KPIT Technologies - Disappoints yet again; Downgrade to NEUTRAL - Phillip Capital

KPIT Tech 3QFY14 results disappointed on topline as well as margins - well below consensus and our estimates.

USD revenues at $110mn, registered a decline of 2.3% QoQ growth û well below consensus expectations of growth of 3.9%. INR revenues reported at Rs6.8bn declined by 3.5% QoQ. Onsite volumes declined 2% QoQ, while offshore volumes grew by ~2%. In addition to the seasonal furloughs, extended shutdown of two additional days and unexpected delay in deal closures due in Q3, affected revenue growth. Onsite utilisations dipped 430bps QoQ to 88.1%, offshore utilisations by 150bps to 71.3%.

The overall revenue decline was led by US (-1% QoQ) and R-o-W (-18% QoQ) while Europe showed a growth of 9% QoQ. Amongst service lines, IES and SAP business declined by 1.2% and 8.8% respectively, while Auto & Engg reported 2% QoQ growth. Auto and Manufacturing verticals declined by 1.5% and 4% respectively while E&U showed a growth of 8% QoQ.

EBITDA Margins at 15.4%, contracted by 10bps QoQ û as against consensus expectation of expansion of ~65bps. We note that EBITDA margins had declined by 37bps last quarter, primarily due to non-recurring provision (-171bps) and additional hiring and training (-164bps). That the company was not able to recuperate even those impacts in this quarter is a big concern. The management attributed the decline in margins to lower margins in SAP business and lower utilizations.

PAT at Rs608mn, declined by 9% QoQ, additionally impacted by a lower other income and higher tax rates (28% vs 25%) in the quarter. Other income came at Rs17.5m, includes FX loss of Rs31mn.

Guidance and Commentary

The management have guided for Q4 revenue growth in the range of 3-5% QoQ, implying FY14 revenue growth in 8-9% range û significantly lower than the earlier guidance of 13-16%. We note that we had expressed our skepticism regarding managementÆs ability of achieving their stated target, in our last quarter update.

The management indicated a strong pipeline going forward with closure of large deals worth of US$70mn in Q4. It however, remains skeptical on the SAP business (25% of overall business). They also indicated that margins would improve going into FY15 primarily on the back of higher US$ realizations due to completion of FX hedges (@ 53.5) by the end of Q4. We remain skeptical on that, and do not expect margins to expand significantly from FY14 levels.

Outlook and Valuation

Two consecutive quarters of underperformance have raised questions about managementÆs ability to sustain growth at current levels. We remain concerned, especially on SPARTA (SAP) business as it remains focused on discretionary spends of SME industries, which is being increasingly captured by the SMAC technologies.

We have significantly downgraded our FY14 and FY15 estimates, on the back of recent performance and management guidance. We also introduce FY16 estimates and roll forward our price target to average of FY15-16. We value the company at 9x (same as before) average of FY15-16 earnings.

The stock has already corrected by 15% after the Q3 results, and we see limited downside further. Our price target of Rs154 represents 2% upside from current levels. We downgrade the stock to NEUTRAL.

Source : Equity Bulls

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