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Near-term Headwinds Persist; Diversification Strategy Hedges OEMs Risk

Q1FY27 was better than management's initial expectations but remained soft, with continued weakness for couple of large automotive clients, weighing on revenue growth and margin. However, KPIT's diversification strategy across clients, geographies, mobility segments and AI-led products is increasingly demonstrating resilience, reducing dependence on traditional passenger vehicle programs. Encouraging traction across AI-defined mobility, vehicle engineering, digital cockpit, autonomous technologies and after-sales solutions, together with a healthy Products & Solutions pipeline and USD 257 Mn of deal wins, reinforces our confidence in a stronger H2FY27. We believe KPIT remains wellpositioned to benefit from the shift towards software-defined vehicles, supported by expanding wallet share, new client addition and growing AIled product adoption. Thus, we revise our rating to ADD with a TP of INR 740 (valuing at 20x FY28 EPS), as we continue to view the current weakness as cyclical rather than structural.

Revenue & Margin In-line; PAT Misses on Forex Loss

* Reported Revenue for Q1FY27 stood at USD 176.8 Mn, down 4.3% QoQ and flat YoY (vs CIE est. of USD 176.0 Mn). In CC terms, revenues de-grew by 3.6% QoQ. In INR terms, revenue stood at INR 16,750 Mn, down 2.1% QoQ

* EBITDA for Q1FY27 came in at INR 2,878 Mn, down 18.5% QoQ (vs CIE est. of INR 2,884 Mn). EBITDAM was down 350 bps QoQ at 17.2% (vs CIE est. of 17.4%)

* PAT for Q1FY27 came in at INR 1,164 Mn, down 28.6% QoQ and 32.3% YoY (vs CIE est. of INR 1,558 Mn) due to FX headwinds

Soft Quarter; Order Momentum Remains Healthy

KPIT reported a soft Q1FY27, owing to continued weakness at a few large automotive clients. Healthy growth in the US geography and strength across Aftermarket and Vehicle Engineering & Design partially offset the slowdown in European Passenger Car OEMs, which continue to face pressure from tariffs, Chinese competition and cost rationalisation. The company closed worth USD 257 Mn of new engagements in Q1, while Products & Solutions continued to witness healthy traction across AI-defined mobility, digital cockpit, autonomous technologies and after-sales. Management remains confident of a stronger H2FY27, supported by new client additions across Passenger Cars, Trucks, Offhighway vehicles and expanding wallet share across existing customers. We expect growth to improve gradually from H2FY27 as deal ramp-ups accelerate and client diversification offsets weakness of few large accounts

Margin Bottoming Out; AI-led Productivity to Drive Recovery

EBITDAM remained under pressure in Q1FY27 due to lower revenue growth. PAT was also impacted by a INR 140 Mn share of loss from Qorix, primarily due to revenue postponement. Management anticipates margin to improve sequentially from Q2 onwards, supported by revenue recovery, a richer services mix and AI-led productivity initiatives. Continued investments in Beacon-powered products and solutions, combined with improving operating leverage, are projected to support gradual margin expansion over the coming quarters. We forecast margin recovery to gather pace through H2FY27 as revenues normalise, AI productivity benefits scale up and higher-value product-led engagements contribute a larger share of the revenue mix.

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