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Long term positive outlook... 

KPIT Technologies Ltd., a digital transformation consulting  & software integration company, provides cutting edge engineering solutions to more than 150 companies & enterprises in the field of CASE mobility.  

• Q1FY25 revenue came in at 30% YoY, driven by middleware architecture consulting and software integration  from the top  strategic clients.  

• EBITDA margin improved by 102bps driven by strong volume growth and favourable currency mix. We expect the margin to  stabilize at 20-21% owing to investments in technology & talent.

• The growth in the mobility & autonomous space is a priority for customers and KPIT continues to hold strong domain expertise by adding more capabilities through JV and acquisition.  

• We expect revenue and PAT CAGR  to grow by  26% and 40%  over FY24-FY26E respectively, on the back of deal wins, pricing benefits and expansion.

• We value KPIT at 55x FY26E EPS and maintain Buy rating at CMP. 

Strong player in the high entry barrier segment 

Q1FY25 revenue grew by 24% YoY and 3.6% QoQ. (Sequentially, 4.7% constant currency). The company reported dollar revenue of 3.7% QoQ (23.1% YoY), led by Middleware architecture consulting and software integration  from the top  strategic accounts. Segment wise passenger vehicles grew by 5.2% QoQ, contributing largely by Asia and Europe. Both the region grew by 13.2% and 3.3% respectively. While CV marginally grew by 0.4% QoQ. EBITDA margin expanded by 102bps YoY owing to strong volume growth and favourable currency mix. PAT grew by 52.4% YoY due to increase in other income. The company added a  TCV (Total contract value) of $202M. In addition, the yearly growth outlook was revised to 24% through organic growth and overall growth to +33%, with a margin estimate of 19 to 20% range. However, it needs to win one mega deal every year to maintain the sustainability of 20%+ growth, which needs to be watched given the valuation burden

Readiness to meet the needs of the EV- clients 

The company derives most of its revenue from the Passenger vehicle segment through its innovative technology, long-term relationships with T25 clients throughout the product cycle. Automotive manufacturers are prioritising investment in new-age technologies and partnering with reliable partners. The company is also focussing on the US market to expand its capability in the commercial vehicle segment. Currently the segment contributes 16.8% respectively. Hence, the KPIT has engaged with ZF to form a 50-50 JV to establish Qorix GmbH to facilitate middleware  architecture for commercial vehicles KPIT is at the forefront of these due to its strong domain expertise, integrity, problemsolving skills, and reliability for outsourcing. Despite weak global macros, engineering spend by OEMs has gone up by 10%, especially in the CASE (Connected Autonomous Shared and Electric) area, where it has gone up by ~20%. Over the years, the company has invested heavily in technologies to maintain its leadership position in this area and improved the deal size from $50 to $200 million. The company is well positioned to increase its focus on electric vehicles, especially in the US and Europe, with a top client concentration of T25 globally. 

Margin to remain resilient.

KPIT has improved its margin in FY24 and currently it is at 20.3% with an expansion of 150bps. This trend is likely to stabilize and continue for a sustainable period. 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.

Valuation 

Despite the industry becoming more cautious about spending, KPIT has not seen any deal rollover from its top clients in the near term. However, it is expected that the growth will be reasonable for H2 due to the offshore shift. Given the strong deal win and superior execution capability, we value KPIT  at 55x FY26E with a target price of Rs.2,216 and recommend Buy rating. 

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SEBI Registration Number: INH200000345