KPIT 2QFY16 Outlook Review

KPIT Technologies Ltd CMP

Rs.138

Target

Rs.144

Rating

REDUCE

SRIVATHSAN RAMACHANDRAN, CFA [email protected] +91 44 4344 0039

AISHWARIYA KPL [email protected] +91 44 4344 0040 Find Spark Research on Bloomberg (SPAK <go>),

Thomson First Call, Reuters Knowledge and Factset

How does our one year outlook change?

KPIT’s 2QFY16 US$ revenues were better than expected led by growth

in SAP SBU & Engineering services. Top client grew 5.4% qoq after

three quarters of decline. IES came in weak this quarter & is expected

to be tepid in H2FY16E as well. We believe Engineering services

growth would come in better in the coming quarters led by increased

traction in Global Auto PES space. However, we would still be cautious

about SAP revival given the strong structural issues in that SBU and

would wait out for at least two quarters of sustainable growth. It is too

early to believe that the restructuring efforts have been successful.

With ~40% of revenues earned from SAP and Oracle implementation

KPIT would continue to run the risk of losing revenues from on premise

implementation. Recent efforts of monetarising platforms and SAP

HANA implementation are in the right direction, but are too small, to

mitigate revenue loss.

KPIT margins would improve significantly yoy led by restructuring

efforts but would not reach the FY14 levels. We are modelling EBITDA

margins of 13.1% & 13.4% in FY16E & FY17E respectively.

The management has taken commendable efforts to plug in revenue

loss. However, given the structural issues in On premise

implementation and KPIT’s portfolio, Revenue growth would continue to

be tepid. Retain Reduce with TP of Rs.144.

Financial summary

Year Revenues

(Rs. mn)

EBITDA

(Rs. mn) EPS (Rs.) P/E (x) EV/EBITDA(x) ROE (%)

FY15P 29,899 3,244 11.9 11.6 8.4 11.9

FY16E 31,429 4,120 13.0 10.7 6.5 13.0

FY17E 32,123 4,306 13.2 10.5 6.2 13.2

FY18E 35,024 4,903 15.9 8.7 4.9 15.9

FY19E 38,841 5,630 19.2 7.2 3.8 19.2

Key estimate revision

FY16E FY17E

Old New Change Old New Change

US$ Revenues 481 492 2.4% 518 535 3.4%

USD/INR rate 61 64 4.6% 58 60 3.4%

INR Revenues 29,344 31,429 7.1% 30,040 32,123 6.9%

EBITDA 3,287 4,120 25.3% 3,759 4,306 14.5%

Margin % 11.2% 13.1% 12.5% 13.4%

EPS 9.9 13.0 30.6% 11.9 13.2 10.9%

All figures in Rs. mn, except EPS, which is in Rs.

How does our 3 year Outlook change?

KPIT Auto SBU, investments in platforms, products and cloud

implementation & newer offerings such as PLM, BTU and RIM would

determine its revenue growth. Growth expansion in these areas would

be crucial to fill the revenue loss in Enterprise Application services.

KPIT’s metrics are below peers in aspects such as offshore, margins

and cash generation. We believe focussed efforts to improve these

metrics would determine multiple re rating.

KPIT has option value due to Revolo. Multiple press articles indicate

Government is keen in promoting adoption of hybrid technology and

has conducted new trails. If the required regulatory changes are

brought in, Revolo would open a new horizon of opportunities.

27 July, 2015

Bloomberg KPIT IN

Shares o/s 197mn

Market Cap Rs. 27bn

52-wk High-Low Rs. 233-85

3m Avg. Daily Vol Rs. 158mn

Index -

2QFY16 Update

Promoters 22.3

Institutions 35.7

Public 42.0

% 1m 3m 12m

KPIT 25 21 -18

Sensex 6 -3 2

CNXIT -3 1 8

Rating: ◄► Target price: ▲ EPS: ▲


Rs.138

Target

Rs.144

Rating

REDUCE

Rs. mn\Period Sep-15 Sep-14 yoy Growth Jun-15 qoq Growth FY15P FY16E yoy Growth

Revenues (US$) $ 125 $ 125 -0.3% $ 118 5.3% $ 489 $ 492 0.8%

Revenues 8,123 7,574 7.2% 7,583 7.1% 29,899 31,429 5.1%

Cost of raw materials 40 291 -86.3% 53 -25.1% 852 219 -74.3%

Employee costs 4,846 4,134 17.2% 4,768 1.6% 17,420 18,986

Sub contracting costs 919 1,070 -14.2% 944 -2.7% 4,125 3,711

Others 1,186 1,075 10.3% 1,097 8.1% 4,259 4,394 3.2%

Total operating expenses 20,877 38,300 -45.5% 5,744 263.4% 26,656 27,310 2.5%

EBITDA 1,132 1,003 12.9% 721 57.1% 3,244 4,120 27.0%

Depreciation 167 245 164 2.1% 851 731 -14.1%

EBIT 965 759 27.2% 557 73.3% 2,392 3,389 41.7%

Int. & finance expense 44 33 34.7% 47 -6.5% 260 172 -33.6%

Other income 86 42 105.2% 106 -18.7% 352 342 -2.9%

PBT 1,007.2 768.0 31.1% 615.7 63.6% 2,484.2 3,557.8 43.2%

Minority int. - - - - -

Expectional items 0 0 0 0 0

Tax 256.3 62.5 171.5 114.8 969.6

PAT 751 706 6.4% 444 69.1% 2,369 2,588 9.2%

Diluted EPS 3.8 3.5 6.8% 2.2 69.4% 11.9 13.0 9.2%

EBITDA Margin 13.9% 13.2% 9.5% 10.8% 13.1%

Cash & cash equivalents 4,264 4,267 -0.1% 3,387 25.9% 4,228 3,438 -1.5%

Quarterly financial results

Quarterly financial statements


Rs.138

Target

Rs.144

Rating

REDUCE Financial Summary

Rs.mn. FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E

Profit & Loss Cash flows

Revenues 29,899 31,429 32,123 35,024 Cash from operating 2,894 1,828 3,840 3,778

Employee costs 17,420 18,986 19,469 20,988 Cash from investing -1,120 -1,146 -649 -328

Sub contracting costs 4,125 3,711 3,694 4,114 Cash from financing -403 -1,224 -935 -965

Other expenses 5,155 8,051 7,997 8,612 Free cash flow 791 340 2,860 2,978

EBITDA 3,244 4,120 4,306 4,903 Key ratios (%)

Depreciation and amortisation 851 731 836 826 Revenue grow th 11.0% 5.1% 2.2% 9.0%

EBIT 2,392 3,389 3,469 4,076 EBITDA grow th -22.5% 27.0% 4.5% 13.9%

Interest costs 260 172 144 128 PAT Grow th -4.8% 9.2% 1.7% 20.9%

Other income 352 342 331 472 EBITDA margin 10.8% 13.1% 13.4% 14.0%

PBT 2,484 3,558 3,657 4,421 EBIT margin 8.0% 10.8% 10.8% 11.6%

Minority int. 0 0 0 0 PAT margins 7.9% 8.2% 8.2% 9.1%

Tax 115 970 1,024 1,238 ROE 18.4% 18.3% 16.0% 16.8%

PAT 2,369 2,588 2,633 3,183 ROCE 21.7% 19.8% 18.1% 18.1%

EPS - Diluted 11.9 13.0 13.2 15.9 Valuation metrics

Balance Sheet Shares o/s (mn) 190.9 190.9 191.1 191.1

Share capital 376 374 374 374 Fully diluted shares (mn) 199.8 199.8 199.7 199.7

Total shareholder's equity 12,961 15,331 17,573 20,318 Market cap (Rs. mn) 26,351 26,351 26,366 26,366

Long term borrow ings 780 311 111 -89 EV (Rs.mn) 27,092 26,580 26,679 24,023

Other liabilities 423 500 500 500 EV/Sales (x) 0.9 0.8 0.8 0.7

Total liabilities 14,165 16,142 18,183 20,729 EV/EBITDA (x) 8.4 6.5 6.2 4.9

Fixed assets 2,328 2,833 2,797 2,770 P/E (x) 11.6 10.7 10.5 8.7

Other long term assets 7,224 7,907 8,087 8,087 EPS(E) / Current market price 0.1 0.1 0.1 0.1

Cash 3,638 2,803 5,059 7,544 Per share data (Rs.)

Total current assets 13,149 12,626 15,095 17,866 Book value 64.9 76.7 88.0 101.7

Short term borrow ings 3,677 3,440 3,240 3,040 Cash 21.2 17.2 28.5 41.0

Total current liabilities 8,536 7,225 7,796 7,994 Operating cash flow 14.5 9.2 19.2 18.9

Total Assets 14,165 16,142 18,183 20,729 Free cash flow 4.0 1.7 14.3 14.9

Financial summary


Rs.138

Target

Rs.144

Rating

REDUCE Spark Disclaimer

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Absolute Rating Interpretation

BUY Stock expected to provide positive returns of >15% over a 1-year horizon

ADD Stock expected to provide positive returns of >5% – <15% over a 1-year horizon

REDUCE Stock expected to provide returns of <5% – -10% over a 1-year horizon

SELL Stock expected to fall >10% over a 1-year horizon

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Rs.

Price Target

KPIT – 3 Year Price and Rating History Report Date Price Target Reco.

24/Jul/15 112 110 Reduce

11/Jun/15 104 120 Reduce

30/Apr/15 124 125 Reduce

23/Mar/15 191 190 Reduce

23/Jan/15 212 200 Reduce

24/Nov/14 171 160 Reduce

27/Oct/14 168 160 Reduce

07/Oct/14 162 180 Reduce

19/Aug/14 153 155 Reduce

24/Jul/14 155 155 Reduce

01/Jul/14 172 170 Reduce


Rs.138

Target

Rs.144

Rating

REDUCE Disclaimer (Cont’d)

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KPIT 2QFY16 Outlook Review

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