Earnings Call Transcript - XNSE:KPITTECH 2026-10-28

Operator

Ladies and gentlemen, good day and welcome to KPIT Technologies Q2 FY27 Earnings Conference Call hosted by Dollard Capital. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchstone phone. Please note, this conference is being recorded. I now hand the conference over to Mr. Rahul Jain. Thank you, and over to you, sir.

Speaker 4

Thank you, Nazneen. Good evening, everyone. On behalf of the Allot Capital, I would like to thank KPIT Technologies for giving us the opportunity to host this earnings call. And now I would like to hand the conference over to Mr. Sunil Fansalkar, who is Vice President CFNG and Head of IR at KPIT, to do the management introductions. Over to you, Sinead.

Sunil Fansalkar, Head of Investor Relations

Kodha Hardikar CFO, and yours truly from IRP. So, as we do always, we will have the opening remarks by Mr. Kishore Patil on the performance of the quarter and the way we look the year ahead, and then we'll have it open for questions. So, once again, a very warm welcome to you all, and I'll hand this over to Mr. Kishore Patil.

Kishore Patil, CEO

Good evening, and thank you for joining the call. Now, welcome to quarter to earning call. Some time back, we had given how KPIT growth will pan out, and in terms of specifically how the Q2 will look like. And we are happy that we are in line with our expectation. And some of the, we can see some of the early results of the strategy we have put in place. So in order to really understand this, let's go into details. So overall growth has been 6.5% year on year. In rupee terms, 1% in terms of quarter-on-quarter, we were expecting more flattish, and in terms of CC terms, again, it is 0.5% quarter-on-quarter and 0.2% year-on-year. So, looking at this, if you go one level below, commercial, off-highway and commercial has grown 27% year-on-year and 17.6% quarter-on-quarter. So, as we had mentioned, this is one of the growth drivers for now and future we are looking at. We have a sharp decline we had due to cancellation of their programs or cutting off their expense is 13% of the total revenue. So, what this means is we have been in a position to make up that drop due to our growth in off-highway commercial and also the products. So, this is how we have been in a position to make up. The pipeline is healthy. We have got reasonable wins, and now 89% of the wins, it's a very active pipeline, and we see that while it is taking some time for realization, it's an active pipeline, And we feel much more comfortable with some of the opportunities on hand. I would like to come back to the products, the products revenue, which we have talked about. And we will talk about this more later in the year, maybe early next year, in more detail how we intend to do. But we have a 5% growth quarter-on-quarter during the quarter and 25% year-on-year. So overall, services revenue has been flackish, but the product has grown 5% quarter-on-quarter and 25% year-on-year. In terms of profitability, our EBITDA has grown from 17.2% to 17.8%. The 600 basis point, largely it is because of the business mix as the product's contributions are higher as compared to the services part and solutions part. And we have continued to make investments in terms of technology. Even during this quarter, our investments into R&D has gone up by a couple of million dollars. So, cash is about 6.2 billion. It has come down a bit, basically, for two, three reasons. One is that there was a dividend payment of 1.4 billion rupees. There was an acquisition payment of Simoti, in the sense, the initial payment of Simoti, about a billion. And the DSO has increased from 51 days to 53 days. I talked about the wins, but the wins have been mainly in terms of autonomy, connected, and IDAT. In terms of AI, if you really look at it, we continue to make good strides in that. We believe that this will be, for now and in medium term, a very significant differentiator. The Beacon product has been received very well, and almost all our products, the Beacon is the basis for that, while we also will take the Beacon as a market to market in due course. So, this is how, in a case of AI, in services and solutions, of course, on all our deliveries, many of our deliveries, we have started using this. There are more than 9,000 users of, you know, the AI platform, overall AI product. We have more than 5 million transactions, I would say, which has happened during the quarter. 12,000 engineering agents have been built. So this is a significant change which we have made, and it is quite well appreciated by the clients. Roughly around 9% of the revenues come from what we call AI-first projects. So, as I said, it's very normal now to use AI in almost everybody uses AI in every project and product. This 9% is where we say that the solution is based on AI, and it makes a significant differentiation, and we use it to go to market. So, this is the progress we have made, and we expect this to go up significantly. On the people side, the fixed price projects have moved to about 70%, which is significant. It's very important because over as we move towards AI more and more, I think these are the projects where we can get both the productivity or we can move in terms of one differentiation. So that is very important. People attrition was a bit higher during this quarter. It was mid-ins, but as we predict the next quarter, it is coming down substantially. We have done our increments during the quarter for certain grades, the initial grade between A to E grades. So we have made the increments, And some other increments will get done during this quarter and some in the last quarter. So, we, of course, this is, so that's why we do believe the attrition will come down reasonably. And because we have, in advance, we understand the attrition for the next quarter. This will come very close to what we were earlier. I wanted to also talk about, you know, that in terms of adjacencies, while we have been, we believe that overall need for software will keep on increasing in the mobility part, there is a significant opportunity, Even though right now there are certain headwinds in the market, the content of the software is going to go up in the car, and this software-defined vehicle is important for most of the OEMs. It will transition to AIDV, where KPIT with Beacon, as well as a few other products, will be in a prime position to take the opportunity, as it has done in the SDVS part. So, I believe that that opportunity is – we believe we are excited about the opportunity, including in PASCAR, into certain segments. However, we believe that we can extend some of this expertise into some of the adjacencies, as we have been talking about. So, over the period, this will allow us to have a more addressable market using our assets, technology, products, which we have built under domain. So, one thing is we're talking about energy tech, where some of our clients already have, like, for example, Cummins does work into energy tech areas, and we can take it to another 15-20 clients, and similarly in the deep tech areas. So, these are the two areas where we are now creating specific offerings which we have our packaging for these specific verticals, and we will be going into these adjacencies in due course. It will take time for us to, even though we believe that early successes will come in two to three quarters, but it will take time to have a meaningful impact. But this is what we have already initiated. We do believe that we are really excited on the AI-native deliveries, AI products, which we have, the overall products chain, the way we have done from the architecture to after sales, the solutions we are building around the products, and adjacencies. So, while our performance is, as I said, in line, but muted to some extent, we believe, remain confident about in the mid-term growth and excited about the opportunity we have in front of us. Thank you.

Sunil Fansalkar, Head of Investor Relations

We can open it for questions now.

Operator

Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchstone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Rishabarati from Goldman Sachs. Please go ahead.

Rishabh, Analyst — Goldman Sachs

Hi, good evening, and thank you for the opportunity. My question is around the geography by sales, and we had talked about the two major customers winding down. If I can just see, in Europe, actually, we've seen a sequential decline, but Asia has picked up in 2Q versus 1Q. So, if you could just give some color, whether going forward, we can see more sequential decline, and is there some positive development in Asia, except the customer decline?

Speaker 14

Hi, Rishabh. This is Sachin T. K. Kerr.

Kinmay Kodagiri, CFO

So, the two clients where we have seen a sharp decline, one happens to be in Japan, which is part of JKC, and the other one is in Europe. And it's primarily because of these two clients, you see degrowth in the two respective geographies. There is growth in America, as you can see, in the U.S., quarter-on-quarter, year-on-year. SEMA, which we split from Asia, so Asia has two parts. One is JKC, Japan, Korea, China. The other part is Southeast Asia, India, Middle East. And that's where we again see growth, primarily driven by fairly well-rounded growth, primarily driven by India in SEMA. So, the way to look at the split is, the issue is actually with these two OEMs, where the revenue has gone down by more than 30%, and we do believe that in the next couple of quarters that both these clients will bottom out, and until that time, there is an opportunity for us to bring broad-based, Broad-based, more resilient growth. And what we mean by that is the growth will happen, A, in existing clients of passenger cars, in new clients that we have picked up in passenger cars, B, more clients in off-highway. So, one is last quarter we announced one software-defined machine kind of an engagement with one OEM. Now, there are two consulting engagements in SDM, two additional ones. And usually, consulting one all going well, they lead to actual SDM programs. So, you know, positive development on our highway as well. The truck market, if you really see, it's been kind of very sluggish for the last several quarters. Finally, in the U.S., it's showing signs of growth. So we believe that trucks, both in Europe as well as in America, specifically in the U.S., will see some growth. So on the other side, besides the two clients where we have seen sharp decline, there are headwinds in Europe when it comes to pass car OEMs. They continue to struggle. However, from KPIT's perspective, except for the one where we have seen sharp decline, there is an opportunity in the other OEMs. Because they are struggling and, you know, we have an increasing footprint there, we have an opportunity to really do consolidation and create efficiencies for them. So that's how actually we see, you know, all these opportunities unfolding for us going forward.

Rishabh, Analyst — Goldman Sachs

Got it. So just to follow up on that, when you mentioned since the European passenger car OEMs are struggling and we see an opportunity here, is there a changing trend wherein the OEMs are starting to spend back again, or are they still in a wait-and-watch period trying to decide on their strategy before finalizing their next steps? If any update you can give on that.

Kinmay Kodagiri, CFO

Yeah, actually, all the past car OEMs in Europe are looking to further cut their cost dramatically. As their margins continue to drop, as they drop their wallet share, market share, specifically in China. But that's also an opportunity. They have many partners that are actually in Europe and some other partners where things are just not viable or efficient. So, given our solutions and, you know, Kishore talked about AI-led transformation, we believe that there is an opportunity for us to disrupt the current economics and create value for them in spite of declining spend.

Rishabh, Analyst — Goldman Sachs

And just one last question. Since you talked about the changing strategy around products, increasing wallet share, providing more solutions, we've seen our fixed price contracts also go up to 71% now, R&D spend also increasing. Are there any metrics we can track or the company is internally tracking with respect to the successful transition towards this strategy? Any updates you can give around that?

Kishore Patil, CEO

Yes, I think right now we will talk about revenues in something of these parts which I shared with you, what are the revenues, but for sure when we talk about next year, we will give you clearly the parameters which we will track internally and we are driving internally, so it will give us two, three quarters to look at them.

Kinmay Kodagiri, CFO

So, going forward, in a nutshell, what will be critical to our strategy is the vertical-wise growth, pass cars, trucks, and off-highway. This is something that we are watching very carefully. The product revenues, and product revenues, solution revenues, and last but not the least, what Kishore talked about is ALA transformation program.

Speaker 6

Right. Thank you so much, and all the best.

Rishabh, Analyst — Goldman Sachs

Thank you.

Operator

Thank you. Next question is from the line of Ravi from Access Capital. Please go ahead.

Speaker 14

Hi, thanks for the opportunity, and congrats on, you know, pretty good show in the U.S. Two, one, it could be good. It's more a suggestion than a question, really. It would be good if you could start sharing product revenue every quarter, given that this is now starting to be a meaningful part of your revenue and efforts on margins. So that would help us. Secondly, in the U.S., I guess that the segmental margins have gone up significantly because of product revenue.

Speaker 8

So, the first question is, will you be able to share product revenues going forward?

Kishore Patil, CEO

Yeah, so product revenues we will be in a position to share, and as I said, maybe next year we can come out with more detailed reporting on that. But for U.S., I think overall the margins have gone up overall. But let me, Kinmay, you can basically talk about it.

Speaker 6

Yeah, so you're right. The margins have definitely gone up across the existing engagement as well as some of the newer engagement, which Mr. Ticker could refer to.

Kinmay Kodagiri, CFO

Yeah, so overall in the U.S., there is a broad-based growth. We see that growth coming from all very verticals. Pass cars are growing. Off-highway is growing. We believe trucks will also grow. And, of course, there is the product sales. So it's a broad-based, resilient growth that we are having.

Kishore Patil, CEO

And overall, fast car market has not gone, has not been that impacted because it's still a protected market. I think that is another.

Speaker 14

Yeah, cash flow seems to have, you know, gone down a bit in the first half. I mean, compared to last year when we were doing, I mean, between 70-80%, you know, over the first half, this time it's about 57%. I'm talking pre-tax operating cash flow to EBITDA. So, what's led to this?

Kinmay Kodagiri, CFO

There are a couple of reasons I think we've mentioned in our investor deck. There have been, you know, cash outflows on account of dividend, some acquisition payment that we did for Saimote, and others, as you can see, our DSOs have gone up by a couple That also has impacted the working capital cycle.

Speaker 14

Only the DSOs would impact the OTH. Other factors that you mentioned will actually not be in the operating cash flow, right?

Kinmay Kodagiri, CFO

Yes, but the fundamental reason is the working capital cycle that has gone up because of increase in DSOs.

Speaker 14

All right. Okay. Thank you.

Speaker 6

Thank you.

Operator

Thank you. Next question is from the line of Karan from Philip Capital, India. Please go ahead.

Speaker 6

Thanks for the opportunity. So, I just wanted to check in terms of the growth outlook for next few quarters, given that the advance will continue in two of our largest lines, but you are also positive on the pipeline. So, how should we think about the growth from next few quarters perspective?

Kishore Patil, CEO

So, I think we have mentioned last time that H2 will be better than H1. I think that we will maintain, and we also feel confident that we'll make up for the drop from these clients with the broad-based growth strategy which we have. So, these are the two things I can say. So, there will be a growth, and this is I think. So, both the things which we have

Speaker 6

mentioned earlier, I would like to reiterate. Okay. So, last time, sir, you had mentioned that you should see some rebound from Q4 onwards. So, is that outlook intact?

Kishore Patil, CEO

So, we expect growth, and we will, you know, we will not be in a position to put any numbers now, but we expect growth.

Speaker 6

Got it. Second question is on the CV.

Speaker 5

So, the CV segment has been growing quite strongly for us for last four to five quarters.

Speaker 6

Is the growth broad-based in this segment, or it's concentrated in one or two large accounts? And also, is the growth sustainable over the medium term within this?

Kinmay Kodagiri, CFO

Yeah, so CV, you know, when we look at CV, we look at it in two verticals. One is off-highway, mostly construction mining, and second is trucks. So the growth, so off-highway is somewhat new to us. So, we already have three clients, and we are adding two more. So, right now, of course, it's concentrated at the beginning on the back of three clients, but it's becoming more broad-based. So, we believe that there is going to be growth, you know, there is going to be increasing revenue over the midterm in off-highway. Absolutely no two ways about it. The second part is on trucks. We've been in trucks a little bit longer, and the market is also coming back in terms of, especially in North America. So we believe that the business in trucks will also pick up, you know, in the immediate quarters to follow. And that should also give us reasonable growth over a period of time. It's not, both are not going to be one-off things that are only there for a year or two. We believe that they are going to be contributing to our top line and bottom line increasingly going forward.

Kishore Patil, CEO

Especially, they are going through the change or transformation which Pascar went for four years back, I think. So, that's why we believe that their spend will go up at the synthetic information. And we have that opportunity because, one, we have, as you know, the SBB, we probably have the maximum experience which they are looking for. Plus, now, the transformation to AIDB. So, I think we will be in a better position.

Speaker 6

Okay. Okay, thanks. Just last question on the margins, friend. So, you know, as the growth accelerates by H2, do you expect margins to go back to, let's say, 20-21% range EBITDA, which we used to operate at? And what would be the headwinds and tailwinds?

Kishore Patil, CEO

We say right now, it will go up to some extent. It will be early next year when we get time.

Speaker 6

Thanks a lot. Thank you.

Operator

Thank you. Next question is from the line of Nitin from Investec. Please go ahead.

Nitin, Analyst — Investec

Yeah, hi. Good evening. Thank you for the opportunity. So, two things, customers. So, the first is, is it fair to say that the incremental drag from these two customers should be significantly lower in H2 versus H1. And second, as we move beyond it, do you think that these customers can start aiding growth or they will continue to remain some sort of a drag on growth?

Kinmay Kodagiri, CFO

Yes, Nitin, you are putting us on the spot by saying that, but you know, in all fairness, I think they will see quite a bit of decline. In these two OEMs over the next couple of quarters, but they will flatten out, bottom out rather, in the next couple of quarters. While we specifically talking about these two accounts, while we are degrowing substantially because the last programs got canceled, there are shoots where we are actually engaging and we are increasing our footprint. To answer your question, of course, there will be some growth that is taking place, and, you know, there will be growth that will come back in early part of next year. It's just that after what they've been through right now, it's going to be gradual. So I hope that answers your first question. What was the second part of the question?

Nitin, Analyst — Investec

Yeah, the second part was, do you believe that once they have sort of bottomed out, those same customers, do you think they can start growing or do you think they will continue to be a drag on growth for a while?

Kinmay Kodagiri, CFO

They are two of our largest clients. We have deep relationships. There is tremendous amount of trust, and we are actually expanding our footprint there. Beyond just one or maybe two or three offerings, we are really making it broad-based growth going forward.

Nitin, Analyst — Investec

Got it. That's very helpful. Apart from that, just wanted some context to the Vietnam subsidiary that you have put up and which markets are it looking to serve. And any incremental context you could give to the incremental opportunities you are seeing in Japan, Korea, China, and SEMA, basically, what is it that you are seeing incrementally in those two?

Kinmay Kodagiri, CFO

You are hitting all the opportunities of growth for us, Nitin. So let's start with Vietnam. There are two reasons why we are doubling down our investments in Vietnam. Number one, there is an OEM that we've been working with, and we think that our footprint with that OEM will grow in Vietnam. Number two, we are actually building a center along with one large Chinese tier one. It's a subsidiary of one of the largest OEMs in China. So we are partnering with them to build a center in Vietnam that will deliver the China OEMs global program outside of China. So that's another reason we are there. We'll see more and more of the Chinese OEMs setting up their manufacturing footprint in Vietnam, and they also create opportunities for us. So one is the business development part. We believe that there will be growth in terms of getting business from Vietnam. The second reason is, you know, the conducive business environment in Vietnam, as well as the talent availability. So, Vietnam over a period of time will become our sort of hub for Southeast Asia, because it's close enough to China to learn the technologies and take them out. But at the same time, there is a Chinese wall, so to speak, between China and Vietnam. So, that's about Vietnam. Second part, JKC. Three countries you talked about. We'll see growth coming from one Pascar OEM. I'm talking about Korea first. On Pascar OEM, we continue to grow. Slow, gradual, but there is growth. And then there is one, Off-Highway OEM, with whom we have one concerting engagement for SDM, and they are committed to this SDM program being launched next year. And, you know, I think we'll be in a decent position to win that as well. So that's about Korea, focus on two. And then there is the Korea ecosystem is also important. There is a chip maker and some tier ones with whom we can have partnerships in Korea. So, you know, midterm, we should see growth in Korea, number one. Number two, Japan. Japan, our growth is going to be broad-based. So, this will go beyond one OEM. That was one of our largest clients. We'll bring back small growth there. But there is one, another OEM with whom we are increasing our engagement. There is also a truck OEM with whom we have started conversations. And I think we'll figure out ways of getting into one to two off-highway players in Japan. Over and above that, both for the large to pass car OEMs, they have a solid tier one ecosystem with whom also we'll have partnership. So, again, and then there is one tier one that has been part of our T25 that continues to grow, especially in the digital cockpit space. So, again, in Japan, what you see is broad-based growth. It's not going to be driven by one account going forward. It'll take time, but we'll get there. China, three things about China. One, China for China, we have started working with one China OEM and two China Tier 1s in China as we speak. We continue to sell and increase our footprint of Technica products in China. So these are the two things that we are doing in China. Second part we are doing in China, you know, which I made a reference to when I talked about Vietnam, which is what do we do with Chinese OEMs in tier one outside of China? So the Vietnam center we talked about. Second is there are three OEMs in Europe, Chinese OEMs in Europe who want to increase their footprint, initial conversations with them. And one thing that we are really proud of is Zikr, which is part of Genie group. We have put our N-Dream in-car gaming in there. So, you know, again, that's for the global market. So happy to see that win coming. So these are the two main levers. And third lever is to learn from China and apply those learnings globally. So you'll see more and more influence on our solutions coming from China going forward, especially solutions that will build for SEMA, Southeast Asia, India, and Middle East market, right, and possibly beyond that. So that makes our China strategy clear. So that's about JKC. Last but not the least is SEMA, Southeast Asia, India, and Middle East. India is our growth market. The bulk of the growth that you've seen year-on-year quarter-on-quarter has come from India, from pass cars, trucks, and off-highway. Some are Indian OEMs, some are global OEMs who are increasing their footprint in India, right? So, India is a very broad-based, robust growth. It will continue to grow. Southeast Asia is primarily Vietnam that we talked about. And in Middle East, there are two OEMs. One has just launched one car. So, we hope to start some engagement with at least one in the next one to two quarters, and maybe the second one will also come on board. So, we do believe that SEMA offers the largest opportunity for growth for us. That's one of the reasons why we decided to separate SEMA from all of Asia.

Kishore Patil, CEO

And also, adjacencies, I think this will be the market we'll go for. So, I think from that perspective, that will also accelerate our growth in this region, the SEMA region.

Nitin, Analyst — Investec

So, very useful and thank you for the broad answer. I just had two more quick ones, if I may. One is, do you believe that in the context of whatever you said initially on Europe, do you believe next year will be the year where we see a lot of vendor consolidations, Close in Europe. And two, just your thoughts on when do you think the losses from Khorig sort of bottom out and start showing up? That's all for my.

Kishore Patil, CEO

So I believe about by the end of first quarter next year, the consolidation process will be meaningfully concluded is what I think. It has started to some extent and it will get some time for different players accordingly. And so, yes, so next year, we will see some impact. The programs which were supposed to come has been, as you know, that has been pushed. We are looking at a few other adjacencies, what we can do, and how we can get revenues till that time. We do believe that it's a strategically, it will make sense, significant sense in the medium term. We will continue to really see some investments in some way.

Speaker 8

The main reason is most of the programs, which were what they called as Gen 4 for most of the OEMs, were supposed to happen in 28. Those are mostly scheduled to happen by 29-30 now. And so the mainstream market for the main product for Corex, which is largely a performance product that goes in the middleware, the timeline has just shifted.

Nitin, Analyst — Investec

Sir, that's super helpful. Thank you so much, everyone, and all the very best.

Kinmay Kodagiri, CFO

Thank you. Thank you, Nithin.

Operator

Thank you. Next question is from the line of Ankur from IIFL. Please go ahead.

Ankur, Analyst — IIFL

Hi, thank you for taking my questions. My first question is around the fact that last quarter, we had seen some large OEMs and you had an impact because of sudden actions from them on the back of profitability warnings that they issued. Are we behind that phase now where the only headwind is probably because of the larger clients, and that sudden impact is not something that you have seen in 2Q? That's my first question.

Kinmay Kodagiri, CFO

So, Ankur, we covered this part. The two OEMs, you know, there is continued impact from them, and we'll see that for the next couple of quarters. And at the end of that, they will bottom out. At the same time, we are also seeing initial green shoots of growth in other areas with these OEMs. They continue to be our strategic clients and will rebuild the relationship one step at a time. So, yeah, they will bottom out in the next couple of quarters, and we'll have a little bit of growth coming from there.

Kishore Patil, CEO

But in the meantime, what we mentioned is we'll be in a position to more than make up this during this time from the broad-based growth strategy we talked about.

Ankur, Analyst — IIFL

Yeah, thank you. And my second question is on the strong momentum in the CV segment. Now, this quarter, we've seen very strong growth, and to sustain growth on the overall front, we need to at least have double-digit growth from this segment. So, do we have the visibility for having that kind of a double-digit growth in the CV segment through the rest of the year?

Kinmay Kodagiri, CFO

So, I think the way to look at it, we talked about it, right? We believe that off-highway and trucks both are important. We are adding new clients. We are getting into more meaningful engagements with them, as Mr. Patil mentioned earlier on. Both the off-highway and truck segments are embarking on their first SDM, SDV programs, and KPIT is in a great place to run these programs for them, to create value for them. So, we will see continued growth from trucks on off highway, hopefully for years to come in future, right? We can't really comment specifically on how much growth there will be, but it will be healthier growth.

Ankur, Analyst — IIFL

So, just reiterating, you do expect growth in both 3Q and 4Q on the headline basis. That was the comment, right?

Sunil Fansalkar, Head of Investor Relations

No, so what we have said earlier is what we reiterate, and we continue that. We have said that H2 is going to be better than H1, and that is what we maintain.

Ankur, Analyst — IIFL

Sure. Thank you so much. All the best.

Operator

Thank you. Next question is from the line of CA Garvit Chumsaray Nalpha. Please go ahead.

Garvit Chumsaray, Analyst — Nalpha

Hi, good evening, and thanks for the opportunity. I just wanted to understand our exact strategy on when you say we will still be creating the value for the existing European OEM, particularly when you are seeing that those OEMs are significantly cutting off the course even now. So, in the declining budget, how we are expecting to get the business from that?

Kishore Patil, CEO

See, there are two, three things. First, I think I mentioned in my opening comments. First is the technology spent is not a discretionary for the OEMs beyond the point. I mean, they have to do it. How they do it is the only option they have. And as we see European OEMs, they had their European ecosystem. They are looking to move towards India, almost all the OEMs. That is one. But the second important part, it is not just the cosplay. It is about the technology which you have, the solutions you have, and AI native part of the nature. So, these are the three very important parts. And I think these three things will help them to reduce cost and have more, I would say, differentiated solution. While their overall spend will go down, but it could substantially increase our footprint in these clients. So, that's basically the reason why we talked about it.

Garvit Chumsaray, Analyst — Nalpha

Got it, sir. That's it for myself, sir. Thank you.

Sunil Fansalkar, Head of Investor Relations

Thank you.

Operator

Thank you. Next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.

Speaker 6

Yeah, thanks. Thanks.

Speaker 5

Most of the questions have been answered. Just one question. If you look at Europe as a market within passenger vehicle, apart from the top

Speaker 6

OEM, which we have defined, may take two more quarters to bottom out. So, is there any other similar risk in any of the other clients? Are we forcing just a date on this?

Kinmay Kodagiri, CFO

No, I think it's a valid question, Sandeep. You know, our footprint in actual OEMs, other OEMs, PASCAR OEMs in Europe is growing. So while we believe that, you know, there are probably ways for us to grow, but I think our strategy essentially going by our experience with the top two OEMs is defend and grow. So first what we are doing is we are making sure that we rank sense our own business. So we are actually disrupting our own business to create more value so that we don't get disrupted by them. And then secondly, then figure out ways to increase our wallet share.

Nitin, Analyst — Investec

This is our strategy when it comes to other PASCAR OEMs in Europe.

Kinmay Kodagiri, CFO

We have engagements with all of them. That's the good thing. And, you know, we believe that there could be added opportunities where we have less of a footprint. Some of these are new to us. We believe that there could be, as Mr. Patil talked about, as the supplier consolidation and value creation comes out, On the back of AILA transformation, there is an opportunity for us to disrupt their existing model and create a lot of value for them. This is something that we are working on now, but you will see the actual impact of it in H1 of next year.

Speaker 5

Okay. Thanks. Thanks and all the best.

Kinmay Kodagiri, CFO

Thank you.

Operator

Thank you. Next question is from the line of Rahul Jain from Dalat Capital. Please go ahead.

Speaker 4

Yeah. Hi. Thanks for the opportunity. I just wanted to understand, you know, we understand the challenges in general that you have highlighted, but are there any important trends that are changing in the competitive spend for these companies, you know, around AI, like a conversation in car AI is one trend, and maybe on the battery efficiency side, like we saw with what Tesla recently announced and all that. So, are there any thoughts where the spends might come, get revived faster because of some of the industry compulsion that might play out?

Kinmay Kodagiri, CFO

Yeah.

Sunil Fansalkar, Head of Investor Relations

So, are you talking, you are breaking up in between. The question is, are there any major industry trends? It would actually may accelerate growth. Of course.

Kinmay Kodagiri, CFO

See, I think we have to understand in Europe, the spend will continue to go down because they really have to figure out their cost thing. But they will prioritize the spend. You know, we know that the spend in digital cockpit continues to be high, comparatively speaking. In diagnostics, over there, update, sales, after sales transformation, there is spend. And ongoing threats with cybersecurity, there will be added focus on cybersecurity. These are the areas. And, of course, if you look at the broader trend of autonomous driving, it kind of went on a back burner right after COVID for two or three years. But now it's rebounded substantially. NOA has a sort of navigation on autonomy has become a standard in China. will become somewhat of a standard in Europe as well as in the US. And then there are added investments by some of the new companies into robotaxis, right? So there is that spend. So these are the areas where there is whatever budget they have, more budget is being allocated to these areas. Fortunately for us, we have footprint in all of these areas. So we look forward to capitalizing

Kishore Patil, CEO

I think there is one area which we talked about is the product, which is where specifically in the area of validation, which is a very important part, both from the quality perspective as well as reduced time. And overall, many of our products are in that line. So overall, the product portfolio is one area which may accelerate capturing that spend.

Speaker 4

I understand, of course, you guys have been talking about it, but it's a very mission-critical decision. Probably that may take more time in the thought process. But thanks for that, Tala. Secondly, I mean, we, of course, are talking about that growth might start turning better, starting Q4. But from the current base of cost that we have, do we see there is some room of optimization? Because probably this company was designed for a much higher growth, and we will go back to that kind of number. But in the interim, do we see a need of some correction in some of the aspects in our current cost base?

Kishore Patil, CEO

So, hopefully there is such an opportunity, and mainly because of the change. First, what we want to do is basically with AI and the products. The second thing is what the customers are looking for. As we mentioned, the European players also are looking at doing more work, you know, remotely than on-site, which they have been used to. So certainly our mix may change in terms of which has been in certain different centers, centers more on the capability side and expectations. We will never optimize our technology investments and the teams which we have. But the client engagement team, the mix may change depending upon what the clients are looking for. So that's something we have started optimizing and will optimize.

Speaker 4

Lastly, on the comment that we mentioned on the losses in the colleagues' business, so is there a way we are thinking about it that where it could stabilize on an annualized basis or any other color that you could give on that?

Kishore Patil, CEO

It will take some time, for sure. It is not something we can fix, but there are a few other ways we are looking at. One, I mean, we are in the exploration stage, as I said. One is the adjacencies, something like robotics or some of these areas where this operating system may be adopted, but we still need some time to ensure that that's how it will happen. The second thing is we can look at some more partners in that area to see, to drive the growth. These are a couple of options we will explore, but that we will know in the course of time. Sure.

Speaker 6

Thanks for those inside. Thank you.

Operator

Thank you. Next question is from the line of Vaibhav Yadav from TradeNest. Please go ahead.

Speaker 6

Good evening and thank you for the opportunity. My question relates to the recovery outlook. Given the persistent weakness in the European automotive market, does management anticipate any change to its previously indicated recovery timeline? Or is there a possibility that the recovery could be delayed further? Thank you.

Kinmay Kodagiri, CFO

All right. Here is the thing. There are two aspects, right? So, when you say recovery, there is recovery for KPIT, and then there is recovery for European PASCA.

Speaker 6

Recovery for both, sir.

Kinmay Kodagiri, CFO

Yeah. So, let me talk about both. First, we'll talk about the industry. So, there is, it's going to be a very long-drawn recovery for European auto OEMs. You know, there is continued pressure, and it's going to go on for a while. Like I mentioned earlier on, while it's going to take some time, they will prioritize investments in certain areas, and we called out those investments, and that's where we see opportunities for KPIT, right? So, A, in PASCAR, there is going to be a long-run recovery for European OEMs. In trucks and off-highway, that's not the case. We are saying trucks coming back slowly, off-highway continue to do reasonably well. So this is the industry outlook in Europe. What it means to KPIT? We have taken a big haircut in Europe, especially for one client in the recent past, and that will bottom out in the next couple of quarters. After that, as Mr. Patil mentioned, there are enough opportunities for KPIT to grow within passenger cars market, given that they'll have to do everything cheaper, better, faster. Given our products, given our AI-led transformation, we believe that as the consolidation kicks in towards the end of the year, that will materialize in H1 of next year. That creates opportunities for KPIT to grow in European passenger car market.

Sunil Fansalkar, Head of Investor Relations

Thank you. Let us answer your question.

Operator

Thank you. Next question is from the line of Gokul from BTH Capital. Please go ahead.

Speaker 6

Hi, Anadol. Yes.

Speaker 5

Hi, thanks for taking my question. I just wanted to understand firstly on the off-highway segment that you mentioned in the beginning of the call also that this is a new segment for us and we just started finding new clients here. So, I just want to understand how different is this in terms of scope of work, you know, from the passenger vehicle where we have our expertise and, you know, any other nuances that you can share with respect to, you know, what kind So, if you

Speaker 8

look at what transformation this particular industry is looking forward is exactly following on the lines of what passenger car went through in terms of the HDV change. The language used is different. It is called software-defined machines rather than software-defined vehicle. But the fundamental technology is the same, and in fact, we stand at a very strong position here because not only we have the experience that we have from SDB in the vehicles, but we also have, you know, fairly advanced solutions and, you know, whatever work we have done through AI now to accelerate these programs, and that is the reason why we stand as the most favorite partner to do these transformations.

Speaker 5

Right, and in terms of like your segment where you classify it as feature development and integration architecture, cloud-based, et cetera, any mix that you can give us within commercial for that?

Speaker 8

It is, you know, exactly the same thing. I think there will be a few things that may not be relevant. For example, the cockpit experience for an off-highway vehicle may be slightly different. But from a technology perspective, it doesn't make any difference right now. Most of the head unit or cockpit experience is built up on Android. Most of the other things are built up on body electronics. Most of the architecture is central zonal. So all the elements on technology remain the same. So we are very comfortable and, you know, we can actually demonstrate a great value to the customer

Kinmay Kodagiri, CFO

So, we'll see growth in all three segments, you know, the architecture, feature development, and after- Integration and aftermarket. Aftermarket, right, diagnostics and aftermarket. So, there is opportunity in all three.

Speaker 5

Got it. And secondly, I wanted to understand your employee base. I understand in the last couple of years has been stagnant, if I'm not wrong. So, I just want to understand, you know, going forward also, do we, given that our revenue You hear from fixed prices also increasing. Do we expect there to be some operating leverage here, you know, where whenever this recovery happens in Europe and the rest of our geographies, we will see, you know, employee costs not rise as in proportion to our revenues. Like, do we expect to add meaningfully the headcount, you know, going forward?

Kishore Patil, CEO

That for sure will happen for the products and solution. And as we talked about our fixed-price projects, I think there is a leverage. I think these are the three things which we have in terms of increasing the revenues per person, leverage. It also, but it won't be for all the customers because it also depends upon the adaptability of the client or technology and ability to manage those engagements.

Speaker 5

Right. I'm wondering, you mentioned two new adjacencies. Energy, what was the other one?

Sunil Fansalkar, Head of Investor Relations

Energy tech and deep tech.

Speaker 6

Deep tech.

Sunil Fansalkar, Head of Investor Relations

Okay, thank you. Okay, thank you.

Operator

Thank you. That was the last question for today. I now hand the conference over to the management for closing comments.

Sunil Fansalkar, Head of Investor Relations

So, thank you, everyone, for your active participation, and have a great evening. Bye. Thank you, everyone. Thank you. Bye-bye.

Operator

Thank you. On behalf of Dollar Capital, that concludes this conference. Thank you for joining us, And you may now disconnect your lines.