BUY KPIT Technologies - AnandRathi Institutional Research

Supernormal recovery; retaining a Buy, with a target of Rs. 190

As our thesis on KPIT Technologies plays out and as the company recovers faster than anticipated from its Q4 FY15 low, we believe that sufficient scope exists for a better performance and for earnings multiples to significantly expand. We now value the company at 11x FY17e EPS of Rs. 17 to derive our new target price of Rs. 190.

Revenue at $125m (up 5.3% qoq, 0% yoy). This is impressive given the H1 FY16 focus on margins, not growth. Growth in the quarter came from two service lines. Auto engineering grew 11% qoq (32% rev. contribution); SAP grew 10% qoq (22% rev. contribution). The third service line (IES) was flat qoq, possibly due to Cummins. In H2 FY16, with margins in place, the company is now focusing on revenue growth and cash generation (DSO).

EBITDA margin (13.9%) recovers sharply, up 444bps qoq, 70bps yoy. For KPIT this quarter turned out to be good on all counts. Management efforts to correct the employee pyramid (net reduction of 321 employees in the last six months, gross addition of 585 fresh graduates) bore fruit. Utilisation inched up 350bps qoq, to 073.1%, aided by revenue growth. Currency depreciated 1.7% qoq, helping offset the impact of wage hikes (200-225bps gross). The company believes this is a sustainable margin range, with some potential in FY17.

FY16/17 business outlook, upbeat. After its big miss in Q4 FY15, KPIT stopped "giving guidance". In terms of business outlook, it expects flattish to marginal growth in the seasonally weak Q3, with growth resuming in Q4. In FY17, it aims to touch industry growth again. On margins, Q3 would be flattish, but management expects 100-150bps improvement in Q4 due to operating leverage.

Valuation. The stock trades at 8.1x our FY17 estimates. We reckon it should comfortably trade at 11x FY17e, a 40% discount to Mindtree and 21% to Wipro. Risk. Lack of persistent execution.

Shares of KPIT Technologies Limited was last trading in BSE at Rs.134.85 as compared to the previous close of Rs. 123.35. The total number of shares traded during the day was 1212710 in over 14902 trades.

The stock hit an intraday high of Rs. 144.65 and intraday low of 133.1. The net turnover during the day was Rs. 167912969.

Source : Equity Bulls

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