Published on 13/11/2017 4:19:39 PM | Source: Equirus Securities Private Ltd

Update On KPIT Technologies Ltd - Equirus Sec

KPIT‟s 2QFY18 US$ revenues grew 4.3% qoq to US$ 148.1mn (EE: US$ 137mn) led by acceleration in key SBU‟s (product engineering, Digital, and Integrated enterprise) while P&P declined 20% qoq given 1Q had US$ 2mn worth non-recurring license sales. From a vertical perspective automotive & transportation (A&T) and energy continue to outperform while manufacturing recovered. Digital transformation rebounded sharply with 14% qoq growth vs. 0.3% in 1Q. Management now expects double digit growth in FY18e (vs. top-end of its 6-8% FY18e CC growth guidance post 1Q) driven by encouraging 1H, while sustainable margin performance is few quarters away. We are raising our estimates and upgrade the stock to ADD from REDUCE rating with a TP of Rs 160 at 11x Dec‟18 TTM EPS of 14.5 (Rs 135, 10x Sep‟18 EPS earlier).

Flat 3Q, 4Q yields ~13% $ growth: 1H revenues have grown 13.6% yoy and imply FY18e revenues could grow ~13% even assuming sequentially flat revenues in 3Q & 4Q18. 1H revenue traction was led by key vertical Automotive and recovery in Energy. Automotive (43.3% of revenues) revenues are up 20% yoy vs. 7.2% in 1HFY17) while Energy & Utilities (17.5% of revenues) has grown 30% yoy vs. 23.6% yoy decline in 1HFY17. However, Manufacturing revenues declined 2% yoy in 1H along with compression in revenue contribution (31.2% vs. 36.1% in IH17). We are raising our FY18e US$ revenue estimate to US$ 560mn as commentary suggests Automotive, Energy (~12%) momentum could continue in 2H.

Other operating highlights: Top customer revenues grew (for the third consecutive quarter) 1.9% qoq while top 20/40 strategic accounts revenues grew 1.3%/4% qoq. Across SBU‟s PES grew 13.2% qoq (37.7% of revenues), Digital grew 14% qoq (10.6%) while IES grew 2% (27%). Geographically, US (63.6%) grew 5% qoq led by growth in engineering, digital; Asia (18%) grew 9% qoq, while Europe (18.5%) grew 3.7%.

EBITDAM commentary remains cautiously optimistic: Reported EBITDAM (9.9%) were ahead of EE (8.6%) as wage hike headwinds were offset by growth. Management reiterated that profitability improvement initiatives (including utilization, mix shift towards higher GM verticals engineering, digital) could bear fruit over the next few quarters. Consequently, we raise FY18e margin assumption to 10.3% vs. 9.9% earlier.

Revise to ADD on growth, margin outlook: Though sustainable margin performance could be few quarters away, accelerating growth and reasonable valuations (~11x FY18e EPS) led to change in rating & TP. Inability to sustain current operating performance could be a key risk to our thesis.


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