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A year after demerging its engineering services, here is why KPIT Tech is in a sweet spot despite COVID blues

KPIT Technologies’ IT services arm merged with Birlasoft on January 15, 2019. Then the KPIT's engineering services became a separate listed entity to focus on automotive software engineering.

November 12, 2020 / 04:13 PM IST
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When KPIT Technologies merged its IT services with Birlasoft to focus on automotive engineering space last year, it least expected the COVID-19 pandemic.

Unfortunately for the firm, automotive was one of the worst-hit sectors due to the pandemic. The unexpected crisis directly impacted the company's growth.

After growing 8.3 percent year-on-year (Y-o-Y) in the December 2020 quarter, the growth began to decline in the next two quarters on the back of the pandemic. KPIT’s revenues declined 15.4 percent in Q2 and 10.3 percent in Q1 on a Y-o-Y basis.

Though the coming quarters look optimistic, driven by autonomous driving and commercial vehicles picking up, a company executive pointed out that there are challenges as well.

So in hindsight, was the decision to focus on a single sector a better move? At least the company does think so.

Sachin Tikekar, Co-founder and President, in a recent interaction said, “(We have) No regrets about the decision. Even though it makes you question every now and then, there are no regrets.”

KPIT Technologies’ IT services arm merged with Birlasoft on January 15, 2019. Post-merger, the KPIT engineering services became a separate listed entity to focus on automotive software engineering, its specialised segment.

When the company decided to let go of its IT services arm, Tikekar said the decision was difficult yet a conscious one. “We not only lost the IT, in manufacturing too we used to service some of the other industries beyond automotive,” he added.

But what the company wanted was a leadership position, which Tikekar pointed out that the company did not have with its earlier positioning. “So we thought our calling was engineering in the automotive industry,” he said.

“Even though it is a setback, the pandemic has not created any fear. We are still confident about our leadership position in the next two or three years,” he added.

Where does KPIT’s confidence come from?

Analysts who track engineering services space, and Tikekar, cite a couple of reasons.

One: while the IT services industry was recording an average growth rate of 8 percent before the pandemic, engineering R&D outsourcing is growing at a much faster rate.

A market research firm Grand View estimates that the global engineering services outsourcing industry was estimated at $316 billion in 2019 and expected to grow at a CAGR of 29.2 percent. This offers huge opportunities for engineering services firms though there might be a temporary pause in spending.

Pareekh Jain, founder, Pareekh Consulting, who tracks engineering services firms, explained that unlike a few years ago, core engineering firms are outsourcing more since software components are steadily increasing like smart devices.

That brings us to the second part.

Two: Even among engineering services, automotive is a significant portion of the pie. In automotive, be it car, connected vehicles or any transportation, the OEMs and global manufacturers cannot ignore the software component and are investing in it.

That was probably why even when they took a 30-50 percent hit in business, Tikekar said the impact on KPIT was less since firms understand that software is the future.

Client investment, he said, are returning. Clients are talking about their plans for the next 6-12 months. A case in point is the recent deal the company won from carmaker BMW.

It is not just KPIT that is gaining though. For instance, Wipro recently won a multi-year deal for automotive software engineering from the automotive firm Marelli. Keshab Panda, CEO, L&T Technology Services (LTTS), an engineering services firm, said in the Q2 earnings release that the company is seeing traction across auto OEMs and suppliers.

At the same time, analysts also pointed out that a single focus could be risky.

A risky road

Engineering services as an industry was impacted by COVID-19. An IT industry executive earlier pointed out that unlike digital services, investments there were long term and clients paused their spending.

At this point, Jain of Pareekh consulting pointed out that having a diverse portfolio does help protect companies against crises.

For KPIT, passenger cars account for about 77 percent of the company’s revenue followed by commercial vehicles, about 20 percent. Both the segments were hit due to COVID-19 resulting in a 15 percent decline in Q2. The company announced paycuts for employees in the beginning of Q1 FY21 (it was reinstated effective October 2020).

Another pure-play engineering services player LTTS too was impacted and gave a revenue guidance for FY21 for a decline of 9-10 percent in Q1, which it upgraded to 7-8 percent in the last quarter. While transportation that accounts for about 31 percent of its revenue declined, its medical devices grew 34.8 percent year-on-year in Q2 FY21.

In the earnings call, the company said it is looking at a broad-based growth driven by vendor consolidation, and digital platform and solutions.

Still, KPIT might have an advantage being a niche player – an attractive acquisition.

Attractive acquisition

Given the momentum the engineering services industry, and more so the automotive space, is seeing in recent times, KPIT does make for an attractive acquisition for IT firms, Jain pointed out.

Recent times have seen IT services players stepping up their engineering services play through acquisitions and in-house focus, which is challenging since engineering play needs a different focus.

Companies acquire engineering firms to tap into the growing opportunity and to get an edge in the market. A case in point is the Capgemini acquisition of Altran, a pureplay engineering services firm, for $4.1 billion.

With connected cars, elective vehicles and autonomous driving catch up, automotive engineering has become an attractive proposition. Market research firm Research and Markets revealed that the global automotive engineering services outsourcing market will grow at a CAGR of 27.8 percent from 2020 to 2027.

Here KPIT is in a sweet spot and for IT firms wanting to grow tap into this market, it will be attractive.

Swathi Moorthy
first published: Nov 12, 2020 04:09 pm