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January 31, 2015

Edelweiss on KPIT

KPIT Technologies Ltd (KPIT IN, INR 214, Buy)

KPIT Technologies Ltd.’s (KPIT) Q3FY15 revenue at USD 126.6mn (up 1.2% QoQ) was in line with our estimate, led by volume growth of 2.3% QoQ. EBITDA margins improved 58bps QoQ to 13.9% led by improvement in SAP SBUs margins. Growth during the quarter was driven by IES and SAP SBUs, which grew by 2.9% and 4.5% QoQ while Auto Engineering SBUs de-grew by 1.8% QoQ, respectively. The company sees improved order pipeline driving growth in FY16 in both Enterprise IT and Auto Engineering segments. Outlook continues to be healthy for revenue growth, while margins too are expected to expand going forward. Declining EBITDA margins, (a key concern earlier) for the company is expected to be addressed from here on as SAP margins have bottomed out. Sustaining the current revenue momentum and cost initiatives will drive the improvement in EBITDA margins. We maintain our ‘BUY’ rating.
 
Revenue traction improving, performance driven by IES & SAP
KPIT reported Q3FY15 revenue of USD 126.6mn, up 1.2% QoQ, led by volume growth of 2.3% QoQ (Onsite volume growth of 1.6% and Offshore volume growth of 2.5%). In INR terms, the revenue came in at INR 780cr, up 3% QoQ. EBITDA margins increased by 58bps QoQ to 13.9%, mainly due to improvement in SAP SBU margins during the quarter. SAP SBU margins continue to improve sequentially with the SBU reporting ~8% margins vs 5% Q2. The PAT came in at INR 65cr, down 7% QoQ, negatively impacted by higher tax rate during the quarter. KPIT witnessed good traction in IES and SAP SBUs grew by 2.9% QoQ and 4.5% QoQ, respectively while Auto Engg SBU, de-grew by 1.8% QoQ.  During Q3FY15, the top client Cummins de-grew by 1.1% QoQ.
 
To achieve lower end of FY15 guidance; Outlook positive
KPIT has reiterated its positive tone and expects to achieve lower end of FY15 guidance of USD revenues of USD 498-506m, implying growth of 4% QoQ for Q4. KPIT has won deals worth USD 40mn TCV deals during the quarter, which it expects to ramp-up in the coming quarters. We expect the company to be a key beneficiary of an uptick in discretionary spending. KPIT has restructured its SAP SBU towards growth oriented sectors and expects uptick in margins and revenues going forward.
 
Revenue growth and SAP SBU transformation to spur operating margin
KPIT’s EBITDA margin improved by 58bps QoQ to 13.9% led by improvement in SAP SBUs margins (8% in Q3 vs 5% in Q2). The company’s front-end investments, increased SG&A spends, one-off provisions and lower utilisation led to decline in overall margins in FY15.  We believe that margins have bottomed out and strong revenue growth itself will drive improvement from here onwards. Additionally, factors such as fresher additions, utilization improvement in SAP SBU, offshore work shift and stricter cost management could lead to overall margin improvement. We expect EBITDA margins to improve by 150bps by FY16E to 15% levels.
 
Outlook and valuations: Maintain BUY
We believe that KPIT, with a stable demand outlook and improving margin profile is likely to witness strong earnings growth in the coming quarters. At CMP of INR 214, the stock trades at P/E of 11.3x and EV/EBITDA of 4.3x FY17E. We maintain Buy rating on the stock.
Financials
Year to December
Q315
 Q215
Growth %
Q314
Growth %
FY15E
 FY16E
 FY17E
Revenue
780
757
3.0
678
15.0
3,008
3,292
3,675
EBITDA
106
101
4.4
104
1.3
399
506
578
Net profit
62
71
(11.8)
61
2.6
230.5
321.5
351.2
Diluted EPS (INR)
3.4
3.7
(7.5)
3.3
4.2
12.4
17.3
18.9
Diluted P/E (x)
17.2
12.3
11.3
EV/EBITDA (x)
 
 
 
 
 
7.1
5.4
4.3
EV / Revenue (x)
 
 
 
 
 
0.9
0.8
0.7

Regards,




EdelInvest Fundamental

Dir: +91 (22) 4088 6033
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