Q3FY17 PAT grows 31% Q-o-Q to ₹ 736 Million
Q3FY17 Revenues at USD 122.88 million
DSO at 76 days, down by 6 days as compared to Q2FY17
Investor Release BSE: 532400 | NSE: KPIT
India, January 18, 2017: KPIT (BSE: 532400; NSE: KPIT), a global technology company specializing in providing IT Consulting and Product Engineering solutions and services to Automotive, Manufacturing, Energy and Utilities companies, today reported its consolidated financial results for the third quarter and nine months ended December 31, 2016.
Highlights for the quarter ended December 31, 2016
Comparable Revenues* in CC terms marginally grew Q-o-Q by 0.65%
In ₹ terms, revenue stood at ₹ 8,307 Million a growth of 2.1% Y-o-Y
EBITDA margins for the quarter stood at 10.2%
PAT for the quarter stood at ₹ 736 million (including one-time exceptional gain), a Y-o-Y growth of 2.1%
* Excluding the revenues from the divested functional safety business for both quarters
Management comments
Commenting on the performance of Q3 FY17, Kishor Patil, Co-founder, CEO & MD, KPIT said, “In the current quarter, despite lower working days, we had marginal growth on a comparable constant currency basis. We will continue to focus on growth with effective account management and new technology solutions for our focus verticals. The cash flow during the quarter was encouraging and we will continue to build further on the same.”
Sachin Tikekar, President & Board Member, KPIT said, “We have built solid traction in Digital Technologies, especially in IOT, Analytics, Sensors and cloud, across focus verticals. We expect Digital and Product Engineering to be good growth drivers going ahead, as depicted by a healthy increase in pipeline and deal closures. We are also seeing encouraging results with our Engineering + Business IT combined vertical led solutions.”
Quick Summary
The 3rd quarter of the financial year is characteristically a quarter with comparatively lower number of billing days due to vacations in Oct-Nov at offshore and in Dec at onsite. Q3FY17 was no exception and on an average the billing days were less by ~ 1.5 days which translates into a loss of billing days of around 2.5%. We also divested our functional safety product business during the quarter and the resultant revenues which went out were around $ 0.5 million for 2 months. There was also a negative impact of cross currency during the quarter. As a result of these 3 primary reasons, the reported $ revenues for Q3FY17 were 0.44% lower than last quarter. In constant currency terms there was a marginal growth of 0.2%. On a comparable basis i.e. excluding the functional safety revenues from both the quarters there was a sequential growth of 0.65% in constant currency terms, despite the 2.5% loss of billing days.
Our business can be broadly divided into two buckets – Services and Solutions Business (S&S) which is ~ 96% of the total business and Products & Platforms (P&P) which is ~ 4% of the total business. The S&S Business can be further divided into Engineering (~ 35% of the S&S Business), Digital Transformation (~ 17% of the S&S Business) and Business IT (~ 48% of the S&S Business)
We have been witnessing faster growth in the Digital Revenues over the last couple of years and currently digital revenues account for 25% of the Business IT revenues. Digital Revenue growth has seen a CAGR of ~ 30% over the last 2 years.
STRATEGIC UPDATE:
During the quarter we divested a small business, KPIT Medini Technologies AG, based out of Berlin, Germany. This business was focusing on functional safety products (Product brand known as ‘Medini’). Medini is a functional safety product which has applications beyond KPIT’s focused industries and as a software product, needs a wider and different distribution network to reach out to other industries beyond KPIT’s focused areas. We will continue to provide services around Medini. The profit on the sale of this business was recorded as an extraordinary gain during the quarter. All the proceeds received from this sale were used for investing into a strategic partnership in a German Engineering services company, MicroFuzzy, focused on powertrain solutions and more so on electric powertrain. The numbers from this partnership were not consolidated during the quarter and will get added to the consolidated numbers, next quarter onwards. Powertrain is our largest practice within Automotive Engineering and E-Mobility is a big focus as well as a growth area. With this partnership, we will be able to enhance and bring in next generation offerings in the key growth area of E-Mobility. This further strengthens our leadership position in the Automotive Engineering domain and bolsters our presence in Germany
AUTOMOTIVE AND TRANSPORTATION VERTICAL Automotive vertical contributed 39.3% of total revenue for the quarter, registering a Q-o-Q decline of 4%. On a 9 month FY17 over 9 month FY16 basis, this vertical has shown a growth of 9%. Global car sales improved in October 2016 up by 5% as compared to last year with Asia leading the way. In Europe purchases have improved in Eastern Europe rising by 3% Y-o-Y in October 2016 with solid gains continuing among the new EU members. In North America new vehicle sales revved up to monthly highs for November in all three NAFTA countries. The industry has increased its North American production schedule to 3% Y-o-Y gain in the opening months of 2017 which is a significant acceleration from only a 1% advance in all of 2016. The key technological trends which are expected to rule the automotive industry include Electrification- drivetrains will shift towards hybrid-electric, electric and fuel-cell technologies; Autonomous Driving- gradual shift from advanced driver assistance systems to fully autonomous driving as technology matures; Diverse Mobility- with expansion in sharing economy and changing consumer preferences the business model will evolve from outright purchase or lease to rentals and car sharing and Connectivity- with connectivity on the rise there will be emergence of infotainment innovations, novel traffic services and new business models. The major traction areas for us are connected vehicle, ADAS and autonomous vehicle features, powertrain technologies, Functional safety, AUTOSAR and diagnostics. With focus on revenue growth, we are enhancing our core strengths and utilizing cross SBU assets and developing multi-practice support, across these areas.
MANUFACTURING VERTICAL Manufacturing vertical contributed 37.2% of total revenue for the quarter, depicting a Q-o-Q growth of 5.5%. On a 9 month FY17 over 9 month FY16 basis, this vertical has shown a growth of 1%. Manufacturing vertical for us is mainly discrete manufacturing comprising of 3 sub verticals - Life Sciences, HiTech and Industrial & Consumer goods In life sciences industry, there is increased focus on product and service innovation. This is driven by rising customer expectations on value added services and margin pressure created by commodization of medical devices. We are helping companies to reduce their SG&A expenditure with Smart Managed Application & Infrastructure Services. To facilitate smooth consolidation of M&A, we are offering services coupled with proven delivery approach and methodology for M&A projects along with tools and IP. We have won deals in SAP consolidation and migration projects in wake of M&A activities. There is growing traction for cloud solutions in regulatory compliance sensitive areas like serialization, track & trace, UDI, GTM, PLM. In Hi-Tech industry we are leading with SAP HANA expertise and our digital capabilities in the areas of Big Data and IoT. Our prime focus area is consumer equipment and OEM industry segment which forms large part of Hi-Tech industry. Similar to the other two sub-verticals, in Industrials also, customers are looking for ways to reduce their operating costs, so as to repurpose their efforts and money for business transformations and digital initiatives. This factor is driving customer discussions around innovative and SMART application managed services. For the next year customers are aligning spend on digitalization, involving customer experience, products and assets tracking, digital procurement and logistics excellence and mobile workforce.
ENERGY & RESOURCES VERTICAL Energy vertical contributed 11.6% of the total revenue for the quarter depicting a sequential growth of 3.8%. On a 9 month FY17 over 9 month FY16 basis, this vertical has shown a decline of 25%. The energy vertical has witnessed a lot of price and demand supply volatility in the last 6 months. There is also a lot of speculation on the environmental regulations, especially in the US. Overall the vertical is characterized by dwindling oil reserves, declining of mature assets, aging skilled manpower, rising competition and diminishing brand loyalty. We are helping our customers reduce the overall opex by converging IT and OT programs, leveraging out Engineering and IT skills, involving digital technologies and analytical capabilities. We are helping on automation across business processes to increase productivity and reduce costs and combining these with outcome based business models. In 2017, we expect energy customers to focus more on IoT, Big Data and analytics for decision making and making investments to leverage cloud technologies. We are focusing on vertical led solutions in the areas of asset management, rig management, productivity improvement, cost reduction and process automation leveraging engineering, IT and digital technologies.
UTILITIES VERTICAL Utilities vertical contributed 2.5% of the total revenue for the quarter depicting a sequential decline of 24.8%. On a 9 month FY17 over 9 month FY16 basis, this vertical has shown a decline of 29%. Large Utility companies are working with digital and online UI/UX firms to present consistent user experience. Utilities are also looking to maximize current technology investments against their new investments.
With our leadership in HANA there are multiple upgrades and HANA migration opportunities while we are also co-testing UtilitiesEDGE with SAP for the HANA version of its utilities solution. We are also exploring the possibility to bring our product engineering capabilities to utilities domain. We are looking forward to alliances and growth in renewable energy space in US and EU markets
GEOGRAPHY UPDATE
US continues to be the largest geography for us. We have strengthened our front end presence in the US over the last one year with addition of account managers, new sales and industry subject matter experts for our focus verticals. As a market, in the US, there is focus on Green Manufacturing, Robotics for Automatic Factories and Repairs, 3D Printing, Social Solutions and Crowd Sourcing and Service as a Product. With increasing focus of the new administration to retain manufacturing jobs in the US, the manufacturing sector looks optimistic. 50%+ of our employees in the US are locals and the cost differential between the locals and visa holders has come down over the years. As we await the final changes in US visa regulations, we believe the proposed changes, if passed, will not have a major negative impact on our operations in the US. Europe geography has been under pressure due to the uncertainties involving Brexit. The revenues from the geography are further affected by the cross currency fluctuations. Having said that certain geographies like Germany are doing well, especially in the manufacturing and automotive verticals. Electrification of vehicles, adoption of stricter safety standards, push towards smart factories and smart manufacturing, enhanced focus on cyber security and faster adoption of newer digital technologies and cloud are some of the mega trends in the geography. We are investing in having front end experts in the areas of ADAS, SAP HANA, IMS+AMS and Digital Technologies. We are getting ready with our industry specific offerings for the geography and enhancing our business IT front end in Germany and Scandinavia. The ASEAN region has been a good growth geography for us in the recent past. Some of the major trends in this region are urbanization of major cities, emergence of fully integrated transportation ecosystem and focus on Digital technologies. Major areas of traction for us are transportation and logistics, product offerings, cloud platforms and IOT. We are strengthening our sales presence in focus countries and partnering with strategic vendors in the region for our products business. We see major investments also happening on the cloud and overall digital front. In Japan, Korea and China (JKC), we are focused on Automotive vertical, pursuing both OEMs and Tier1s. We are also engaged with Silicon (Micro-controller) suppliers. We have expanded our foray into IT, ERP and DT with addition of Sales bandwidth. Across the JKC region, we see lot of traction in Autonomous Driving, ADAS, AUTOSAR, Diagnostics, Infotainment and Body Electronics. There is significant investment from OEMs, T1s and other industry players in developing various, comprehensive "connected" solutions. The upcoming 2020 Olympics is also seen as a major milestone to put some of these technologies in the market. We are well positioned and are seen as a very credible partner in key technology areas. We are continuously pursuing the above areas and making strategic investments accordingly. We have set up a development center in China and will look forward to engaging with local companies servicing them from China. Overall trend in the region is looking encouraging. We have been able to add few high potential new customers to our portfolio in JKC and are looking for those becoming strategic accounts for us.
SBU Update
PRODUCT ENGINEERING SERVICES (PES)
PES SBU contributed 31.8% of the total revenue for the quarter, depicting a sequential decline of 4.5%. The major deal wins during this quarter were in areas such as ADAS, AUTOSAR, Powertrain, Infotainment and clusters. In Powertrain there are opportunities across battery management system and hybrid technologies. We won a few projects involving state of the art technology in algorithm development, software integration, verification and validation.
Some of the new initiatives we are focusing on include automotive software security, technology for secured, shared and synchronized data across multiple networks spread across different geographies and advanced control techniques for complex systems like HEV/EV.
EPLM We are re-organizing our offerings into 3 buckets to align with the changing needs of value harvesting, Smart PLM and integrated solutions. In terms of traction we are noticing significant uptick in PLM implementations mainly in India while ALM upgrade and performance improvement is an area of interest in existing automotive customer install base. Overall there is good momentum in automotive industry in Europe and Medical devices industry in US. KPIT has expanded its partnership with PTC, by signing Value Solution Provider and Service Advantage Partner agreements to deliver product lifecycle management (PLM) solutions to customers in India. We have also partnered with PTC to develop role based applications for the Medical device industry.
PRODUCTS & PLATFORMS (P&P) SBU
P&P SBU contributed 3.9% to the total revenue for the quarter and it declined by $ 0.5 million QoQ. KPIT was recognized with “Certificate of Appreciation” for its indigenous electric bus technology – REVOLO by United Nations Department of Economic and Social Affairs Grant on Energy. It was nominated among 8 finalists from 157 international applicants for this grant on energy which was themed around “Energy for Sustainable transport”. KPIT’s ITS bagged “Order of Merit” award at BW Businessworld Smart Cities Conclave 2016 in Innovative Smart Solution – Accessibility and Mobility category.
THOUGHT LEADERSHIP KPIT showcased its expertise in Infotainment, ADAS & Diagnostics at the globally acclaimed auto show, Paris Motor Show. The Virtual Reality (VR) video of KPIT facility and products at the Paris Motor Show received great reviews from the show attendees. KPIT participated in Urban Mobility India Expo, a flagship event of Ministry of Urban Development, at Gandhinagar from 8th - 11th November. KPIT organized Vehicle Diagnostics: Future Trends Conference at Detroit, US on 11th October and speakers from leading Automotive OEM's, Tier 1s and Research Organizations.
SAP SBU
SAP SBU contributed 23.4% of the total revenue for the quarter depicting a sequential growth of 2.5%.
SAP has accelerated its efforts to increase its cloud based revenues and there is also strong momentum in CEC/ Hybris and SuccessFactors. The key growth areas in SAP SBU are HANA, Cloud, Hybris/ C4C Solutions. Amongst solutions our Simplecommerce and CPQ Accelerator for manufacturing, Auto and IM&C customers is gaining interest and will generate more opportunities. We are exploring hybris billing as a new initiative. Customers are also leveraging our M&A solutions to integrate and roll out IT and business processes for their M&A activities.
INTEGRATED ENTERPRISE SOLUTIONS (IES) SBU
IES SBU contributed 29.5% of the total revenue for the quarter depicting a sequential decline of 0.6%.
Recognitions and Thought Leadership
KPIT has been conferred with the prestigious “Special Jury Commendation” award for its sustainable water conservation project at the recently concluded FICCI CSR Awards 2015-16, held in New Delhi.
Mr. Pankaj Sathe, CMO has been honored with the Most Influential Marketing Leaders' award, organized by the World Marketing Congress at Mumbai. This award recognizes his exemplary leadership in contributing to the business growth.
Customer Highlights
A large global supplier has chosen KPIT as its partner for ADAS expertise. KPIT will help the client in software development and feature enhancement. A leading European manufacturer selected KPIT owing to its domain experience and technical expertise for an engagement in the area of AUTOSAR and Diagnostics. KPIT was selected for 3 key projects by leading global OEMs/ Tier1s in the domains of Powertrain, Infotainment & Clusters and AUTOSAR, owing significantly to its domain experience and delivery readiness. A US based leading provider of medical technologies for the health care industry selected KPIT for a HANA integration project. KPIT was selected by a leading US based electrical service provider for an engagement in ERP/EAM softwaredriven business process improvements and benefits. A leading global manufacturing company selected KPIT for EBS implementation project. KPIT was selected by a leading US based medical device supplier for a PLM implementation project. A global Auto Tier1 chose KPIT for an engagement in the area of ALM support.
Financial Update
REVENUE UPDATE Our $ revenue for the quarter stood at $ 122.88 Million, a Q-o-Q decline of 0.4% and Y-o-Y decline of 0.3%. In ₹ terms revenue grew by 2.1% Y-o-Y to ₹ 8,306.78 Million. On a Q-o-Q basis it declined by 0.04%. As stated earlier in the update we divested our functional safety product business during the quarter. Hence in Q3, only one month revenues for this business were consolidated. As compared to Q2, we recorded $ 0.5 Million less revenue in Q3. Thus on a comparable basis (excluding functional safety revenues and cross currency impact) Q3 revenues showed marginal growth of 0.5% as compared to Q2 revenues.
Amongst SBUs, DT was the highest growing SBU with Q-o-Q growth of 16.9% while SAP grew by 2.1%. There was a Qo-Q decline of 1% in IES SBU, 4.9% in PES SBU and 13.9% in Products & Platform SBU. The overall digital revenues for KPIT now stand at ~18%. Digital revenues have been growing at 30%+ for KPIT. The decline in PES revenue during the quarter was a result of less billing days and some larger milestones billed last quarter. We will see growth in PES in Q4.
Amongst geographies, US grew by 3.8% on a Q-o-Q basis while Europe and APAC declined sequentially by 11.5% and 6.9% respectively. On a constant currency basis, Europe Revenues saw a decline of 10.5% and a decline of 8% in CC comparable terms (excluding impact of divestment of functional safety business). On a YoY 9 months basis Asia has grown by 12% and US is flat. Europe is also flat on a YTD comparable basis in constant currency. In terms of industry verticals, Manufacturing grew by 5.1% on a Q-o-Q basis while Automotive & Transportation and Energy & Utilities declined by 4.4% and 3.1% respectively. Our top customer declined by 3.8% on a Q-o-Q basis while the revenue for Top 2-10 customers grew by 2.64%. Revenues from MicroFuzzy were not consolidated during the quarter.
*All the revenue growth numbers mentioned under revenue update are in equivalent $ terms.
PROFITABILITY The realized rate for the quarter was ₹ 67.6/$ against ₹ 67.33/$ in Q2FY17.
We added 215 people during the quarter. The utilization was also affected due to less number of billing days during the quarter. We gave salary corrections to select people across the organization in Q3. As a result, there was increase in employee cost with flat revenue, resulting in 82 bps decline in the operating margin. The Profit for the quarter grew by 31% on a sequential basis. As stated earlier, the gain on divestment of the functional safety business was recorded during the quarter. `
The Cash Balance as at December 31, 2016 stood at ₹ 4,773.41 Million as compared to ₹ 4,371.58 Million as on September 30, 2016. The DSO at 76 days, at the quarter end, were down by 6 days as compared to last quarter As on December 31, 2016 our total debt stood at ₹ 3,995.88 Million (₹ 4,131.60 Million as of September 30, 2016) comprising of ₹ 2,267.27 Million of Term Loan and ₹ 1,728.61 Million of Working Capital Loan. Thus the Net Cash Balance as at December 31, 2016 stood at ₹ 778 Million
*The SBU revenues have been re-classified based on new organizational changes and previous period figures have been restated for comparison. Products & Platforms SBU revenue has been separated from Product Engineering Services SBU. ^ Digital Transformation SBU (erstwhile Enterprise Solutions SBU) # SI represents the revenues for our Telematics solution.
The currency market has been extremely volatile in the recent period and the company has major exposure in 3 currencies- USD, Euro and GBP. As per our hedging policy, we cover 75% of the net exposure through forward contracts for the next two quarters.
Total Outstanding Hedges: Total amount of USD hedges as on 31st December 2016 : $ 37.70 Million These hedges are maturing in FY16-17 and average rate for these hedges is ₹ 68.95/$