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.

Download Full Report from HDFC Securities

Share post with: