KPIT Technologies Ltd Management Discussions

Global Outlook

The January 2024 IMF Global Economic Outlook projects global growth to be at 3.1% in 2024 and 3.2% in 2025, with a slight upward revision for 2024 due to stronger-than-expected performance in some major economies. The IMF upgraded global growth by 0.2% on account of greater-than-expected resilience in the US economy. World trade growth is estimated to be 3.3% in 2024 and 3.6% in 2025, but still is below the historical average growth of 4.9%.(1)

In 2023, Global Central banks continued to unite in their battle against rising Inflation and monetary policies were highly restrictive as interest rates hit multi-decadal highs, with the US federal funds rate exceeding 5%, last seen only in the mid-2000s. The IMF forecasts global Inflation to fall further from an estimated 6.8% in 2023 to 5.8% in 2024 and further down to 4.4% in 2025. The IMF expects, with disinflation and steady growth, the risk of a hard landing has receded, the risks to global growth are broadly balanced.

For the United States, growth is projected to fall from 2.5% in 2023 to 2.1% in 2024 and 1.7% in 2025, with the lagged effects of monetary policy tightening and gradual fiscal tightening. Growth in the Europe is projected to recover from its low rate of an estimated 0.5% in 2023, which reflected relatively high exposure to the war in Ukraine, to 0.9% in 2024 and 1.7% in 2025. The IMF forecasts that Germany, which had a contraction in its economy in 2023, will grow by 0.5% in 2023 and 1.6% in 2024. The German economy was impacted by subdued foreign demand, ongoing geopolitical tensions and high energy prices that resulted in a weaker trade for goods.121 The silver lining for the economy was that inflation fell from low double-digit levels in 2022 to around 6% for 2023. France is also expected to have a steady growth of 1.0% in 2023 and 1.7% in 2024. The United Kingdom is projected to rise modestly, from an estimated

0.5% in 2023 to 0.6% in 2024, as the lagged negative effects of high energy prices wane, then to 1.6% in 2025, as disinflation allows an easing in financial conditions and permits real incomes to recover.

The IMF upgraded Chinas growth by 0.4% since its last quarterly report and forecasts to grow by 4.6% in 2024 and 4.1% in 2025. India stands out and is now one of the fastest-growing large economies, with a forecasted 6.5% growth in Indias Financial Year 2024 and 2025. Japans growth, after a stellar 1.9% in 2023, is expected to decelerate to 0.9% in 2024 and 0.8% in 2025.

The downside risk to growth emanates from commodity price spikes due to the emerging geopolitical situation, sticky core inflation, resulting into continuation of tighter monetary policy. The war in the Middle East may escalate further into the wider region, which produces about 35% of the worlds oil exports and 14% of its gas exports. This could disrupt oil and gas supplies and cause a sharp increase in global energy prices, with adverse effects on growth and inflation. In addition, the fiscal situation in certain economies, given the rising debt ratios, can result in spending cuts as well as tax hikes that may result in a reduction in growth in the near term.

The upside to growth emerge from faster than expected disinflation, easing the monetary conditions, a faster recovery in China and a slower withdrawal of fiscal support, especially in the advanced economies. Equity markets rallied towards the end of the calendar year 2023 as market participants priced in multiple rate cuts as inflation started taking a downward trajectory.

Global Automotive Sales Rebound

In 2023, the global automotive industry witnessed a remarkable resurgence. Light vehicle sales surged to nearly 86 million units, reflecting an 8.9% increase from 2022.P1 This robust growth was primarily driven by improved supply chain conditions and the normalization of production outputs. Regionally, Europe experienced a 12.8% year-over-year increase, benefiting from enhanced production and inventory recovery.

The United States also saw a significant rise, propelled by higher inventory levels and strong demand for new vehicle models. In China, the worlds largest automotive market, sales increased by 4.9%, as a result of support from government incentives for new energy vehicles (NEVs) and a recovery in local production.

Looking ahead to 2024, global light vehicle sales are projected to grow by 2.8% year-over-year.t3] The ongoing recovery in light vehicle output is expected to continue supporting inventory restocking efforts across various regions. This positive outlook is underpinned by recovering supply chains and sustained pent-up consumer demand. However, challenges such as elevated vehicle pricing and stringent credit and lending conditions remain. The forecast also accounts for factors like persistent high-interest rates, the affordability squeeze, new vehicle prices, fluctuating consumer confidence, energy price concerns, auto lending risks, and the growing pains of ongoing electrification.

The global medium and heavy-duty truck (MHDT) market experienced a mixed performance in 2023. The market dynamics were influenced by moderate global GDP growth, supply chain disruptions, and inflationary pressures. Despite these challenges, the latter half of the year saw a recovery in demand and production as economic conditions improved. The global MHDT market is expected to remain nearly flat between 2021 and 2030, with a slow recovery from the post-COVID baseline. Major markets in North America and Europe are showing recovery from the sharp declines experienced due to COVID-19. In China, the largest market, sales are expected to average out around 1.2 million units per year after the peak years of 2019 and 2020. Meanwhile, the Indian market is projected to exhibit the highest growth, driven by strong economic development. Key trends driving the growth and adoption of technology and software within commercial vehicles include efforts to consolidate scale and expand product portfolios, stringent and frequently-changing emission regulations, and major technological disruptions driven by electrification to meet these regulatory demands. Additionally, advancements in autonomous driving are progressing due to driver shortages and safety concerns, while leveraging data and connected services enhances customer experience, fleet uptime, predictive maintenance, and monetizing use cases.

The global electric vehicle (EV) market continues to demonstrate exceptional growth, with projections indicating it will reach USD 1.3 trillion by 2030, supported by a robust CAGR of 26.8% from 2023 onwards. In 2023, China led this surge with over 4 million units sold, followed by significant contributions from Europe and North America.

Increased R&D Spending

In 2023, global R&D spending in the automotive and mobility sector reached USD 150 billion, emphasizing a substantial focus on software and technological innovations. These investments are crucial for maintaining competitive advantage, faster time-to-market and addressing the evolving demands of the mobility industry.

The automotive industry is moving towards newer value pools, a strategic shift that is driven by evolving customer demand, emerging technologies and tightening regulations. This will see the value in the industry shift from manufacturing and transactional sales to the complete vehicle lifecycle, and will open opportunities for automakers, battery manufacturers, suppliers, energy companies, and for investors to shift to new areas of focus. This presents a global opportunity of over USD 660 Bn by 2030[4] for the industry as it shifts its focus away from internal combustion engine (ICE) vehicles to electric vehicles (EVs). Some of key focus and spend areas for the Mobility industry would be:

Batteries, Charging and Energy Storage

By 2040, the number of Electric Vehicles (Battery Electric and Hybrid Electric) are expected to be more than non-EVs. Batteries and Charging (Infra, Technology) are paramount to steer this successful EV transition.

New Vehicle Architecture

The shift from hardware to software-defined vehicle (SDV) architectures, unlocks new revenue pools for mobility OEMs, enabling to launch data-based services, and are likely to drive cost efficiencies, faster feature deployment and improve consumer experiences.

Move towards sustainability and fully circular models

Incorporating reusing and recycling materials promises a greener automotive and mobility industry and might present an alternative approach to ease the ever-increasing geopolitical war for rare minerals.

Al for all

The mobility industry is leveraging Al to revolutionize various aspects of vehicle production, performance, and user experience. OEMs are increasingly investing in Al to enhance autonomous driving capabilities, improve predictive maintenance, and create personalized in-car experiences. By integrating Al, automakers can analyze vast amounts of data to optimize vehicle performance, predict component failures before they occur, and offer tailored services to drivers. As Al continues to advance, it opens new avenues for innovation, making vehicles smarter, safer, and more efficient, thus driving the industrys transition towards a more sustainable and technology-driven future.

The automotive software market is projected to more than double in size from $31 billion in 2019 to roughly $80 billion in 2030—a CAGR of more than 9%. ADAS and AD software will account for much of this growth and make up almost half the software market by 2030. Infotainment, connectivity, security, and connected services will also grow at pace with the overall software market, becoming the second-largest software market by 2030. This growth is driven by a high share of connected vehicles and demand for features such as in-car payments, location-based services, and music streaming. The market for body and energy software will exhibit a CAGR of 10% because of increasingly stringent energy management requirements for EVs and an increasing number of premium comfort features in lower vehicle segments.

Overall, the automotive and mobility industry is on a positive trajectory, driven by technological advancements and increasing investments in R&D. The automotive and mobility market is witnessing a significant transformation driven by evolving consumer demand, technological advancements, and stringent regulations. The industry is shifting from traditional internal combustion engines (ICE) to electric vehicles (EVs), creating new opportunities and challenges. KPIT is well-positioned to leverage these trends with its focus on software and system integration for automakers, including passenger cars and trucks and be their trusted partner in this transformation. The Company anticipates a robust growth trajectory, driven by its solid pipeline and extensive work in embedded software, electrification, autonomous driving, e-cockpit solutions, and central architecture. KPITs deep engagement with global OEMs and increasing business with Indian automakers further solidifies its market position, enabling it to capitalize on the industrys shift towards more modern and technology-driven vehicles. Despite uncertainties such as geopolitical tensions and economic pressures in key markets like Europe and China, KPIT remains optimistic about achieving an 18-22% growth rate, supported by its strategic initiatives and the expanding EV market.

KPIT Overview

KPITs Vision is ‘Reimagining mobility with you for creation of a cleaner, smarter, safer world.

The Company is a global partner to the automotive and mobility ecosystem for making software-defined vehicles a reality. It is a leading independent software development and integration partner helping mobility leapfrog towards a clean, smart, and safe future. With 13000+ automobelievers across the globe specializing in embedded software, Al, and digital solutions, KPIT accelerates its clients implementation of next-generation technologies for the future mobility roadmap. With engineering centers in Europe, USA, Japan,

China, Thailand, and India, KPIT works with leaders in automotive and Mobility and is present where the ecosystem is transforming.

In the pursuit toward its vision of reimagining a cleaner tomorrow, KPIT is committed to Sustainability. In its ongoing commitment and journey towards sustainability, KPIT has launched EcoVoyage to double down on our Vision of "Reimagining Mobility for the creation of a cleaner, smarter, and safer world". This is a unique programme which helps bring an organizational focus on sustainability across ALL aspects of business over time. Moving forward, KPIT will minimize its operational footprint by, including but not limited to:

Revising our processes to achieve Net Zero emissions by 2030

Investing, building and integrating innovative solutions with lens of sustainability through the KPIT Centers of Excellence for Mobility Domains (Practices)

Aligning our KPIT delivery teams to cleaner, smarter, safer coding practices and to do more with less

Working with our select clients to expand the partnerships to sustainability, to scale our collective impact

Encouraging every KPITian to integrate sustainability-focused actions at work and at home

Significant highlights from the year

During FY 23-24, the Company continued to work and win strategic engagements with its T25 clients. KPIT entered key strategic partnerships with major global automotive OEMs and technology companies to co-develop next-generation automotive technologies. Collaborations with leading universities and research institutions were strengthened to drive innovation and stay ahead in the competitive landscape. These engagements are broad-based, multi-year and across practice domains for both Passenger Vehicle and Commercial Vehicle OEMs. KPIT expanded its global footprint by establishing new development centers and offices in strategic locations, enhancing its ability to serve clients worldwide.

The Company continues to explore and invest in new technologies relevant for the mobility industry. During the year, KPIT joined a small and elite group of sustainability-focused organizations worldwide that have developed sodium-ion-based battery technology. This battery technology promises to reduce import dependency on core battery materials. It has several use-cases for automotive and mobility, especially for electric two and three-wheelers and commercial vehicles.

KPIT has partnered with Microsoft to introduce an Azure OpenAI Service-powered Copilot to transform automotive repair and maintenance. The Copilot is built on KPITs proven root cause diagnostics platform Trace2Fix, which addresses customer retention and dealership profitability challenges. These challenges stem from difficulties in identifying the underlying root causes due to complex vehicle systems and a global shortage of certified and skilled service technicians.

REVENUE

During FY24, KPIT Technologies $ revenue stood at $587.3 Million, a Y-o-Y growth of 40.4% against $418.28 Million in FY23. In Rs. terms, revenue for the year was reported at Rs.48,715.4 Million as against Rs.33,650.4 Million in FY23, a Y-o-Y growth of 44.8%.

The passenger cars vertical contributed around 77.1% of the total revenues in FY24 whereas the commercial vehicles segment contributed around 19.0% of the revenues.

In terms of geography, the United States contributed around 30.8%, Europe 52.0% and the balance 17.2% came from Asia. Europe led the growth followed by Asia and then the United States.

Our Strategic Accounts contributed around 84.6% of the overall revenues and growth in these accounts was close to 44.0%.

Starting FY25 on a strong footing, the Company will be deepening its focus on Strategic Client Partnerships, Technology Innovations, People and Zero-Defect Deliveries. With a lookout for future growth areas, we will also be pivoting our investments on enhancing domain practices and sharpen our focus on Commercial Vehicles and Asia strategy.

PROFITABILITY

The EBITDA for FY24 stood at 20.3% as against 18.9% for FY23. The EBITDA for FY24 was Rs.9,913.3 Million. The Net Profit for FY24 stood at Rs.5,945.3 Million, a Y-o-Y growth of 56.0%.

With EBITDA growth in Q4, FY24 registered 15th consecutive quarter of steady revenue and EBITDA growth.

In the medium term, we want to focus on improvement in operating profitability with emphasis on productivity improvement, increase in offshore revenues, leveraging of fixed costs and scaling up in our strategic accounts. We would want to invest further in technology, front-end and people to strengthen our positioning and ability to grow at a faster rate in the coming years. Thus, the increased operating profits would majorly be invested in the above areas and thus the reported operating profits would be net of these added investments.

SHAREHOLDERS FUNDS

The Shareholders Funds as at March 31, 2024 stood at Rs.21,629.7 Million.

LIQUIDITY

The Cash Balance as at March 31, 2024 stood at Rs.8,959 Million as against Rs.6,288 Million as at March 31, 2023.

The DSO were at 51 days as at March 31, 2024 as against 54 days as at March 31, 2023 as we continue our consistent focus on faster cash conversion.

As on March 31, 2024 the total debt on the books of the company stood at Rs.445 Million consisting fully of Working Capital Loan in the books of Technica.

Thus, the Net Cash Balance as at March 31, 2024 stood at Rs.8,514 Million as against Rs.5,802 Million as at March 31, 2023, a net operational increase (without considering M&A payouts) of Rs.6,463 Million.

EMPLOYEES

The total headcount for the Company stood at 12,856 as at the end of FY24. The same was 11,013 as at the end of FY23. The Development Headcount was 12,064 as against 10,297 last year. The detailed update on People is covered under the Chairmans Letter.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The CEO & CFO certification provided elsewhere in this Annual Report discusses the adequacy of internal control systems and procedures in place.

RISKS AND CONCERNS

A separate report on Enterprise Risk Management is provided elsewhere in this Annual Report.

Cautionary Statement

Certain statements under ‘Management Discussion & Analysis describing the Companys objectives, projections, expectations may be forward looking statements within the applicable securities laws and regulations. Although the expectations are based on reasonable assumptions, the actual results could differ materially from those expressed or implied, since the Companys operations are influenced by external and internal factors beyond the Companys control. The Company assumes no responsibility to publicly amend, modify or revise any forward-looking statements, basis any subsequent developments, information or events.