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Investment in new growth engines and geographies to drive growth

KPIT Technologies reported robust Q1FY25 revenues at $165mn, up 4.7% QoQ and 24.8% YoY in constant currency. In USD terms, reported revenue was up 3.8% QoQ and 23.2% YoY. INR revenue for Q1FY25 stood at INR13,646mn, up 3.6% sequentially and 24.3% YoY. The company closed deals of TCV $202mn during the quarter representing healthy pipeline across practices. PAT for the quarter came in at INR2,042mn (+51.2% YoY) led by one-time other income. EPS for the quarter stood at INR7.53.

* Investment and focus areas:

Sequential CC growth was led by Middleware and Powertrain domains and Asia geography. Company formally launched EcoVoyage 2030 to reduce carbon footprint in its operations and infrastructure and is also a key area focus for its clients. Other growth engine identified by the company is adjacencies, which is into truck and off-highway segment. Many global OEMs are looking at USA to increase their spending where KPIT shall play a huge role and hence, USA geography shall see growth in coming quarters. Company is also strengthening its presence in China where it is getting unique products and technologies to Chinese OEMs. Company is investing in and launching formal leadership development programs for next 12-18 months to focus on multiple initiatives at the same time. On AI side, it has taken various concrete steps to improve productivity as an organization, in software development life cycle and to create differentiated offerings for its clients to bring efficiency. OEMS are looking forward to create lifelong relationships with end customers with want to provide immersive digital experiences and increase their business efficiencies along with increase in scope of collaboration with new partners. It continues to see traction in its T-25 clients as technology investments and meaningful engagements are happening with few clients while 86.5% of the revenues coming from real strategic clients. Management has retained its guidance of 18-22% cc growth for FY25E.

* Improving margin profile:

Operating margins came in at healthy 17.3% for the quarter, up 188bps YoY. EBITDA margins for the quarter expanded to 21.1%, up ~160bps YoY in-line with the guidance. The management has retained its comfortable EBITDA margin guidance of 20.5%+ in FY25E. The board has approved an ESOP scheme for employees and the ESOP cost and other incentive costs would be around INR1bn in FY25E and the guided margin is after considering all these costs.

* Net addition remains positive:

As of Q1FY25, employee headcount stood at 13,253. Sequential employee net addition came in at 397 employees (+3.1% QoQ). The attrition rate is at all-time low at high single digit at an industry level. KPIT continues to invest heavily into training and development of freshers and is the only company to create an individual development plan across the organization. The management aims to improve utilization rates hereon, thereby aiding profitability and boosting the revenue per development employee.

Valuation:

KPIT expects creation of meaningful growth opportunities via investments in differentiated offerings and adjacencies and continue with the growth momentum, paving way for a fair demand visibility in the medium term. We maintain our BUY rating and arrive at a revised target price of INR1,980 implying a P/E of 50x on FY26E EPS of INR40.

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