KPIT - CASE (connected, autonomous, shared, electric) - Focused Automotive Play

Stock Opportunities Untested - but worth a good look
210

They had a CFO change in May 2020. Company need to come clean on it.

"At meeting held on 27 May 2020

The Board of KPIT Technologies at its meeting held on 27 May 2020 has accepted the resignation of Vinit Teredesai from the position of Chief Financial Officer and Key Managerial Personnel of the Company with effect from 12 June 2020. The Board has appointed Priyamvada Hardikar, Senior Vice President & Head of Finance as a Chief Financial Officer & Key Managerial Personnel of the Company."

Disc: invested small amount

211

As per this interview, Sentient Labs is going to pay a royalty to KPIT as and when revenue starts coming in. (4:25)

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212

Thanks for this video. Good that KPIT will get some royalty. Will wait for the reply from KPIT. Hope they will give some more details like how much royalty KPIT get back for spending all these money and resources.

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Royalty is not good enough. I have serious concerns on the following grounds (which I also mentioned in the email to Mr. Phansalkar):

  1. The CSIR partnership tp develop H fuel cell tech was with KPIT as per CSIR’s official releases from 2 years back. How, when, and why did this partnership shift to a entity apparently privately owned by the management?

2 The Ravi Pandit interview on bloomberg quint said that Sentient took over some tech that KPIT was working on earlier. Has any compensation been paid to KPIT?

  1. Why are complementary activities being carried out privately by the management, whilst using the listed company’s resources. Is this a case that if the tech succeeds, the management will reap the benefits while giving some small scraps to the listed entity, while it is actually the listed entity that bears the cost if the project fails?

  2. Why are employees being shared? Senior KPIT officer has been named as contact for Sentient lab on Zauba. In fact, the contact details include her kpit email id!

  3. Finally I pointed out that these shenanigans are a big irritant for global fund managers because the management has shown its propensity to pull of such stunts. Its unacceptable.

Companies need to be put on the spot for such things. H fuel cell may become big business in a couple of years. Why should the management use our resources (minority shareholders) to seed that business but then deprive us of the benefits. If the management argues that this is a high risk business and will likely fail, then why are they doing it at all, that too with listed company resources.

KPIT is a big part of my portfolio, and I had expected corporate gov had improved, so am very disappointed with what they are doing.

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214

See I thik he made it clear in the interview that KPIT is not into hardware that is the reason they have transferred this technology to Sentinet to work on it. I guess instead of giving this technology to someone else they have choosen their own unlisted firm… correct me if I am wrong…

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From the annual reports:

Sentient Labs was established in FY20.

For FY21 and FY22, there is 1 entry each for Sentient Labs in Related Party Transactions under the header Reimbursement of expenses

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The sum of the 2 transactions are around 28 Cr. I am not sure if these are expenses incurred by KPIT in favour of Sentient or if these are paid back by Sentient to KPIT. If its the former then it amounts to 7% of KPIT Consol PAT in FY21 and FY22 and is definitely a big concern for minority shareholders.

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I completely agree with you. They are not very transparent on this topic.

1)First of all they are mixing the names of KPIT and Sentient labs every where which gives the wrong feeling to every one that both are same companies. But there is not even a single sentence written about this incubation, royalty etc in the annual reports, which is really bad. I checked the past 3 years report. The only thing mentioned is about the related party transaction, that too under Reimbursement of expenses. Reimbursement of expenses means Sentient Labs incurred some expenses from KPIT which is being reimbursed. This is completely wrong I believe. It should be the other way around. If it is funding as an incubator then it should be mentioned like that. Also the amount is increasing every year. In FY21 it was around 9 crore which increased to 19 crore in FY22. How much it will be in FY23? We only heard about royalty in the media. Why it is not written anywhere? What percentage is the royalty no one knows.

  1. Secondly incubating a startup is ok. But funding a startup which is owned by the same management is not really good. Why didn’t they make it as a subsidiary or associate company for now which they can sell off later if they dont want to work on this technology further. Then every one will get the benefits. Currently they are using the resources and money of KPIT. But they want to keep it as a separate company.

Hope they will give a clear answer to this.

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It doesnt matter what he says in an interview. If its a good business they management can resign and carry it out separately. They should not use listed company resources to carry out a private business.

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218

If they havent replied in 5 working days, you should send them a reminder.

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219

Hi, I got the below reply. It says the money was paid from Sentient to KPIT not the other way around. Not sure how sentient was able to give that money. I think the reply is fine. What you think?

Dear Investor,

Trust you are doing well.

We value and appreciate your investment in KPIT.

Apologies for a late revert on this.

Since the year 2019-20, KPIT Technologies Limited has sharpened its business focus only in the field of the automotive embedded software development. Till then

KPIT was also engaged in development of technologies for generation of hydrogen from bio-mass, non-lithium battery chemistry which could be safe and affordable as well as fuel cells. None of these products were in the new focus that the company had decided for itself since they had minimal embedded software content. Moreover, these products were in the initial R and D stage and so the technologies were not saleable.

Sentient Labs Pvt Ltd is a research and development focused company. From the beginning of the year 2020-21, Sentient took over the further development of the above hardware-led research activities. Sentient would now be actively seeking different models for monetization, including bringing a majority investment from operating or financial investors. Sentient along with the new investors will decide on the appropriate way forward, either as a complete product licensing or outright sale to third parties or other monetization opportunities. The new majority investor or operating partner along with Sentient will explore appropriate options for building an independent management team, along with new investors. KPIT has not made any investments in these non-software research areas since 2020-21 either by itself or through Sentient. All Investments made before 2021 have been fully written off.

The financial transactions reported in the years 2021-22 and 2020-21 represent reimbursement of costs incurred by KPIT on behalf of Sentient, for which KPIT has received advance from Sentient Labs.

Having said that, if Sentient is able to register profits either by licensing or outright sale or any other monetization model, those gains will flow to KPIT through a separate royalty arrangement with KPIT, subsequently.

Thus to summarize:

KPIT has no intent and focus on Hardware Business
Sentient is an independent entity with focus on the above
The financial transactions between Sentient and KPIT are only money paid by Sentient to KPIT for the work done by KPIT for Sentient. These are at arm’s length and Sentient always pays advance money to ensure KPIT is never out of the money.

Whenever (and if) Sentient is able to make profits on the technology, the gains will flow to KPIT.

We had clarified the above in our quarterly Investor Update for Q1FY2022. Please have a look at page 16 and page 17 of the attached Investor Update. This is also available on the exchanges as well as KPIT website.

Trust this clears your queries.

Please give me a call on my cell () if you need any further clarifications.

regards,

Sunil Phansalkar
Head Investor Relations
KPIT Technologies

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This is what written in that slide he mentioned in the mail:

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Sounds fine to me. While looking at the figures I was also in doubt whether these were reimbursements by Sentient or investments by KPIT.

They should clarify to Exchanges that media articles giving credit to KPIT for Hydrogen powered bus launches are incorrect.

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I got the exact same reply, almost word for word. I think they have done a copy paste.

So here are my concerns for this reply:

In 2018-2020 period (presumably) KPIT gets into a partnership to develop fuel cell technology. So this is part of the company’s plan then. Then suddenly in FY21, after there is a working product, the management decides that this is no longer part of the plan and therefore we have to stop working on fuel cell. So what do they do? They write off all the investment made in this venture.and then hand this tech over to a promoter controlled company. So, KPIT bore the write-off loss, and the promoters got it for free? They should clarify.

Also, how is the company’s capital allocation policy changing so often? One year they decide to do fuel cell, next year they dont. Very strange. And are the independent directors not questioning this?! Intriguing to say the least.

Also it is not clear why this Sentient is not made a subsidiary. See, you spin off non core activities so that management bandwidth is not diverted. For example L&T sold off its cement division so that it could focus on ifra. But in this case, the same management is on the board of both KPIT and Sentient. They are clearly sharing high level resources, so why hold it in a management controlled vehicle instead of the listed entity?

Also, they mention that they have a royalty agreement, but what are the terms? In 5 years when fuel cell might be a big deal, people might not even remember sentient because the name will have gone off their balance sheet altogether. And then who is going to track royalty payments and if it is correct amount or not?

In my view this is a corporate governance issue. And in my experience there is never just one.

I do not think KPIT has adequately clarified this. I am trying to get hold of sentient accounts, as they should be on the MCA website. I checked with KPIT if they have these accounts and they said they dont. So if they dont know what is happening in Sentient, how are they even going to monitor the royalty?

In case anyone gets their hands on sentient accounts for past years, please do let me know. Thanks.

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I just want to clarify that I am bullish this company and I have a significant amount in it, and am in the money. This isnt a recommendation though to be clear.

I am only worried that these small issues are not indicative of a bigger issue going forward. This company has cutting edge tech in automotive space and will be a key beneficiary of the multi decade electrification trend in my opinion. I do not want CG issues to derail this story, and am taking this move of moving assets (tech) outside the listed entity quite seriously.

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224

Demerger from Birlasoft was done in 2019, before that KPIT has some hardware products. Post demerger management decided to concentrate only on core competence - CASE - software business. In the same line of thinking they don’t want to continue the uncertain / non-core business of sentient lab. Sentient was and is still a small R&D company without meaningful revenue and seems no point in thinking of royalty etc as of now.
This is my thought process of management thinking after tracking the company closely since 2020.

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225

May be you should ask for more details on the royalty payment agreement. If there is any proper agreement, they will be able to give a clear answer on this.

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Even before that the hardware products were in the automotive space only. They had some project called Revolo. Birlasoft demerger was the generic IT services businesses and has, to the best of my knowledge, nothing to do with hardware or software related to automotive.

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Also If management is fully concentrating on software why Sentient had to pay 28 crore in the last 2 years. See the below line from his mail. It shows KPIT employees are working on this technology. Why cant Sentient set up its own office and employees? Why should KPIT employees work on some technology which management of KPIT is not interested. I am getting confused if I think more on this.

The financial transactions between Sentient and KPIT are only money paid by Sentient to KPIT for the work done by KPIT for Sentient. These are at arm’s length and Sentient always pays advance money to ensure KPIT is never out of the money.

Asset of a company like KPIT is its employees, why should KPIT invest time and money to train its resources for sentient? They can do it themselves right?

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Now this news in papers, normal investor will keep scratching head as no such information in AR or company information sheet. No idea which subsidiary developing this and if they in listed entity

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I think it is Sentient Labs not KPIT :frowning: