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Near term headwinds, recovery hinges on H2 execution

KPIT’s revenue declined 3.6% QoQ CC, marginally better than our estimate of 4.1% decline; however, profitability disappointed materially, with EBIT margin at 12.3% (vs. our estimate of 14.4%) due to missing operating leverage and continued investments in products & solutions. Deal wins were steady, with TCV of US$257mn led by connected, autonomous and after-sales engagements, although revenue conversion continues to be impacted by prolonged customer decision-making and weakness across European OEMs. Management reiterated its expectation of an H2FY27 recovery (largely towards Q4), aided by cost reduction programs across European OEMs, leveraging adjacencies through off-highways and scaling to newer geographies (JKC and SIMA). However, the revenue impact from the completion of a large European OEM program, which was initially expected in Q1FY27, has now shifted to Q2FY27. While management expects this headwind is Europe dominated and can be offset against growth within US and APAC regions. Further, Qorix losses widened sequentially due to deferred customer programs that are expected to remain a drag over the next 1-2 quarters, although management expects to recoup the revenue losses sooner than later. Margin recovery will largely be a function of revenue growth, which is unlikely to materialize in the immediate near term. Accordingly, we revise our FY27E/FY28E CC revenue growth estimates to -0.6%/5.6% (from 0.7%/9.2%) and lower our EBIT margin estimates to 12.3%/14.0% (from 14.8%/15.7%). We assign a P/E multiple of 18x (earlier 20x) to FY28E EPS to arrive at a revised target price of INR 460 (earlier INR 580). With strategic programs increasingly unwinding and fewer opportunities available to fill the resulting gaps, growth is likely to remain challenging in the near to medium term. Hence, downgrade to SELL (earlier HOLD).

Revenue:

KPIT reported revenue of USD 176.8 mn, with 3.6% QoQ CC decline and 4.3% QoQ USD decline, ahead of our 4.1% QoQ CC decline estimate. The CV segment declined 12.2% QoQ on account of a high Q4 base, while the PV segment declined 2.4% QoQ (4thcconsecutive qtr. decline). Geography wise, America & Europe region reported growth of 10.5% & 1.2% QoQ respectively while JKC & SIMA regions declined by 25% & 41.1% QoQ respectively.

Margin:

EBITDA margin declined by 360 bps QoQ to 17.2%, compared to our estimate of 19.3% due to revenue contraction, certain provisions created for acquisitions, forex impact, & subcontracting costs incurred in European regions for clients. EBIT margin came at 12.3%, down 360 bps QoQ compared to our estimate of 14.4%

Deal Wins:

KPIT reported healthy deal wins, with TCV of USD 257 mn, down 28.4% QoQ but up 6.6% YoY, in line with historic trend. Deal wins were mainly driven by connected cars, sales transformation and autonomous deals.

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