KPIT Technologies Ltd - Express Idea

India Infoline News Service | Mumbai |

KPIT, scope is substantial for earning much higher than existing margin.

CMP Rs165, Target Rs181, Upside 9.7%

Large deal wins pointing towards improving revenue growth

Recent large deal wins have enhanced revenue visibility especially in SAP SBU that has been going through a rough patch. Of the four large deals closed by KPIT in Q2/Q3 FY14, two deals worth US$20mn+ each were in SAP business. Execution on these deals (to start soon) and general revival in discretionary spend should improve growth and profitability of this SBU. Other SBUs such as IES and BTU are witnessing impressive growth in revenues; 29% and 17% respectively in H1 FY14. Having done a good job at mining the Top clients (excluding Cummins), KPIT is working on the next set of important clients. Though we expect H2 revenue growth to be much better than H1 (13.5% v/s 6.5%), it would still fall short of the requirement for meeting the annual growth guidance. Company expects revenue growth to be better in FY15.


Material margin improvement likely in FY15 

For KPIT, scope is substantial for earning much higher than existing margin. Currently SAP SBU is Ebidta negative but growth recovery from Q4 FY14 will ensure reasonable turnaround in FY15 and this alone could be the biggest swing factor for overall profitability. Company’s utilization is also low at 73% and can improve to 76-78% in the medium term. Further, with lower-rate hedges expiring by Q4 FY14, the company would receive benefits of current market rates and this should reflect positively on the margin. Revenue mix is expected to move offshore gradually after having witnessed a substantial onsite shift. Post Q3 FY14, we see a reasonable possibility of margin improving by 170-200bps over the ensuing five quarters. 


To deliver 26% earnings CAGR over FY13-15; valuation cheap

Though KPIT may revise its annual revenue growth guidance downwards, it should comfortably exceed earnings guidance for FY14. In FY15 also, earnings growth would be strong supported by margin expansion and much lower forex losses. We estimate FY13-15 earnings CAGR at robust 26%, above the average growth for our sector coverage. Cheap valuation at 10x FY15 P/E (15% discount to our Mid-cap IT average) is largely discounting the possibility of revenue slippage and an elongated margin improvement cycle.


Financial summary
Y/e 31 Mar (Rs m)
FY12
FY13
FY14E
FY15E
Revenues
15,000
22,386
27,793
32,379
yoy growth (%)
49.0
49.2
24.2
16.5
Operating profit
2,171
3,641
4,389
5,308
OPM (%)
14.5
16.3
15.8
16.4
Reported PAT
1,453
1,990
2,530
3,147
yoy growth (%)
53.3
36.9
27.1
24.4

 
 
 
 
EPS (Rs)
8.2
10.4
13.1
16.3
P/E (x)
20.2
15.8
12.6
10.1
Price/Book (x)
4.1
3.0
2.4
2.0
EV/EBITDA (x)
13.9
9.0
7.4
5.9
RoE (%)
20.6
22.9
21.3
21.3
RoCE (%)
22.4
25.6
23.3
23.8
Source: Company, India Infoline Research
BSE 171.40 5.70 (3.44%)
NSE 172.40 5.65 (3.39%)

***Note: This is a NSE Chart

 

Advertisements

  • Save upto Rs.2.67 lakh with Pradhan Mantri Awas Yojana ...Know more
  • Now Save Rs.3150 on your Demat Account ...Click here
  • Now get IIFL Personal Loan in just 8* hours...APPLY NOW!
  • Get the most detailed result analysis on the web - Real Fast!
  • Actionable & Award-Winning Research on 500 Listed Indian Companies.