KPIT 2QFY16 Result Update - 151026

ANTIQUE STOCK BROKING L IMITED 26 October 2015 ||||| 1FROM THE RESEARCH DESK

Quarterly financialsINRm 2QFY16 1QFY16 QoQ(%) 2QFY15 YoY(%)

Revenue (USDm) 125 118 5.3 125 -0.3

Revenue 8,123 7,583 7.1 7,574 7.2

EBITDA 1,132 721 57.1 1,010 12.1

EBIT 965 557 73.3 766 26.0

Recurring PAT 751 444 69.1 706 6.3

EPS (INR) 3.8 2.2 69.4 3.67 2.3

Margins 2QFY16 1QFY16 QoQ (bps) 2QFY15 YoY (bps)

Gross profit 31.3 28.0 328 29.7 154

EBITDA 13.9 9.5 444 13.3 60

EBIT 11.9 7.3 454 10.1 177

PAT 9.2 5.9 339 9.3 -8

Source: Company, Antique

2QFY16 RESULT REVIEW

KPIT Technologies LimitedStellar quarter; Margin improvement to continueKPIT Technologies' (KPIT) reported a robust 5.3% QoQ USD revenue growth,ahead of consensus and our estimate of 3%. EBITDA margin expanded awhopping 440bps QoQ to 13.9%, way ahead of our estimate of 9.6%. Keypositives from the result are: i) Continued traction in SAP SBU, 22% of revenue(9.5% QoQ growth on the back of 17.4% growth in 1Q), ii) Top client growing5% QoQ after three consecutive quarters of decline, and iii) Stability in theIES SBU, with a positive outlook for ensuing quarters. The company expectsEBITDA margin trajectory to improve from here on, riding initiatives likepyramid rationalisation, offshoring and decline in attrition among others.

Given the beat on the margin front, anticipated margin expansion andrevision of USD:INR to 66 from 64 earlier, we revise our FY17 EPS by 10%and have factored in 10.7% USD revenue growth versus 9.4% earlier. Thestock is up 20% in the last three months and current valuations of 9.7x mid-FY18e EPS factors in positives, based on our revised target price of INR140per share (now based on mid-FY18 P/E vs FY17 earlier). Hence, we maintainour Hold rating on the stock.

Growth driven by key segments

The quarter under review saw significant traction in key segments of SAP SBU and productengineering (49% of revenues), growing over 9% each, while after two quarters of declineIES posted flat growth. Automotive and energy and utilities grew 5.8% and 19.8% QoQ,respectively. Europe and RoW grew over 14% each, while USA grew 1.2% QoQ. Top clienttoo made a comeback with 5% QoQ growth after three quarters of sequential decline. Whilethe management expects 3QFY16 to be flattish, given the seasonal impact of furloughs andlower working days, it expects growth to bounceback in 4Q riding the healthy demandenvironment in SAP and IES SBUs.

Margin accretion to continue in 2H

Post the 4QFY15 debacle, where EBITDA margin tanked to 4.5% due to a client-specificissue, the company has seen margin returning to 3QFY15 levels of 13.9%. To achieve this,the management has embarked on an optimisation drive like right sizing the pyramid throughhigher fresher hiring (585 freshers added in 1HFY16) and improving utilisation. With growthreturning, these measures have yielded positive results. The management expects margin toimprove in 2HFY16 as well, led by fresher intake, offshoring and other operational initiatives.While the 1HFY16 performance is encouraging, the company will have to follow it withconsistent performance in coming quarters for re-rating in valuations from here on.

Current Reco : HOLDPrevious Reco : HOLDCMP : INR135Target Price : INR140Potential Return : 4%

Market dataSensex : 27,471Sector : ITMarket Cap (INRbn) : 26.6Market Cap (USDbn) : 0.409O/S Shares (m) : 197.252-wk HI/LO (INR) : 233/85Avg Daily Vol ('000) : 732Bloomberg : KPIT IN

Returns (%)1m 3m 6m 12m

Absolute 23 20 (12) (19)Relative 15 25 (11) (21)Source: Company, Antique

Shareholding patternPromoters : 22%FII : 30%DII : 6%Others : 42%Source: Bloomberg

ValuationFY16e FY17e FY18e

EPS (INR) 12.3 13.4 14.4P/E (x) 11.0 10.1 9.4P/BV (x) 1.7 1.5 1.3EV/EBITDA (x) 6.4 5.1 4.5Dividend yield (%) 0.7 0.8 0.9

Source: Bloomberg

Price performance vs Nifty

Source: Bloomberg, Indexed to 100

Source: Bloomberg

Omkar Hadkar+91 22 4031 [email protected]

Srinivas Seshadri+91 22 4031 [email protected]

40

80

120

160

Oct-14 Feb-15 Jun-15 Oct-15

KPIT NIFTY


SAP SBU growth continues IES revenue continues to lag

Source: Company, Antique Source: Company, Antique

Top client grows after declining for the previous three quarters Utilisation uptick continues, see still scope for an improvement

Source: Company, Antique Source: Company, Antique

(3.4)

8.74.5

(27.9)

17.4

9.5

(35)

(30)

(25)

(20)

(15)

(10)

(5)

0

5

10

15

20

1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16

Revenue grow th QoQ

4.6

2.02.9

(4.0)

(1.6)

(0.1)

-5.0-4.0-3.0

-2.0-1.00.01.02.03.0

4.05.06.0

1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16

IES revenues

78%

76%77%

76%

74%75%

73%

70%

73%

68%

74%74%

77%77%

65%

67%

69%

71%

73%

75%

77%

79%

1QF

Y13

2QF

Y13

3QF

Y13

4QF

Y13

1QF

Y14

2QF

Y14

3QF

Y14

4QF

Y14

1QF

Y15

2QF

Y15

3QF

Y15

4QF

Y15

1QF

Y16

2QF

Y16

Blended

4%

1%

6%

-10%

4%2%

-1% -1%

-8%

5%

15

16

17

18

19

20

1QF

Y14

2QF

Y14

3QF

Y14

4QF

Y14

1QF

Y15

2QF

Y15

3QF

Y15

4QF

Y15

1QF

Y16

2QF

Y16

-12%-10%-8%-6%-4%-2%0%2%4%6%8%

Revenues from top client (USDm) QoQ grow th (%) - RHS


FinancialsProfit and loss account (INRm)Year-ended March 31 FY14 FY15 FY16e FY17e FY18eRevenues 26,940 29,899 32,223 36,308 39,997

Software development expenses 18,180 21,473 22,491 25,260 28,029

Gross profit 8,761 8,426 9,731 11,048 11,968

Expenses 4,528 5,155 5,657 6,172 6,799

EBIDTA 4,233 3,271 4,075 4,876 5,168

Depreciation 540 851 761 1,089 1,200

EBIT 3,694 2,420 3,314 3,787 3,968

Other income -74 345 357 401 451

Interest expense 287 279 363 523 484

Profit before tax 3,333 2,486 3,308 3,666 3,935

Taxes including deferred taxation 941 115 849 990 1,063

Extra ordinary items & others -98 0 0 0 0

Profit after tax 2,294 2,371 2,459 2,676 2,873

Recurring EPS 12.4 11.9 12.3 13.4 14.4

Balance sheet (INRm)Year-ended March 31 FY14 FY15 FY16e FY17e FY18eShare capital 386 384 384 384 384

Reserves & surplus 12,365 12,578 15,036 17,712 20,585

Net worth 12,751 12,961 15,420 18,096 20,969

Debt 4,390 4,457 6,088 5,698 5,214

Deferred tax liability & others 234 423 463 503 543

Capital employed 17,375 17,842 21,972 24,297 26,726

Gross fixed assets 5,179 6,109 7,309 8,609 9,809

Accumulated depreciation 3,041 3,901 4,662 5,751 6,951

Net assets 2,138 2,208 2,647 2,858 2,858

Capital work in progress & others 1,087 2,031 2,231 2,431 2,631

Investments 1,859 815 881 947 1,047

Goodwill 5,994 5,088 5,088 5,088 5,088

Current assets, loans & adv. 10,156 12,559 15,989 18,035 20,433

Inventory 34 229 229 229 229

Debtors 7,373 7,952 8,742 9,776 10,986

Cash & bank balances 1,908 3,638 6,078 6,890 7,877

Loans & advances and others 841 740 940 1,140 1,340

Current liabilities & prov. 3,859 4,859 4,865 5,062 5,331

Creditors 1,021 1,308 1,264 1,411 1,336

Other liabilities & provisions 2,839 3,551 3,601 3,651 3,995

Net current assets 6,297 7,700 11,124 12,973 15,101

Application of funds 17,375 17,842 21,972 24,297 26,726

Per share dataYear-ended March 31 FY14 FY15 FY16e FY17e FY18eNo. of shares (m) 192 200 200 200 200

BVPS (INR) 66.3 64.9 77.2 90.6 105.0

CEPS (INR) 19.6 22.3 34.9 39.3 44.7

DPS (INR) 1.1 0.9 1.0 1.1 1.2

Margins (%)Year-ended March 31 FY14 FY15 FY16e FY17e FY18eEBIDTA 15.7 10.9 12.6 13.4 12.9

EBIT 13.7 8.1 10.3 10.4 9.9

PAT 8.5 7.9 7.6 7.4 7.2

Source: Company, Antique

Cash flow statement (INRm)Year-ended March 31 FY14 FY15 FY16e FY17e FY18ePBT 3,430 2,485 3,308 3,666 3,935

Depreciation & amortisation 540 851 761 1,089 1,200

Interest expense 182 165 363 523 484

Interest/dividend received (158) (97) (357) (401) (451)

Other adjustments 57 (98) - - -

(Inc)/dec in working capital (1,730) 365 (1,144) (1,196) (1,302)

Tax paid (1,291) (777) (849) (990) (1,063)

CF from operating activities 1,030 2,894 2,082 2,690 2,804

Capital expenditure (689) (913) (1,200) (1,300) (1,200)

(Purchase)/sale of Investments (1,374) (304) (66) (66) (100)

Income from investments 155 97 357 401 451

CF from investing activities (1,908) (1,120) (909) (965) (849)

Inc/(dec) in share capital 75 141 - - -

Inc/(dec) in debt 1,047 (103) 1,631 (390) (484)

Dividends & interest paid (376) (412) (363) (523) (484)

Others 118 196 - - -

CF from financing activities 865 (177) 1,268 (913) (968)

Net cash flow (13) 1,597 2,441 812 987

Opening balance 1,921 1,811 3,637 6,078 6,890

Closing balance 1,908 3,407 6,078 6,890 7,877

Growth indicators (%)Year-ended March 31 FY14 FY15 FY16e FY17e FY18eRevenue 20.3 11.0 7.8 12.7 10.2

EBITDA 15.8 -22.7 24.6 19.7 6.0

PAT 15.3 3.4 3.7 8.8 7.4

EPS 17.1 -4.5 3.7 8.8 7.4

Valuation (x)Year-ended March 31 FY14 FY15 FY16e FY17e FY18eP/E 10.9 11.4 11.0 10.1 9.4

P/BV 2.0 2.1 1.7 1.5 1.3

EV/EBITDA 6.3 8.2 6.4 5.1 4.5

EV/Sales 1.0 0.9 0.8 0.7 0.6

Dividend Yield (%) 0.8 0.7 0.7 0.8 0.9

Financial ratiosYear-ended March 31 FY14 FY15 FY16e FY17e FY18eRoE (%) 18.0 18.3 15.9 14.8 13.7

RoCE (%) 21.3 13.6 15.1 15.6 14.8

Debt/Equity (x) 0.3 0.3 0.4 0.3 0.2

EBIT/Interest (x) 12.9 8.7 9.1 7.2 8.2

Source: Company Antique

Antique Stock Broking Limited20th Floor, A Wing, Naman MidtownSenapati Bapat Marg, Elphinstone (West)Mumbai 400013Tel. : +91 22 4031 3444 • Fax : +91 22 4031 3445www.antiquelimited.com

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KPIT 2QFY16 Result Update - 151026

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