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Shares of KPIT Technologies tumbled over 17.8 per cent on Monday after global broking firm JP Morgan initiated its coverage on the stock with Underweight rating.
The brokerage’s price target of ₹520 implied a potential downside of 44 per cent (from Friday’s close of ₹925). The stock, after hitting a low of ₹759.90 or a drop of ₹165.10, managed to recover to end at ₹809.50 on Monday, still down 12.5 per cent against Friday’s close. On the NSE, after hitting a high of ₹92.45 and ₹760, the stock closed at ₹811.20, down 12.3 per cent. The stock’s 52-week high and low figures are ₹946.65 and ₹440.40 respectively.
According to JP Morgan, a growth slowdown to less than 20 per cent beyond FY24 (reverse DCF ask rate is 24 per cent for the next 10 years) and the scarcity premium going away with the announced IPO of Tata Technologies are key catalysts for de-rating the company.
‘Growth drivers’
Bhavik Mehta and Ankur Rudra, analysts at JP Morgan, in a note said, they see two main growth drivers for automobile engineering research and development (ER&D). One, automobile original equipment manufacturers’ urgency to invest in the new age of electric, autonomous, and connected vehicles driving multi-year deals for service providers and two, dearth of digital engineering talent in client geographies driving increased offshoring, where India is in a sweet spot.
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“We expect India’s offshoring to increase to 33 per cent by FY23 from 25 per cent in FY22 and the share of service providers versus captives to rise to 55 per cent from 51 per cent,” they said in the note.
These tailwinds, the brokerage said, should benefit auto ER&D service companies such as KPIT Tech, Tata ELXSI, and L&T Technology Services.
Key risks
“We forecast the highest revenue and earnings growth for KPIT over FY23-25 among our coverage,” it said, adding, however, “we initiate at UW with a ₹520 price target, driven by lower structural margins, risks from single vertical and high client concentration and excessive valuation.”
KPIT would need to win large deals every year in order to maintain growth over 20 per cent. “We see this as a challenge as the auto industry is cyclical, hence it would be too optimistic to give KPIT the benefit of doubt,” they said in the report.
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