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Well positioned

KPIT reported a good set of numbers with revenue growth of 6% QoQ in CC terms, but lower in USD terms at 3.2% QoQ (I-Sec: 4.2%). The hit in USD terms was due to 280bps CC headwinds resulting from a total of 48.5% revenue exposure to EUR, GBP and JPY. Growth was largely propelled by architecture and middleware consulting (+31.1% QoQ USD). Though this business unit accounts for only 14% of revenue currently, most of the upcoming client spend is in this domain. The current spend will further lead to spends in feature development and integration (69% of revenue) and cloud-based connected devices (17% of revenue).

TCV of wins is strong at US$155mn (+24% QoQ) led by multi-year programmes across middleware, electric powertrain and connected solutions. Management said demand continues to be robust and that spends in middleware architecture = are critical and existential in nature for most automotive OEMs. Hence it is reasonable to expect no budget cuts in this area. However, management acknowledged that clients are reducing spends in other areas wherein KPIT is not impacted. Management has retained its revenue guidance of 18-21% YoY CC growth given the strong Q1FY23 and deal bookings. However, USD-denominated growth is expected to be impacted by cross- currency headwinds. We therefore reduce our USD revenue estimates to 15.2% and 13.7% revenues for FY23E and FY24E respectively.

EBIT margin during the quarter expanded by a further 100bps QoQ to 14.9%, higher than our estimate of 14%. This was despite roll-out of promotions in Q1, and it was led by revenue growth leverage and operational efficiency. Positive impact of INR depreciation against the USD was offset by INR appreciation against EUR, GBP and JPY. EBITDA margin stood at 19.4%. In Q2FY23E, there will be impact of higher than normal wage hike but is likely to be partially offset by revenue growth and improving offshore mix. Management has retained its EBITDA margin guidance of 18-19%.

KPIT is investing in building its talent pool and has done strong net headcount addition of 938 employees (+11% QoQ). Total headcount is up 40% YoY. Management mentioned that attrition is trending down, especially among top performers.

KPIT is well positioned to benefit from increased R&D spend on CASE (connected, autonomous, shared, electric). However, in our view, ER&D spends tend to be more discretionary in nature compared to IT services and are likely to get delayed in the event of slowdown or recession. Our EPS estimates largely remain intact. KPIT currently trades at 41x/36x FY23/24E P/E at EPS of INR ~13/15. We believe, at current levels, the stock is fairly valued and offers limited upside hereon. We revise our target price to Rs455 (earlier: Rs442), valuing the company at 30x FY24E EPS. Maintain REDUCE.

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