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Outperformance continues in Q3

Strong Q3 performance continues with robust orderbook

KPIT Technologies (KPIT IN) continued to outperform in Q3. It posted a robust USD revenue growth of 4.3% QoQ / 31.5% YoY in CC and 60bps margin expansion in Q3. CC growth was slightly ahead of consensus estimate of 4%, while margin outperformed by 30bps. KPIT saw negative cross-currency impact of 160bps due to higher mix of EURO, JPY and GBP revenue (60%+ of total revenue), which led revenue growth to 2.3% in USD terms. FY24 guidance on both margin and revenue is intact, i.e., 37%+ revenue growth and 20%+ EBITDA margin in FY24. KPIT may most likely deliver better-than-guided performance in FY24. Headcount net addition was at 756 QoQ. Overall, KPIT has set its foot forward, with solid net new TCV of USD 189mn, taking 9MFY24 net new orderbook value to USD 535mn.   

Passenger vehicles and T25 clients lead momentum

Vertical-wise, stellar performance continued in Passenger Vehicles (+6.2% QoQ). Fixed-price projects were up another 240bps QoQ, guiding better rate realization. However, pyramid rationalization supported margin. Strategic T25 customers continued to lead growth, with 3.9% sequential growth, even in a quarter with lower working days. Revenue per development employee too rose 2.7% QoQ, which supported KPIT’s pricing power with clients.

Valuation: Revise to Accumulate; new TP at INR 1,560

All in all, KPIT further strengthened its footing, with USD growth in a furlough-led quarter, expansion in margin and TCV, robust cashbook, and N-Dream acquisition. This with continuous headcount addition further boosts confidence towards demand environment for KPIT’s services. We factor in Q3 and up our FY25E-26E EPS by 2.6% to +4.4%. KPIT’s rich valuation already factors in most positive triggers. The stock is trading at rich valuation of 38x FY26E EPS. We revise KPIT to Accumulate from Buy with a raised TP of INR 1,560 from INR 1,480 on 41x FY26E P/E (four-year P/E average + 1SD). Key risk is slowdown in automotive R&D and Software Defined Vehicle growth.

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