ll come back in queue. Thank you. Thank you.

Operator

Ladies and gentlemen, we’ll be taking the last question that is from the line of Bhavik Mehta from JP Morgan. Please go-ahead.

Bhavik Mehta — JP Morgan. — Analyst

Thank you and congratulations on a very strong. Just one question. On the [indecipherable], I understand that maybe over the life of the deal, the margins remain the same, but how will it evolve over the course of he deal when it’s ramping-up because my understanding is that they might have some initial investment, which will be concluded when the deal starts to ramp-up, which might hurt margins in the short-term, maybe for a couple of quarters before additional, so can you just throw some light on that? How should we look about margins in large deals over the course of the deal when it ramps up?

Sachin Tikekar — President and Joint MD

Bhavik, good to have you on the call and thanks for the question. Typically, these are all longer-term engagement. And they’re are different in nature. So there is no specific model there, investments are all upfront or so forth. But in certain cases, we do have to invest, make some investment, usually that happens for the first one or two quarters after that, it pretty much evens out. That’s how it works. And that’s been the case with some of the larger engagements that we have announced in the recent past and some of the ones that we’ve been doing for the last few years.

Anup Sable — Whole-Time Director & CTO

But just to add on this — what Mr. Tikekar mentioned. I think these are not very significant investment. These are relatively smaller investment. Mainly — mainly to initially set it up and some related infrastructure, relatively, not so significant.

Bhavik Mehta — JP Morgan. — Analyst

Okay, okay, got it. And just a follow-up on that. Is the largely view, typically you start initially with higher onsite billings and then gradually move it offshore over the course of the deal or you can start directly from the offshore locations right from the beginning?

Sachin Tikekar — President and Joint MD

In some of the recent. See these — some these clients, the OEM, many of them, we’ve been working with them for quite some time and we’ve been engaged with them and we have had some business with them for a long period of time and given all of that, in most cases, there is no real difference that we see and it can happen during the course of the different cycles of the projects, so It’s nothing as I had mentioned earlier on, it’s negligible if any during the course of the, the entire program.

Bhavik Mehta — JP Morgan. — Analyst

Okay, okay, got it. This is very helpful. Thanks.

Sachin Tikekar — President and Joint MD

Yes, Thank you.

Operator

Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for their closing comments.

Rahul Jain — Dolat Capital Market Private Ltd. — Analyst

Thank you all for your participation in the call, and you have a great evening ahead. Thank you and take care. Bye.

Operator

[Operator Closing Remarks]