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Asia geography to drive growth

KPIT Technologies reported robust Q2FY25 revenues at $173mn, up 4.7% QoQ and 20.1% YoY in constant currency. Growth was led by Asia geography and Passenger cars. In USD terms, reported revenue was up 4.8% QoQ and 19.1% YoY. INR revenue for Q2FY25 stood at INR14,714mn, up 7.8% sequentially and 22.7% YoY. The company closed deals of TCV $207mn during the quarter representing healthy pipeline across practices. PAT for the quarter came in at INR2,037mn (+44.0% YoY) led by one-time gain. EPS for the quarter stood at INR7.51

* Growth areas: Sequential CC growth was led by Powertrain and Middleware domains and Asia geography, particularly Japan, Korea and India. The current overall environment in the USA presents both opportunities and challenges. Notably, two key opportunities are emerging. First, with the ban on Chinese software, there is potential for the company to provide software and integration solutions to U.S. agents. Second, the off-highway and commercial vehicle sectors are identified as areas of growth. In Europe, many OEMs are currently experiencing financial challenges, leading to an anticipated market consolidation. This consolidation is expected to be advantageous for the company, leveraging its competencies, relationships, and scale. Additionally, there are growth opportunities in the offhighway vehicle and truck sectors. In Asia, especially in Japan, Korea, and India, there are substantial growth prospects. While some OEMs are encountering difficulties, it is acknowledged that these struggling companies may look for consolidation and partnership opportunities to bolster their capabilities. Furthermore, the company's strong relationships with existing clients continue to create avenues for growth. The pressure is particularly acute in Europe, as many OEMs are heavily reliant on large sales in China, which are now compromised. Additionally, the European economy is facing challenges. In contrast, U.S. OEMs benefit from a 100% tariff, which reduces competition from China, although they still face pressure from other global players. In the passenger car market, there is indeed pressure as companies strive to optimize vehicle costs, creating significant opportunities for the organization. On the off-highway side, management expects commercial vehicles and truck segment to grow in FY26E.

* Outlook on mobility industry: The Mobility Industry, specifically the Automotive sub vertical, has been under pressure to keep up with the changing regulations, reduce cost of vehicles and meet demands of the ever-changing consumer preferences in recent times. It continues to prioritize investments in technology and markets ahead of demand to help its T25 clients stay on the cutting edge of technology and competitiveness. In anticipation of changes in the Mobility Industry, it has doubled down efforts to help our T25 clients reduce the cost of their vehicles and cut the time to market in the areas of software and system integration.

* Improving margin profile: EBITDA margins came in at healthy 20.5% (in-line with guidance) for the quarter, up 50bps YoY after absorbing increments and additional ESOP costs. The management has raised its comfortable EBITDA margin guidance to 20.8% in FY25E, mainly due to productivity improvement and fixed cost leverage.

Valuation: KPIT retains its cc growth guidance for FY25E to 18-22% expecting it to be on a lower side due to postponement and off-shoring of opportunities. We have introduced FY27E and expect Revenue/EBITDA/PAT to grow at a CAGR of 21.5%/25.4%/28.3% respectively over FY24-FY27E. We maintain our BUY rating to arrive at a revised target price of INR1,731 implying a P/E of 48x on Sep-FY27E EPS of INR42.

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