KPIT - Q1FY18 Result Update Rating - Reduce - Arihant capital Markets Ltd

Weak Performance:

- Dollar revenue for the quarter stood at $134.4 Million, a Q-o-Q growth of 4.8% and Y-o-Y growth of 12.2%. In terms revenue grew by 1.4% Q-o-Q and 8.4% Y-o-Y to Rs. 870.4cr. During the quarter, it had around $2 million worth technology license revenues which will not repeat in Q2. Amongst SBUs the growth across most of the SBUs with P&P SBU registering highest Q-o-Q growth of 48.5% while IES and PES SBU grew by 5.9% and 3.8% respectively. DT SBU was flattish while SAP marginally declined by 0.3% on a Q-o-Q basis. The 20 top strategic accounts constituted 51.5% of the total revenues and grew 13.3% sequentially. Similarly the 40 top strategic accounts contributed 60.6% of the revenues and had a Q-o-Q growth of 7.7%.

Geographical growth:

- Amongst geographies, Europe and APAC registered Q-o-Q growth of 17.7% and 16.1% respectively while US geography declined by 1%.In terms of industry verticals, Energy & Utilities vertical grew by 32.1% on a Q-o-Q basis while Automotive & Transportation grew by 3.5%. There was a decline of 1.2% in manufacturing vertical. On a Q-o-Q basis top customer grew by 5.6%.

- Profitability:

- The realized rate for the quarter was Rs. 64.75/$ against 66.91/$ in Q4FY17. Thus on a realized basis there was a rupee appreciation of 3.2% against the dollar. This led to a negative impact of 110 bps on the operating (EBITDA) margins. Thus, almost all the decline in the EBITDA for the quarter was due to the rupee appreciation. During the quarter, there was an increase in the sub-contracting cost, in the US geography. KPIT also added 151 people during the quarter.

Management comments

- Management has guided Constant Currency Revenue growth for FY18 will be in the range of 6% to 8%.

- A wage hike kicking in the next quarter and it is anticipated to be around 2.3% to 2.5% of the revenues.

- Management continues to focus on utilization improvement and productivity coupled with operational cost control to improve operating margins.

- Confident of exiting the year with much improved operating margins.

Outlook:

- KPIT is confident of achieving higher end of their revenue guidance (6-8% CC terms) for FY18, which translates into a poor CQGR of (0.3%) over the next three quarters. Wage hike will come into effect in Q2FY18 and we believe higher wage costs/FX headwinds would dent EBIT margins further in FY18 which are already low (6%-8% range); this would translate into earnings decline of 10.5% YoY. The stock is currently trading at expensive valuations based on 10.5x FY19 earnings; we have a REDUCE rating on the stock with TP of Rs 120 at 10x PE of FY19 EPS of Rs12.

Shares of KPIT Technologies Limited was last trading in BSE at Rs.126.3 as compared to the previous close of Rs. 129.5. The total number of shares traded during the day was 85484 in over 2262 trades.

The stock hit an intraday high of Rs. 131.1 and intraday low of 125.9. The net turnover during the day was Rs. 10914047.

Source : Equity Bulls

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