KPIT Technologies (2QFY19): PES driven growth. Maintain BUY
(TP Rs 285, CMP Rs 211, MCap Rs 42bn)
KPIT Tech (KPIT) posted in-line revenue (PES, Digital and Product led growth), profitability beat (business-mix, utilisation). Revenue came at USD 152.5mn, 1.3/7.4% QoQ/YoY. EBITDA% stood at 13.6%, +147bps QoQ and margins expected to improve ahead with lower G&A. Revenue guidance of 8 to 10% YoY maintained (9.7% YoY in 1HFY18), while EBITDA margin guidance raised to 14% (ex-transaction expense) vs. 11.5 to 12.5% earlier. KPIT-Birlasoft merger-demerger transaction is expected to be completed in three months with NCLT approval pending. We value KPIT-Birlasoft combined at Rs. 285/share, with PES valued at Rs 150/share (20x FY20E) and KPIT-Birlasoft ITS at Rs 135/share (12x FY20E).
Synergies in KPIT’s IT services with Birlasoft include (1) Service portfolio (high ADM in Birlasoft), (2) Vertical addition (BFSI), (3) Geographical presence (higher Europe presence in Birlasoft), and (4) Limited client overlap between KPIT ITS and Birlasoft. Also, there is limited client overlap between KPIT’s ITS and its PES division (2-3% client overlap), de-risking the demerger further. PES growth driven by spends in automotive (OEM and tier-1) in areas of Autonomous, Electrification, In-vehicle network, Diagnostics. Expect rev/EPS CAGR at 8/22% over FY18-21E factoring USD rev growth at 8.2/7.4/7.9% and EBITDA% at 13.2/13.1/13.1% for FY19/20/21E, respectively. Maintain BUY with TP of Rs 285, 13x Sep-20E EPS.
Highlights of the quarter
- Management expects PES to grow at 25-30% YoY in FY19E and >20% over medium term. PES’ EBITDA margin at company average ~14% and management expects margin potential of 18% over 2-3 years. Wage hike impacted margin (-220bps QoQ) in 2Q, offset by INR depreciation (+120bps) and business-mix and efficiency (+250bps).
- Near-term outlook: 3Q expected to be soft with deceleration in PES and muted IES/SAP performance, expected to recover in 4Q.