KPIT Technologies, recently made news for its alliance with Honda to enhance Honda’s Software defined Mobility (SDM) journey. The company’s Chief Executive Officer (CEO) and Managing Director (MD), Kishor Patil, last week said that the Honda partnership would be the largest in SDM. The stock touched a fresh 52-week high of Rs 894 on March 20th.
The company, which was earlier known as KPIT Engineering, had merged with Birlasoft in 2018 in order to create two separate specialised listed entities, i.e. Birlasoft, focused on digital business IT services, and KPIT Technologies, focused on automotive engineering and mobility solutions. The companies demerged with KPIT Tech listing at Rs 99 on the National Stock Exchange (NSE) in April 2019.
The auto-tech company has come a long way with its stock price surging around 785 percent since then. The stock has outperformed the market with the sectoral Index Nifty IT growing 71 percent in the same period, while the broader index Nifty50 grew only 46 percent.
In the last one year, the company’s share price has witnessed an increase of over 45 percent, much of which is attributed to an eventful year comprising acquisitions, new partnerships, good growth in numbers, and a strong deal pipeline.
Recent developments
In addition to the recent Honda partnership, the company was chosen as the strategy technology partner by the Renault Group in November 2022 for its software-defined vehicle (SDV) programme. The company’s clients include players such as BMW, Lafarge, Hitachi, and Denso, among others.
Also Read: KPIT Tech up 6% after CEO says Honda tie-up largest for SDM
In September 2022, it had acquired four of the Technica group companies, viz. Technica Engineering in Germany, Spain and USA and Technica Electronics in Spain for a consideration of Rs 640 crore. The transaction enables KPIT to offer a one-stop shop for the industry to migrate rapidly towards SDV.
Business
KPIT Tech works as a software integration partner offering electronic and mechanical engineering solutions to the automobile Industry and focuses on the Connected, Autonomous, Shared, Electrified (CASE) vehicles domain. The company offers technology solutions to Original Equipment Manufacturers (OEMs) in the passenger cars and commercial vehicles space.
The automobile industry’s increasing focus towards technical enhancements and software deployment in vehicles will see the research and development (R&D) expenses of OEMs rise to $60 bn over the next five years, from $20 bn currently, according to stock broking firm Ashika.
“Engineering spend by the OEMs gone up by 10 percent and specially the CASE area gone up by ~20 percent,” it added.
The company generates revenue through three business units, viz. feature development and integration, architecture and middleware consulting, and cloud-based connected services. In December 2022 quarter, feature development and integration contributed 65 percent to revenue, while architecture and cloud segment stood at 16 and 19 percent respectively. Vertical-wise, passenger cars contributed 79 percent to revenue and commercial vehicles accounted for the rest.
“Unlike other peers, KPIT’s 100 percent revenue comes from automobile software and it holds competitive advantage in the software integration space. KPIT’s relationships with the top global OEM clients have allowed them to become involved in numerous complicated production processes, allowing them to work on future software integration projects,” according to the brokerage.
Geographically, the company has presence in Europe, USA, Japan, China and India and in Q3FY23, Europe drove more than 52 percent of its revenue followed by US which contributed 32 percent and 16 percent came from Asia.
Financial performance
In Q3FY23, the company saw strong growth with 47 percent YoY increase in reported revenue to Rs 917 crore. Revenue stood at Rs 745 crore in September 2022. It also secured new deals of total contract value (TCV) $272 mn compared to $142 mn in the September 2022 quarter.
“In the next two, three years, we will have a robust growth that I have said. Of course, 30 percent plus is part of organic and inorganic (growth). But I think our organic growth has been strong even in this year (at) 24-25 percent,” said Patil on March 1 in the NASSCOM Tech Forum.
Its largest segment, the feature development and integration business grew 20.6 percent year-on-year (YoY). However, significant growth came from architecture and middleware consulting, which jumped 73 percent YoY. The cloud-based connected services increased 50 percent YoY with Technica acquisition, which saw full integration this quarter, aiding its growth.
“The Cloud business unit grew 20.8 percent quarter-on-quarter (QoQ) and 49.8 percent YoY. Based on the recent deal wins and revenue growth trajectory boosted by Technica acquisition and aided by future acquisitions, our estimates indicate KPIT will have c.33 percent revenue growth CAGR from TTM to FY25E,” said analysts at Choice Equity Broking.
Earnings before interest and taxes (EBIT) margin stood at 14.1 percent, up 65 basis points (bps) and flat quarterly due to the Technica-related integration costs.
According to brokerage firm Anand Rathi, “Integration costs are likely to persist through the next two quarters. Technica’s operating margin is ~20 percent. We expect margins to keep inching up, driven by SG&A leverage, a modest rise in employee costs, and higher utilisation. Currency will also help in Q4.”
Also Read: Tata Group likely in talks to engage outgoing TCS CEO Rajesh Gopinathan beyond September 15
Risks
High dependence on one sector, i.e the automotive sector and region is one of the key risks to the company. Another negative catalyst for the company includes reduction of innovation budgets by OEMs and Tier I Auto companies due to economic slowdown, according to broking house Ashika.
Forex fluctuations, especially since the company derives major part of its revenue from international markets, is also an additional risk.
“Appreciation of INR will impact negatively to the company’s business,” it added.
As per Bloomberg Data, the stock currently has 10 ‘buy’, one ‘hold’ and two ‘sell’ analyst calls, with an average 12-month target price of Rs 818.56.
On March 21, the scrip closed 1.54 percent down on the NSE at Rs 875.90, while sectoral Index Nifty IT closed 0.98 percent lower at 28,164.85 points.
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