KPIT Technologies - Q2FY14 RESULT UPDATE - Sushil Finance

CMP Rs.145, NEUTRAL

3.1% USD Revenue growth in Q2FY14

During Q2FY14, KPIT delivered USD Revenue (112.2 mn) growth of 3.1% QoQ. In USD term APAC & Europe witnessed growth, while US market had a marginal de-growth during the quarter. In INR term its Revenues grew 14.6% QoQ to Rs. 7,027.7 mn, driven by strong growth across the SBUs (IES 14.4%, A&E 17.4%, & SAP 11.7%) and verticals (A&E 16.5%, manufacturing 14.8%, & E&U 10.4%). IT also witnessed decent growth in its top-5 (12.9% QoQ) & top-10 (12.2% QoQ) accounts, while its top account Cummins' also grew 12.9% QoQ. In view of its H1FY14 performance, the management has maintained its FY14 USD Revenue growth guidance i.e. 14-16%.

EBITDA Margins down 40 bps on one-off provision & net employee additions

Its EBITDA grew 11.9% QoQ to Rs. 1,088.2 mn, while the EBITDA margins fell 40 bps QoQ to 15.5%. Despite tailwind from currency of ~250 bps, the contraction in margins was attributed to (i) non-recurring provision of Rs. 120 mn due to additional cost estimated to be borne for a delayed ERP implementation, (ii) Rs. 35 mn additional cost impact due to net additions of 360 people, and (iii) Rs. 50 mn cost on customized leadership training program at Stanford. However, the other income declined 60.7% QoQ to Rs. 23.1 mn despite lower foreign exchange loss of ~Rs. 14 mn (Rs.122 mn in Q1). Its APAT grew 11% QoQ to Rs. 667.3 mn. The company expects its margins to improve in H2FY14 with completion of some low margin businesses and execution of some large contracts. We expect its FY14 EBITDA margins to stabilize at 16.2% during FY14.

Deal pipelines provide growth visibility

During Q2FY14 KPIT added 3 new customers and the number of its active customers increased to 192 from 189 at the end Q1FY14, while the customers with Revenue run rate of USD 1 mn+ stood at 78. The company closed two USD 10+ mn deals during the quarter, one in Europe and one in the US. As per management, out of the 6-7 large deals it is chasing currently, the initial work has already started on 2 large deals which are in excess of USD 25+ mn each. Hence, the company expects better growth in H2FY14 as compared with H1FY14. KPIT is well positioned across its businesses with strong relationship with global players in manufacturing, Automotive and Energy sectors, that enhances its client mining ability and provides growth visibility of its business going forward.

OUTLOOK & VALUATION

During FY10-13, KPIT has delivered strong CAGR of 38.7% in its USD Revenue, while for FY14 the management has provided USD Revenue growth guidance in the range of 14-16%, while expects its APAT to be in the range of Rs. 2,309 - 2,388 mn (Y-o-Y growth of 16 - 20%). We expect KPIT to meet its lower end USD Revenue guidance, while exceed its INR profit guidance on account of exchange rate benefits in FY14.

In view of H1FY14 performance & current business outlook, we have slightly upgraded our FY14E & FY15E Revenue estimates. We also have upgraded our FY14E Net Profit estimates, while reduced our FY15E net profit estimates. We expect KPIT to deliver 18.3% CAGR in INR Revenue and 21.2% CAGR in APAT during FY13-15E. At CMP of Rs.145, it is trading at 10.3x & 9.5x its FY14E & FY15E Earnings respectively, and is fairly valued. With recent run-up in the stock price, it has reached our target of Rs. 145 and hence we change our rating to "Neutral" on the stock recommending our investors to liquidate their holdings at current level.

Source : Equity Bulls

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