KPIT Technologies Strong beat, Visible signs of turnaround; Retain ‘BUY’ October 21, 2014 Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report Q2FY15 Result Update Shashi Bhusan [email protected]+91‐22‐66322300 Hussain Kagzi [email protected]+91‐22‐66322242 Rating BUY Price Rs155 Target Price Rs220 Implied Upside 41.9% Sensex 26,576 Nifty 7,928 (Prices as on October 21, 2014) Trading data Market Cap. (Rs bn) 29.8 Shares o/s (m) 192.9 3M Avg. Daily value (Rs m) 234.2 Major shareholders Promoters 22.22% Foreign 45.81% Domestic Inst. 8.02% Public & Other 23.95% Stock Performance (%) 1M 6M 12M Absolute (9.0) (9.4) 6.8 Relative (7.1) (26.2) (20.4) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2015 13.9 13.9 0.0 2016 17.3 16.7 3.4 Price Performance (RIC: KPIT.BO, BB: KPIT IN) Source: Bloomberg 0 50 100 150 200 Oct‐13 Dec‐13 Feb‐14 Apr‐14 Jun‐ 14 Aug‐ 14 Oct‐14 (Rs) KPIT Technologies’ (KPIT’s) Q2FY15 results were a strong beat to PLe/Consensus expectations on all the operating parameters. In line with our expectation (Refer our note: “Autonomous roadmap for growth”, September 18, 2014), KPIT reported strongest QoQ growth in the company’s history in Automotive. We see visible signs of turnaround in fundamentals along with cash generation. We retain ‘BUY’ with a revised TP of Rs220 (Old: Rs200) as we tweak our model for stronger growth. Strong operational performance: Revenue grew by 8.5% QoQ (Organic: ~6.3% QoQ) to US$125m (PLe: US$121m, Cons.: US$120.4m), whereas in INR terms, revenue grew by 9.8% QoQ to Rs7,574m (PLe: Rs7,319m, Cons: Rs7,281m). EBITDA margins expanded by 128bps QoQ to 13.3% (PLe: 13.4%, Cons: 13.7%) due to currency depreciation (30bps), offshore drive and utilization improvement. EPS grew by 38% QoQ to Rs3.52 (PLe: Rs3.08, Cons: Rs3.12), due to lower tax (Q2FY15: 8%, Q1FY15: 30%) as US jurisdiction approved revised tax. Revenue guidance achievable: We expect revenue momentum to sustain in H2FY15 adjusted for seasonality. We are factoring in 13% YoY growth for FY15 in USD terms in‐line with their guidance of 12‐14% YoY. (Exhibit: 2, 3, 4). Management expects strong growth momentum in H2FY15 despite seasonality. We see limited concern due to miss at bottom‐line guidance by ~10% for FY15 as visible signs of operational improvement will be reflected in FY16. Autonomous growth: In‐line with our expectation, KPIT reported the strongest ever growth in Automotive vertical. Management sees strong return of spending in ‘A&E SBU’. We expect continued strength in Automotive vertical. Continued improvement in SAP profitability and FCF: SAP SBU reported 8.2% QoQ growth in Q2FY15 with mid‐single digit margin. Management expects exit operating margin in double digit. Moreover, KPIT continues to show improving FCF generation. (Exhibit: 5) Valuation and Recommendation – BUY, revise TP of Rs220: We expect revenue momentum to get better as project ramp‐up accelerates. Moreover, higher offshoring, absorption of cost and improved profitability in SAP SBU would result in accelerated earnings momentum. We revise TP to Rs220 (from Rs200), 12x (from 11x) FY16E earnings estimate, as earnings visibility improves. Key financials (Y/e March) 2013 2014 2015E 2016E Revenues (Rs m) 22,386 26,940 30,377 34,444 Growth (%) 49.2 20.3 12.8 13.4 EBITDA (Rs m) 3,655 4,233 4,188 5,120 PAT (Rs m) 1,991 2,490 2,686 3,332 EPS (Rs) 10.3 12.9 13.9 17.3 Growth (%) 26.4 25.0 7.9 24.1 Net DPS (Rs) 0.8 1.8 2.2 2.4 Profitability & Valuation 2013 2014 2015E 2016E EBITDA margin (%) 16.3 15.7 13.8 14.9 RoE (%) 22.8 21.5 19.3 20.2 RoCE (%) 20.9 20.2 18.2 18.9 EV / sales (x) 1.3 1.1 1.0 0.8 EV / EBITDA (x) 8.1 7.0 7.0 5.3 PE (x) 15.0 12.0 11.1 9.0 P / BV (x) 2.9 2.3 2.0 1.7 Net dividend yield (%) 0.5 1.2 1.4 1.5 Source: Company Data; PL Research
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KPIT Technologies
Strong beat, Visible signs of turnaround; Retain ‘BUY’
October 21, 2014
Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.
Please refer to important disclosures and disclaimers at the end of the report
KPIT Technologies’ (KPIT’s) Q2FY15 results were a strong beat to PLe/Consensus expectations on all the operating parameters. In line with our expectation (Refer our note: “Autonomous roadmap for growth”, September 18, 2014), KPIT reported strongest QoQ growth in the company’s history in Automotive. We see visible signs of turnaround in fundamentals along with cash generation. We retain ‘BUY’ with a revised TP of Rs220 (Old: Rs200) as we tweak our model for stronger growth.
Strong operational performance: Revenue grew by 8.5% QoQ (Organic: ~6.3% QoQ) to US$125m (PLe: US$121m, Cons.: US$120.4m), whereas in INR terms, revenue grew by 9.8% QoQ to Rs7,574m (PLe: Rs7,319m, Cons: Rs7,281m). EBITDA margins expanded by 128bps QoQ to 13.3% (PLe: 13.4%, Cons: 13.7%) due to currency depreciation (30bps), offshore drive and utilization improvement. EPS grew by 38% QoQ to Rs3.52 (PLe: Rs3.08, Cons: Rs3.12), due to lower tax (Q2FY15: 8%, Q1FY15: 30%) as US jurisdiction approved revised tax.
Revenue guidance achievable: We expect revenue momentum to sustain in H2FY15 adjusted for seasonality. We are factoring in 13% YoY growth for FY15 in USD terms in‐line with their guidance of 12‐14% YoY. (Exhibit: 2, 3, 4). Management expects strong growth momentum in H2FY15 despite seasonality. We see limited concern due to miss at bottom‐line guidance by ~10% for FY15 as visible signs of operational improvement will be reflected in FY16.
Autonomous growth: In‐line with our expectation, KPIT reported the strongest ever growth in Automotive vertical. Management sees strong return of spending in ‘A&E SBU’. We expect continued strength in Automotive vertical.
Continued improvement in SAP profitability and FCF: SAP SBU reported 8.2% QoQ growth in Q2FY15 with mid‐single digit margin. Management expects exit operating margin in double digit. Moreover, KPIT continues to show improving FCF generation. (Exhibit: 5)
Valuation and Recommendation – BUY, revise TP of Rs220: We expect revenue momentum to get better as project ramp‐up accelerates. Moreover, higher offshoring, absorption of cost and improved profitability in SAP SBU would result in accelerated earnings momentum. We revise TP to Rs220 (from Rs200), 12x (from 11x) FY16E earnings estimate, as earnings visibility improves.
Key financials (Y/e March) 2013 2014 2015E 2016E
Revenues (Rs m) 22,386 26,940 30,377 34,444
Growth (%) 49.2 20.3 12.8 13.4
EBITDA (Rs m) 3,655 4,233 4,188 5,120
PAT (Rs m) 1,991 2,490 2,686 3,332
EPS (Rs) 10.3 12.9 13.9 17.3
Growth (%) 26.4 25.0 7.9 24.1
Net DPS (Rs) 0.8 1.8 2.2 2.4
Profitability & Valuation 2013 2014 2015E 2016E
EBITDA margin (%) 16.3 15.7 13.8 14.9
RoE (%) 22.8 21.5 19.3 20.2
RoCE (%) 20.9 20.2 18.2 18.9
EV / sales (x) 1.3 1.1 1.0 0.8
EV / EBITDA (x) 8.1 7.0 7.0 5.3
PE (x) 15.0 12.0 11.1 9.0
P / BV (x) 2.9 2.3 2.0 1.7
Net dividend yield (%) 0.5 1.2 1.4 1.5
Source: Company Data; PL Research
October 21, 2014 2
KPIT Technologies
Exhibit 1: Strong beat to expectation
Y/e March (in Rs m) Q2FY15 Q1FY15 QoQ gr. Q2FY14 YoY gr. Cons. PLe Var Ple
3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India
Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209
Rating Distribution of Research Coverage
31.7%
50.0%
18.3%
0.0%0%
10%
20%
30%
40%
50%
60%
BUY Accumulate Reduce Sell
% of Total Coverage
PL’s Recommendation Nomenclature
BUY : Over 15% Outperformance to Sensex over 12‐months Accumulate : Outperformance to Sensex over 12‐months
Reduce : Underperformance to Sensex over 12‐months Sell : Over 15% underperformance to Sensex over 12‐months
Trading Buy : Over 10% absolute upside in 1‐month Trading Sell : Over 10% absolute decline in 1‐month
Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly
This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as
information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be
considered or taken as an offer to sell or a solicitation to buy or sell any security.
The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy
or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information,
statements and opinion given, made available or expressed herein or for any omission therein.
Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The
suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an
independent expert/advisor.
Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or
engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication.
We may from time to time solicit or perform investment banking or other services for any company mentioned in this document.
KPIT Technologies
Autonomous roadmap for growth, Retain “BUY”
September 18, 2014
Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in i ts research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.
Please refer to important disclosures and disclaimers at the end of the report
We evaluated KPIT’s service offerings and strength to dig deeper into our hypothesis. KPIT offers exposure to a highly attractive, rapidly expanding market (Automotive Electronics, Manufacturing and Energy & Utility), alongside an ability to capitalise as a low-cost disruptor with compelling technology like ‘Revolo’. KPIT has one of the strongest industry positioning profiles in the Automotive Segments. Retain “BUY”.
Core drivers of growth – Strength in Automotive sector to drive surprises: We expect strong end-market growth of AUTOSAR, Infotainment, Vision Systems and Powertrain driven by new car ratings regimes. We believe KPIT’s technological superiority will retain its dominant share in the automotive vertical. We expect the mix to shift towards higher-end functionality, leading to higher realization driving mid-20s revenue growth in the segment.
Return in discretionary and renewed strategy to drive SAP and IES momentum: SAP and IES (Oracle) SBU struggle are likely to grow over the last six quarters due to technology reset, weaker maintenance revenue, cost overrun and slow decision making. We see the concerns waning in FY15 as the management sees improved deal pipeline, deal closures and deal ramp-ups.
Account mining – Increasing focus on top 50 acccounts: Management has increased their focus on mining top-50 clients. KPIT has hired ~35 account managers to mine top-50 accounts and is in the processs of ramping it up. We expect this focus on account mining and restructuring of account management by verticals to drive stronger revenue growth.
Risks to the investment case: Risks to our view include (1) Weakening discretionary spend (2) In-house R&D for Automotive (3) Investment needs (4) Worsening DSOs and (5) Risk associated with inorganic ventures.
Valuation and Recommendation – BUY with TP of Rs200: We forecast top-line growth of 14% in FY14-16, while KPIT’s asset-light model should allow EBITDA margin expansion over FY14-16 from 12.1% to 15.6% and a net income CAGR of 16%. We maintain “BUY” with 27% upside from the current market price.
Key financials (Y/e March) 2013 2014 2015E 2016E
Revenues (Rs m) 22,386 26,940 29,606 33,547
Growth (%) 49.2 20.3 9.9 13.3
EBITDA (Rs m) 3,655 4,233 4,137 5,220
PAT (Rs m) 1,991 2,490 2,620 3,312
EPS (Rs) 10.3 13.4 14.1 17.9
Growth (%) 26.4 30.0 5.2 26.4
Net DPS (Rs) 0.8 1.9 2.2 2.5
Profitability & Valuation 2013 2014 2015E 2016E
EBITDA margin (%) 16.3 15.7 14.0 15.6
RoE (%) 22.8 21.5 18.9 20.2
RoCE (%) 20.9 20.2 17.8 18.9
EV / sales (x) 1.3 1.1 1.0 0.8
EV / EBITDA (x) 8.3 6.8 7.0 5.2
PE (x) 15.3 11.8 11.2 8.9
P / BV (x) 2.9 2.3 2.0 1.6
Net dividend yield (%) 0.5 1.2 1.4 1.6
Source: Company Data; PL Research
September 18, 2014 2
KPIT Technologies
Exhibit 1: Services and Vertical Metrics of KPIT
Source: Company Data, PL Research
Exhibit 2: KPIT Competencies – Strength in Auto Vertical
In Auto Vertical In Manufacturing Vertical In Energy & Utility Vertical
3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India
Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209
Rating Distribution of Research Coverage
34.5%
49.1%
16.4%
0.0%0%
10%
20%
30%
40%
50%
60%
BUY Accumulate Reduce Sell
% o
f To
tal C
ove
rage
PL’s Recommendation Nomenclature
BUY : Over 15% Outperformance to Sensex over 12-months Accumulate : Outperformance to Sensex over 12-months
Reduce : Underperformance to Sensex over 12-months Sell : Over 15% underperformance to Sensex over 12-months
Trading Buy : Over 10% absolute upside in 1-month Trading Sell : Over 10% absolute decline in 1-month
Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly
This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as
information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be
considered or taken as an offer to sell or a solicitation to buy or sell any security.
The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy
or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information,
statements and opinion given, made available or expressed herein or for any omission therein.
Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The
suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an
independent expert/advisor.
Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or
engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication.
We may from time to time solicit or perform investment banking or other services for any company mentioned in this document.