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Our Take

KPIT Technologies Ltd (KPIT) expects significant improvement in revenue, led by new deal wins and increase in offshore billing. The company derives most of its revenue (~70%) from innovative technology areas such as Advanced Driver Assistant Systems (ADAS), EV, powertrain, and infotainment, where we believe the opportunity size is quite large. With huge innovation in electric vehicles and ADAS, we further believe the market opportunity is large enough for multiple vendors to coexist and grow. As per the management, its revenue growth and margin improvement will continue in Q4FY21 and beyond. The automotive and mobility industry is prioritizing investments in new age technologies and KPIT is at the forefront of these. Growth will be driven by electric powertrain and autonomous vehicles (AV) within Europe and Asia.

KPIT is confident of sustaining its profitable growth momentum, going forward. Higher utilization, pyramid rationalization, and cost optimization would help sustain strong revenue and profitability growth. Moreover, the company plans to launch more products, which would contribute to growth ahead. With efficiencies in revenue growth and operations, the company’s operating and PAT margins are likely to improve further.

Mobility industry could be an important growth engine in the future. We could expect more demand for personal vehicles, safer vehicles, and smart connected vehicles. The US President Joe Biden’s plans to replace the government vehicle fleet with electric vehicles will be one of more such opportunities in the US; we believe there is tremendous focus on electric vehicles, especially in the US and Europe. Over the past 15+ years, KPIT hasinvested in various technologies for automotive companies and it would continue to maintain its leadership position in these areas. The company is positioned well in developing platforms and software integration with regards to mobility. Also, the increased focus on electric vehicles, especially in the US and Europe, is creating new growth opportunities for the automotive sector as a whole.

Valuations & Recommendation:

With its niche offerings, strong position in automobile engineering, and mobility solutions supported by established relationships with top global original equipment manufacturers (OEMs), KPIT plans to launch more products, which could contribute to growth, going forward. KPIT is well on its way to double-digit growth in FY22E and FY23E, led by favorable demand in the mobility space and stability in the IT business. Higher utilization, pyramid rationalization, and cost optimization could lead to strong profitability growth and better return ratios.

Further, the company's financial profile remains strong with healthy profitability. Liquidity is expected to remain robust, and long-term debt would reduce in the medium term. We feel that the discount in valuation of KPIT to its peer L&T Technology Services could narrow going forward. We believe the base case fair value of the stock is Rs 203 (22.5x FY23E EPS) and the bull case fair value of the stock is Rs 221 (24.5x FY23E EPS) over the next two quarters. Investors can buy at LTP and add further on dips in the Rs 165-169 band (18.5x FY23E EPS). At the LTP of Rs 188, the stock is trading at 20.8x FY23E EPS.

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