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A bumpy ride ahead Near-term margin pressure to keep recovery under stress

* KPIT Technologies (KPIT) reported revenue of USD177m in 1QFY27, a decline of 3.6% QoQ in CC terms vs. our estimate of 0.8% decline. Both the passenger car/commercial vehicle segments declined 2.4%/12.2% QoQ. EBIT margin was 12.3% (down 360bp QoQ), below our estimate of 16%. Adj. PAT was down 28.5% QoQ/32.3% YoY to INR1,164m (below our est. of INR2,201m).

* For 1QFY27, revenue grew 8.9% while EBIT/adj. PAT declined 21.4%/32.3% YoY in INR terms. We expect revenue/adj. PAT to grow 3.2%/6.2% while EBIT is likely to decline 14.4% YoY in 2QFY27. We factor in the near-term impact of OEM weakness, loss from Qorix, delay in deal closures, and volatility in the global supply chain. We reiterate our BUY rating with a revised TP of INR730, based on 22x FY28E EPS (earlier 25x).

Valuations and changes to our estimates

* We believe KPIT will continue to see near-term weakness as it is grappling with global pressure in the automotive industry, along with geography and client-specific weakness. Near-term demand uncertainty will weigh negatively on the business, leading to weakness in margins and profitability.

* Factoring in the near-term impact of OEM weakness, loss from Qorix, delay in deal closures, and volatility in the global supply chain, we cut our EPS estimates by 23%/15% for FY27/FY28. We reiterate our BUY rating with a revised TP of INR730, based on 22x FY28E EPS (earlier 25x).

Revenue in line, but miss on margins; deal TCV down 26.4% QoQ

* USD revenue came in at USD177m; decline of 3.6% QoQ in CC terms vs. our estimate of a 0.8% decline.

* Both the passenger car/commercial vehicle segments fell 2.4%/12.2% QoQ.

* In terms of geographies, the US was up 10.5% QoQ, while Europe remained flat in USD terms. JKC/SIMA were down 25%/41.1% QoQ.

* EBIT margin was 12.3% (down 370bp QoQ), below our estimate of 16%.

* Deal TCV stood at USD257m, down 26.4% QoQ.

* Adj. PAT was down 28.5% QoQ/32.3% YoY to INR1,164m (below our est. of INR2,201m).

* DSO at the end of 1QFY27 stood at 51 days.

* The net headcount was down 1.7% QoQ to 12,303 in 1QFY27.

Valuation and view

* We believe KPIT will continue to see near-term weakness as it is grappling with global pressure in the automotive industry, along with geography and client-specific weakness. Near-term demand uncertainty will weigh negatively on the business, leading to weakness in margins and profitability.

* Factoring in the near-term impact of OEM weakness, loss from Qorix, delay in deal closures, and volatility in the global supply chain, we cut our EPS estimates by 23%/15% for FY27/FY28. We reiterate our BUY rating with a revised TP of INR730, based on 22x FY28E EPS (earlier 25x)

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