Anand Rathi

KPIT Technologies (Buy)

CMP: ₹49.2

Target: ₹85

For FY20, KPIT delivered 14 per cent dollar revenue growth, better than peers (LTTS 9 per cent, Tata Elxsi -1 per cent, Cyient -5 per cent). Besides, it secured a large, over $50 million, deal from a tier-1/existing OEM client/Europe, spread over five years, possibly its largest, and assures of its capabilities in the auto space. Growth continued to be driven by Europe (Germany) while the US was relatively soft. Its strategic-25 clients (83 per cent of revenue) declined 1.5 per cent q-o-q, up 17 per cent y-o-y).

The 8.5 per cent EBIT margin came better than anticipated. Despite a reduction of 178 employees q-o-q and favourable currency, the gross margin was merely steady because of a revenue shortfall. SG&A leverage brought a benefit of 40 bps. The company is operating at 98 per cent (work-from-home, from April 15) and is, therefore, unlikely to see any supply side challenges ahead. KPIT lags its peers, with an 8.8 per cent EBIT margin in FY20 (LTTS 16.5 per cent, Tata Elxsi 18.6 per cent), which possibly can be shored up with higher offshoring.

The stock trades at 7x FY22e EPS, attractive given the anticipated H2 FY21 recovery we are building in. From a macro perspective, recovery in Germany and China are important factors for KPIT. Promoter pledges are expected to be cleared in the next 24 months.

Risk: Dependence on one vertical.

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