HOLD : KPIT Technologies - Volatile performance plays spoilsport : AnandRathi Institutional Research

KPIT Technologies - Volatile performance plays spoilsport; downgrade to Hold

KPIT, in our opinion, is fairly valued at 11x FY18E EPS, a 30% discount to Mindtree, which we think is fair given that KPIT is experiencing slower growth in IES (34% of Rev) and may see volatile SAP practice (23% of Rev). The profit warning suggests a bad Q1 (we exp Rev -4% qoq, EBITDA margin -500bps qoq in 1Q). Since Q2 may also remain soft, KPIT can only deliver earnings CAGR of just 5% over FY16-18E.

Revenue growth in H1 FY17 expected to be slower. KPIT has guided for a revenue decline of ~4% in Q1 and a flattish Q2, which translate to 0-1% growth in FY17 (FY16 growth was also 0%). The profit warning is driven by structural weakness in ERP (JD Edwards also included this time) and in the top client. Its 13% revenue exposure to the energy and natural resources sectors may also impact growth.

EBITDA margins to reflect revenue decline. KPIT may see erosion of 500bps in margins in Q1 as the entire revenue shortfall will flow through the P&L. Also, Q1 will be impacted by wage hikes and increase in visa costs (KPIT expenses out over four quarters). Q4 FY16 EBITDA margin of 15.7% included ~103bps of one-time benefits. We are building in FY17 margins of 12.4%, assuming some improvement in H2. Offshore utilization is currently at 70% and can be used as a trigger.

Client dispute liabilities may not materialize, but reputational damage is done. KPIT's client had filed a lawsuit against the company for $50m, citing losses due to a failed SAP implementation project in 2013. KPIT does not expect any immediate financial impact (actual penalty may be much lower than $50m) and will defend it. This may be part of contingent liabilities although no provisioning is expected in 1Q.

Valuation. We cut our FY18 estimates and target price by 13% and 11%. The convergence of valuation multiple has happened and any upside from here needs to be supported by improved revenue growth. Risk. Execution

Shares of KPIT Technologies Limited was last trading in BSE at Rs.155.5 as compared to the previous close of Rs. 154.6. The total number of shares traded during the day was 224909 in over 2556 trades.

The stock hit an intraday high of Rs. 158.6 and intraday low of 153.2. The net turnover during the day was Rs. 35128492.

Source : Equity Bulls

Keywords