KPITTechnologies-Sunidh-280715

Sunidhi Research | 1

KPIT Technologies

Subdued revenue performance, margin improvement a surprise, Buy

KPIT’s Q1FY16 performance was disappointing on revenue front. Revenue at US$1118.4mn was down 3.3% QoQ, below our estimates of flat revenue growth QoQ. Revenue miss was largely on account of substantial decline in Products & Platform services due to the cyclical nature of ITS and other software products revenue. EBITDA margin for the quarter improved 510bps QoQ at 9.5% due to absence of one-time cost provision and tighter control on lateral hiring. PAT declined 11.7% QoQ at `444mn, due to absence of tax revision done in the last quarter. We maintain our rating to “Buy” with our Price Target at `165, at 10xFY17E earnings (from `155 at 10xFY17E earnings).

IT Service revenue growth healthy 3.4%: During the quarter, IT services registered strong growth of 3.4% QoQ on the back of robust growth in SAP and Enterprise solutions. SAP, where KPIT faced some challenges in last quarter, registered a growth of 17.0% QoQ. Products and Platform revenue declined 61% QoQ due to cyclical nature of the ITS business and other software products revenue.

EBITDA margin improvement better than estimates: EBITDA margin improved 510bps QoQ at 9.5% from 4.4% in last quarter, driven by employee pyramid rationalization, more freshers inducted during the quarter and higher utilization. Adjusting the one-off cost over-run in last quarter, margin improved 110bps QoQ. Though the margin performance was better than estimates, we do not expect KPIT to return to its normalized margin range of 14%-15% in near future given the organization restructuring in the form of 1) delivery excellence, 2) qualitative growth and 3) investments for future growth. For Q2, it will feel margin pressure due to wage hike (~200bps) which will be partly off-set by increase in fresher hiring and other operational efficiencies.

US grew 4.5% QoQ despite sluggish performance in Cummins account: US reported strong growth of 4.5% QoQ after decline of 7.3% QoQ in last quarter. Cummins, the largest customer, declined 8.2% QoQ. This is the third consecutive decline in Cummins revenue on the back of 0.8% and 1.1% QoQ decline in Q4 and Q3 respectively.

Outlook and Valuation: Q1 performance for KPIT was below our estimates on revenue front while 510bps QoQ improvement in margin came in as a surprise. Out of the four focus areas of profitability improvement, people development, predictability and growth, it delivered on profitability improvement in this quarter while the rest three areas will take couple of quarter to show the result. With the organization restructuring under way, we believe FY16 to be the year of transition. We lower our FY16E/FY17E revenue forecast by 7.8%/5.7% respectively while raise our EPS growth forecast by 7.0%/8.0% respectively. We maintain our “Buy” rating with our Target Price at `165 implying 10xFY17E earnings (earlier `155 on 10xFY17E earnings).

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Stock Recommendation Buy

CMP (`) 114

Price Target (`) 165

Upside (%) 47%

Earlier Call Buy

52 Week H / L ` 233/85

BSE 30 28112

Key Data

No. of Shares, Mn. 196.9

Mcap, ` Bn 22.4

Mcap,USD Bn @ `63 0.4

2 W Avg Qty (BSE+NSE) Mn 1.8

Share holding, Jun'15

Promoters 21.7

FII 29.2

DII 7.7

Public & Others 41.4

Performance 1 M 3 M 6 M 12 M

Stock Return % 14.6 -21.6 -48.0 -28.2

Relative Return % 12.7 -24.2 -44.4 -37.0

Shyamal Dhruve [email protected]

Phone: +91-022-61131366

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KPIT Technologies NIFTY

IT services Sector Outlook - Neutral

July 27, 2015

Financials Revenues EBIDTA Net Profit EPS P/E EV/EBIDTA ROE

` mn ` mn ` mn ` x x %

FY13 22,386 3,650 2,095 11.3 10.1 5.8 19.4

FY14 26,940 4,233 2,391 13.7 8.3 5.3 18.7

FY15 29,899 3,271 2,385 12.7 9.0 6.7 18.4

FY16E 31,677 3,496 2,256 12.0 9.5 6.4 15.5

FY17E 36,527 4,710 3,132 16.6 6.8 4.4 17.9

Source: Company, Sunidhi Research

KPIT Technologies


Q1FY16 Result Review Q1FY16 quarterly details

` mn 1Q16 4Q15 1Q15 QoQ YoY Comments

Revenues 7,583 7,630 6,897 (0.6) 9.9

Q1FY16 revenue at US$118.4mn was down 3.3% QoQ. Cummins declined 8.2% QoQ, while Top 10 Clients registered de-growth of 1.8%.

- Operating costs 6,862 7,296 6,070 (5.9) 13.1

EBITDA 721 334 827 115.6 (12.8)

EBITDA margin (%) 9.5 4.4 12.0 512bps (249)bps

Operating margin improved 510bps QoQ mainly on account of absence of one-off cost provision.

- Interest expense 47 140 42 (66.2) 11.9 - Depreciation 164 225 162 (27.3) 0.9

+ Other income, net (incl forex)

106 177 108 (40.0) 1.6

PBT 616 146 730 322.1 (15.7) - Taxes 172 (357) 222 NA (22.8) Effective tax rate (%) 27.9 (244.9) 30.4 NA (256)bps

PAT 444 503 508 (11.7) (12.6) - Minority interests - - - NA NA Consolidated PAT 444 503 508 (11.7) (12.6) Net margin (%) 5.9 6.6 7.4 (74)bps (151)bps

EPS (`) 2.4 2.7 2.7 (11.8) (13.5)


Revenue above estimates: KPIT reported USD revenue of $118.4mn, down 3.3% QoQ, below our estimates of flat revenue compared to last quarter. IT services revenue registered strong growth of 3.4% QoQ on the back of robust performance on SAP (+17.0% QoQ) and Enterprise solutions (+7.4% QoQ) front. In INR terms, revenues came in at `7,583mn, down 0.6% QoQ, lower than our estimates.

Revenue Trend


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Revenue ($ mln) QoQ Growth (%)

KPIT Technologies


Strong growth in US despite decline in Cummins account: North America, which generates ~70% of revenues for KPIT, reported strong growth of 4.5% QoQ despite sluggishness in Cummins account. Cummins declined 8.2% QoQ, third consecutive decline for it. Management indicated Cummins account to have bottomed-out and slight uptick in FY16. Europe declined 4.0% QoQ while APAC declined 29.5% QoQ mainly due to decline in ITS revenue. Amongst industry segments, Automotive & Transportation declined 13.0% QoQ while manufacturing grew 3.9% QoQ. Margin performance better than estimates: KPIT reported EBITDA margin increase of 510bps QoQ at 9.5%. The improvement in margin was on account of employee pyramid rationalization and higher utilization. For Q2, it will have ~200bps headwinds to margins which will be partially off-set by more freshers hiring, higher utilization and other operational efficiencies. Margin Profile


Employee reduction due to pyramid rationalization: To improve the profitability, it moved people internally to higher roles while controlling the lateral hiring. This resulted in reduction of 141 employees on net basis. It also hired more freshers (170 freshers) in the quarter. For Q2, managemnet plans to add 300+ employees.

Employee strength

Employees Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16

Development team - Onsite (avg) 1,176 1,243 1,274 1,366 1,423 1,456 1,494 1,534 1,564

Development team - Offshore (avg) 6,553 6,708 6,987 7,139 7,224 7,518 7,868 8,317 8,514

Onsite FTE 1,107 1,148 1,123 1,231 1,293 1,327 1,348 1,316 1,362

Offshore FTE 4,809 4,888 4,985 5,064 5,068 5,383 5,519 5,456 5,654

Development (at qtr end) 7,771 8,122 8,430 8,583 8,757 9,191 9,541 10,213 10,062

General (end of qtr) 545 548 554 558 568 572 575 586 585

Marketing (end of qtr) 140 146 152 155 165 170 175 181 192

Total (at qtr end) 8,456 8,816 9,136 9,296 9,490 9,933 10,291 10,980 10,839

Onsite Utilization 94.2 92.4 88.1 90.1 90.8 91.1 90.2 85.8 87.1

Offshore Utilization 73.4 72.9 71.3 70.9 70.2 71.6 70.2 65.6 66.4 Source: Company, Sunidhi Research

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EBITDA Margin (%) EBIT Margin (%)

KPIT Technologies


Client addition moderate: During the quarter, KPIT added 2 new clients, taking the total active client base to 210.

Client details

Client concentration Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16

Clients Added 6 3 3 3 3 2 3 2 2

Total active clients 189 192 195 198 201 203 206 208 210

Customers with a run rate of $1mn+ 78 78 78 80 83 84 87 90 87

Top customer - Cummins (%) 16.8 16.5 17.9 15.5 15.9 14.9 14.6 14.9 14.2

Top 5 Clients (%) 38.6 38.0 38.2 35.7 34.4 32.1 28.6 30.1 30.7

Top 10 Clients (%) 47.3 46.3 47.6 45.8 45.1 42.8 39.4 41.6 42.2 Source: Company, Sunidhi Research

SBU Performance Highlights:

A) Integrated Enterprise Solutions – down 2.5% QoQ, down 0.9% YoY

Seen significant success in winning new cloud deals and are building new solutions on cloud platform

Investing in strategic platforms, technologies and solution offerings like IoT, Social ERP, P2P automation etc

Intend to leverage its niche position in Product Lifecycle Management (PLM) by integrating strategic consulting, extended PLM and Product engineering service offerings

During the year, digital revenues in IES were ~5% of the total IES revenue

B) Product Engineering Services – up 1.8% QoQ, up 21.8% YoY

See healthy traction in its solutions in Advanced Driver Assistance Systems (ADAS) and also witnessing pull in areas such as diagnostics, lane departure features as well as V2X-V2V communication mainly from Indian customers

Focused on investment in incubation of new practice offerings and new practices and have initiated a new practice on Mechatronics, sensor optimization and IVHM

C) SAP – up 17.0% QoQ, down 4.5% YoY

Started work on a few deals, which were delayed during Q4FY15. With growing significance of cloud based technologies like SuccessFactors, CEC, Hybris, CPQ and other emerging technologies like HANA, Hadoop and IoT, also transforming its business mix from traditional ERP to these innovative solutions.

There is good growth momentum in the US geography. Continued winning deals in CRM, BI, SuccessFactors, S4/ HANA, Simple Finance, SAP Hybris and CPQ during the quarter.

With significant increase in M&A activity mainly in manufacturing sub-verticals, have been building solutions and accelerators designed for this industry, which have been adding value to our customers. Also working with other companies in various complementary technology areas such as Hybris/ CEC.

During the year, digital revenues in SAP were ~22% of the total SAP revenue

D) Enterprise Solutions – up 7.4% QoQ, down 5.6% YoY

There is an increase in demand for CRM solution implementations, Support and version upgrade. It is also witnessing increased adoption of Microsoft solutions by existing customers in Collaboration area - content and portal, integration and cloud. The traction is primarily growing in US and Canada region.

Continue to invest further in building solutions addressing Legacy Modernization needs of customer - e.g. Lotus Notes Applications migration to Microsoft SharePoint platform. We are also building Business Process Library covering key business areas (O2C, P2P & Customer Service) using BPMN compliant tools like ARIS and Provision.

During the year, digital revenues in ES were ~5% of the total ES revenue

KPIT Technologies


Geographical wise Performance

Geographical mix (%) Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 QoQ (%) YoY (%)

US 72.6 69.8 69.1 66.5 67.3 64.5 69.7 4.5 3.5

Europe 15.4 14.5 15.8 13.7 15.5 16.9 16.7 (4.0) 8.7

RoW 12.0 15.8 15.1 19.8 17.2 18.6 13.6 (29.5) (7.4)

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 (3.3) 2.7dd Source: Company, Sunidhi Research

Revenue split by Vertical

Revenue spread (%) Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 QoQ (%) YoY (%)

Automotive & Transportation 36.4 33.1 32.7 37.1 36.0 41.3 37.1 (13.0) 16.7

Manufacturing 38.9 39.2 40.9 31.6 32.8 33.3 35.8 3.9 (10.3)

Energy & Utilities 15.1 18.0 17.8 21.7 21.8 17.8 18.7 1.7 8.0

Others 9.7 9.7 8.6 9.6 9.5 7.7 8.4 6.3 0.3

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 (3.3) 2.7 Source: Company, Sunidhi Research

Revenue split by SBU

Revenue spread (%) Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 QoQ (%) YoY (%)

Integrated Enterprise Solutions 39.2 39.2 40.4 38.0 38.7 38.7 39.0 (2.5) (0.9)

Product Engineering Services 25.1 25.9 21.9 30.0 29.1 24.7 26.0 1.8 21.8

Products & Platforms 0.0 0.0 4.4 0.0 0.0 10.5 4.2 (60.9) (2.4)

SAP 23.8 23.7 22.6 22.6 23.3 17.4 21.0 17.0 (4.5)

Enterprise Solutions 11.9 11.2 10.7 9.4 8.9 8.8 9.8 7.4 (5.6)

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 (3.3) 2.7 Source: Company, Sunidhi Research

Revenue and Contract Type Split

Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16

Onsite/Offshore Split (%)

Onsite Revenue 54.2 54.6 52.8 54.3 57.2 51.1 53.5 52.4 55.3

Offshore Revenue 45.8 45.4 47.2 45.7 41.6 43.7 43.2 42.6 437

SI - - - - 1.3 5.3 3.3 5.0 1.0

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Revenue by Contract Type (%)

Time and Material Basis 76.9 76.4 75.6 72.9 71.6 65.1 62.9 63.7 72.9

Fixed Price / Time Basis 23.2 23.6 24.4 27.1 27.1 29.6 33.8 31.3 26.2

SI - - - - 1.3 5.3 3.3 5.0 1.0

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company, Sunidhi Research

Outlook and Valuation: After the muted performance in last quarter, KPIT delivered strong margin performance during the quarter while miss on revenue can be attributed to the organization restructuring. Out of the four focus areas of profitability improvement, people development, predictability and growth, it delivered on profitability improvement in this quarter while the rest three areas will take couple of quarter to show the result. With the organization restructuring under way, we believe FY16 to be the year of transition. We lower our FY16E/FY17E revenue forecast by 7.8%/5.7% respectively while raise our EPS growth forecast by 7.0%/12.8% respectively. Currently, stock is trading at 9.5xFY16E and 6.8xFY17E earnings. We maintain our “Buy” rating with our Target Price at `165 implying 10xFY17E earnings (earlier `155 on 10xFY17E earnings).

KPIT Technologies


Change in Estimates

FY16E FY17E

Old New %Chg Old New %Chg

Revenue (US$ mn) 543 501 (7.8) 615 580 (5.7)

Revenue (` mn) 33,936 31,677 (6.7) 38,432 36,527 (5.0)

EBITDA margin (%) 10.3 11.0 69bps 11.9 12.8 95bps

EPS (`) 11.2 12.0 7.0 15.4 16.6 8.0

`/Dollar Rate 62.5 63.3 -- 62.5 63.0 --


1 Year Forward PE


Peer Comparison Company CMP Rating Target

(`) Upside

(%) Adj EPS (`) P/E (x) USD Rev Growth

(%) RoAE (%)

FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E

MindTree 1269 Accumulate 1395 9.9 64.1 70.7 87.1 19.8 17.9 14.6 16.4 17.8 16.0 29.4 27.0 27.6

KPIT Tech 113 Buy 165 45.5 12.7 12.0 16.6 9.0 9.5 6.8 10.0 2.4 15.8 18.4 15.5 17.9

Hexaware 274 Sell 230 -16.1 10.7 13.4 15.8 25.7 20.5 17.4 8.9 14.8 16.5 25.7 29.5 31.2

NIIT Tech 480 Hold 465 -3.1 18.7 42.5 46.3 25.6 11.3 10.4 1.1 9.1 10.2 8.5 17.8 17.2


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KPIT Technologies


Valuations Summary Balance Sheet (` mn)

Year End-March FY13 FY14 FY15 FY16E FY17E Year End-March FY13 FY14 FY15 FY16E FY17E

Per share (`)

Equity Share Capital 386 371 376 376 376

EPS 11.3 13.7 12.7 12.0 16.6 Reserves & Surplus 9,977 12,380 12,585 14,719 17,564

CEPS 13.9 15.8 17.2 16.5 22.1 Total Shareholders Fund 10,362 12,751 12,961 15,095 17,941

BVPS 58.1 68.7 68.9 83.5 98.7 Minority Interest 270 - - - -

DPS 0.9 1.1 1.1 1.1 1.3 Non- current liabilities 1,533 1,244 1,271 1,127 790

Payout (%) 9.4 10.0 10.1 10.7 9.1 Long Term Borrowings 1,459 1,301 1,368 623 223

Valuation (x) Deferred Tax Liabilities (69) (289) (520) - -

P/E 10.1 8.3 9.0 9.5 6.8 Other LT Liabilities & Prov 143 233 423 504 572

P/BV 2.0 1.6 1.6 1.4 1.1 Current Liabilities 5,597 6,949 7,948 8,182 8,868

EV/EBITDA 5.8 5.3 6.7 6.4 4.4 Short Term Borrowings 1,753 3,089 3,089 3,089 3,089

Dividend Yield (%) 0.8 1.0 1.0 1.0 1.1 Trade Payables 1,199 1,021 1,308 1,185 1,344

Return ratio (%)

Other Cur Liabilities & Prov 2,645 2,839 3,551 3,908 4,434

EBIDTA Margin 16.3 15.7 10.9 11.0 12.9 Total Liabilities 17,763 20,945 22,181 24,405 27,603

PAT Margin 9.4 8.9 8.0 7.1 8.6 Assets

ROAE 19.4 18.7 18.4 15.5 17.9 Non- Current Assets 7,721 9,048 8,925 10,459 10,759

ROACE 21.8 21.1 15.9 17.1 20.4 Fixed Assets 2,005 2,161 2,328 2,572 2,487

Leverage Ratios (x) Goodwill 4,423 5,994 5,088 5,293 5,293

Long Term D/E 0.1 0.1 0.1 0.0 0.0 Non-Current Investments 118 118 118 118 118

Net Debt/Equity (0.2) (0.2) (0.2) (0.2) (0.3) Long-Term Loans & Adv 1,138 672 1,266 - -

Debt/EBITDA 0.4 0.3 0.4 0.0 0.0 Other Non-Current Assets 37 103 125 2,476 2,861

Interest Coverage 19.6 12.6 10.2 18.2 27.6 Current Assets 10,042 11,897 13,256 13,946 16,845

Current ratio 1.8 1.7 1.7 1.7 1.9 Current Investments 2,036 1,741 698 522 522

Growth Ratios (%) Trade Receivables 4,673 6,743 6,979 8,427 9,737

Income growth 49.2 20.3 11.0 5.9 15.3 Inventories - 34 229 436 503

EBITDA growth 67.4 16.0 (22.7) 6.9 34.7 Cash & Bank Balances 1,921 1,908 3,638 3,130 4,430

PAT growth 52.4 19.1 (0.3) (5.4) 38.8 Short-Term Loans & Adv 593 744 681 - -

Turnover Ratios Other Current Assets 818 727 1,032 1,431 1,653

F.A Turnover x 11 12 13 12 15 Total Assets 17,763 20,945 22,181 24,405 27,603

Inventory Days - 0 2 4 5 Cash flow Statement

Debtors Days 73 77 84 89 91 Year End-March FY13 FY14 FY15 FY16E FY17E

Payable days 29 18 16 16 15 PBT 2,860 3,332 2,500 3,031 4,176

Income Statement (` mn) Depreciation 466 540 850 722 885

Year End-March FY13 FY14 FY15 FY16E FY17E Interest Exp 154 287 272 177 157

Revenues 22,386 26,940 29,899 31,677 36,527 Others (86) - - - -

Op. Expenses 18,736 22,708 26,628 18,307 27,065 CF before W.cap 3,394 4,158 3,623 3,929 5,218

EBITDA 3,650 4,233 3,271 3,496 4,710 Inc/dec in W.cap 1,240 1,657 100 2,143 1,231

Other Income (170) (74) 352 433 508 Op CF after W.cap 2,154 2,501 3,523 1,787 3,987

Depreciation 466 540 851 722 885 Less Taxes 766 941 115 775 1,044

EBIT 3,014 3,619 2,771 3,208 4,333 Net CF From Operations 1,388 1,560 3,408 1,011 2,943

Interest 154 287 272 177 157 Inc/(dec) in F.A + CWIP 618 696 1019 966 800

PBT 2,860 3,332 2,500 3,031 4,176 (Inc)/Dec in Goodwill (801) (1,571) 906 (206) -

Tax 766 941 115 775 1,044 (Pur)/sale of Investments (1,572) 295 1,044 176 -

PAT 2,095 2,391 2,385 2,256 3,132 CF from Invst Activities (2,991) (1,971) 931 (995) (800)

Minority (86) - - - - Loan Raised/(repaid) 1,074 1,177 67 (744) (400)

Sh. of Associates - - - - - Equity Raised 30 (15) 5 0 -

Ex. ordinary 5 - - - - Interest Payment (154) (287) (272) (177) (157)

Adj Pat 2,014 2,391 2,385 2,256 3,132 Dividend (188) (239) (242) (242) (286)

Source: Company, Sunidhi Research Others 1,294 (239) (1,846) 640 (0)

CF from Fin Activities 2,051 398 (2,610) (523) (843)

Net inc /(dec) in cash 448 (13) 1,730 (507) 1,300

Op. bal of cash 1,473 1,921 1,908 3,638 3,130

Cl. balance of cash 1,921 1,908 3,638 3,130 4,430

KPIT Technologies


Disclaimer

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KPIT Technologies


Sunidhi’s Rating Rationale The price target for a large cap stock represents the value the analyst expects the stock to reach over next 12 months. For a stock to be classified as Outperform, the expected return must exceed the local risk free return by at least 5% over the next 12 months. For a stock to be classified as Underperform, the stock return must be below the local risk free return by at least 5% over the next 12 months. Stocks between these bands are classified as Neutral.

(For Mid & Small cap stocks from 12 months perspective)

BUY Absolute Return >20%

ACCUMULATE Absolute Return Between 10-20%

HOLD Absolute Return Between 0-10%

REDUCE Absolute Return 0 To Negative 10%

SELL Absolute Return > Negative 10%

Apart from Absolute returns our rating for a stock would also include subjective factors like macro environment, outlook of the industry in which the company is operating, growth expectations from the company vis a vis its peers, scope for P/E re-rating/de-rating for the broader market and the company in specific.

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KPITTechnologies-Sunidh-280715

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