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Unexpected beat, broader challenges continue

KPIT delivered a surprising Q2FY27 performance ahead of our estimates, with rev. growing 0.5% QoQ CC (PLe of a 0.9% decline) and EBIT margin at 12.7% (PLe of 11.7%). Growth was driven by strong traction in Trucks & Off highway, which grew 17.6% QoQ and 27% YoY, and the product business, which grew by 5% QoQ and 25% YoY, offsetting continued weakness in passenger vehicles. Deal wins were relatively weak with TCV of US$ 213mn across connected, autonomous, powertrain, vehicle engineering and after-sales engagements; however, conversion into revenue remains gradual amid elongated customer decision-making and continued cost pressure on European OEMs. Management expects H2FY27 to be better than H1, with the two large accounts likely to bottom out over the next couple of quarters, while corresponding efforts to drive Off-highways and Trucks should support revenue growth. Qorix losses increased sequentially to INR 156mn (from INR140mn in Q1) as OEMs pushed nextgeneration programs from 2028 to 2029–30, delaying revenue from its core middleware product. Management expects Qorix losses to reduce from Q3 while exploring adjacent opportunities and other products to bridge the delay. Management expects sequential margin improvement & aspire to return to the 20–21% EBITDA margin range by FY28E. Accordingly, we revise our FY27E CC revenue growth estimate to +0.5% (from a 0.6% decline), while maintaining FY28E/FY29E estimates at 5.6%/8.3%. We also raise our EBIT margin estimates to 12.8%/14.7%/15.4% for FY27E/FY28E/FY29E, respectively, from 12.4%/14.5%/15.2%, passing on the Q2 beat. We assign a P/E multiple of 18x to Sept. 28E EPS to arrive at a TP of INR 520 (earlier INR 470). Key segment remains under stress, while growth consistency from new avenues is yet to be validated. Maintain our REDUCE rating.

Revenue:

KPIT reported revenue of USD 176.8 mn, up 0.5% QoQ CC flat in USD terms, ahead of our 0.9% QoQ CC decline estimate. The CV segment improved 17.6% QoQ after a weak Q1, while the PV segment declined 4.1% QoQ (5 thcconsecutive qtr. decline). Geography wise, America, JKC region & SIMA region reported growth of 15.7%, 10.7% & 27.6% QoQ respectively while Europe region reported decline of 15.2% QoQ.

Margin:

EBITDA margin improved by 50 bps QoQ to 17.7%, compared to our estimate of 16.7% aided by operational efficiencies & revenue mix. EBIT margin came at 12.7%, up 40 bps QoQ compared to our estimate of 11.7%.

Deal Wins:

KPIT reported soft deal wins, with TCV of USD 213 mn, down 17.1% QoQ & 8.2% YoY. Deal wins were mainly driven by autonomy, connected cars, and iDART, with ~89% wins being in active pipeline.

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