27 January 2015

KPIT Technologies - Turning constructive after long… :: ICICI Securities

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Turning constructive after long…
• US$ revenues grew 1.2% QoQ to $126.4 million (0.5% QoQ growth
and $125.7 million estimate) led by Europe, the US, SAP and IES
SBUs. Onsite volumes grew 1.6% QoQ while offshore grew 2.5%
QoQ leading to overall volume growth of 2.4% QoQ
• EBITDA margins improved 59 bps QoQ to 13.9% (14% estimate) led
by an improvement in SAP margins. Reported PAT of | 65.3 crore
was below our | 71 crore estimate, led by higher taxes
Adjusting estimates modestly…
KPIT now expects FY15E revenues to grow at the lower end of its 12-14%
($498-506 million) guided range led by order bookings and recovery in
SAP SBU. Note, with recovery in Q2 and Q3 – dollar revenues grew 8.5%,
1.2% QoQ – KPIT requires 4% QoQ growth in Q4 to achieve the lower
end of its guided range. Though steep, it seems achievable given >$40
million TCV signed during the quarter and recovery in large client spends.
One of its large client spends was challenged during 9MFY15 but seems
the bottom was reached in Q3 & revenues could recover in Q4. Achieving
lower end of guidance represents healthy acceleration relative to 1) FY14
(8.3% growth) and 2) slow start to FY15E (Q1 growth was modest 1.4%
QoQ). KPIT reiterated the deal pipeline continues to be robust both in IES
(Oracle, JD Edwards) while repositioning of offerings & geography within
SAP SBU & reoccurrence of postponed orders in FY13 could aid growth.
Margin recovery continues in Q3 led by SAP…
Q3 margins expanded 59 bps QoQ to 13.9% led by improvement in SAP
SBU margins. SAP SBU margins continue to improve sequentially with
the SBU reporting ~8% margins vs. ~4.5-5% Q2 and break-even in Q1.
KPIT highlighted SAP margins are sustainable with likely modest increase
in Q4, which could help the SBU report average margins of 8-10% in
FY15E. Hence, we maintain our 13.5% margin assumption for FY15E, 221
bps lower than FY14 margins of 15.7%. This, itself, has declined 652 bps
from the 22.2% achieved in FY09, primarily led by unfavourable pyramid,
acquisitive growth and lower-than-company average SAP SBU margins.
Likely bottom for top client weakness; non-top 10 drive growth…
The client metric improved as the company added three new customers
to >$1 million revenue run rate during Q3 and 64 since FY08. Note, a
significant number could also be attributed to acquisitions. Large client
revenue growth continues to be uneven. Top customer revenues declined
1.1% QoQ (1.9% QoQ growth in Q2); top 5 declined 9.9% (+1.3%) while
top 10 declined 6.8% (+3%). Note, top customer revenues grew 3.6% in
Q1 while top 5, 10 declined 2.4%, 0.2%, respectively. Top 5 and 10
customer revenue decline was accompanied by 398 and 364 bps decline
in contribution to 28.6% and 39.4%, respectively.
Supportive valuation coupled with growth recovery leads to upgrade...
We estimate KPIT will report rupee revenue, earnings CAGR of 13%, 19%
in FY14-16E (average 14.8% EBITDA margins in FY15-16E), vs. 28%, 30%
reported during FY09-14 (average 17.6%), respectively, driven by
recovery in 1) large client spends, 2) healthy bookings and revenue,
margin recovery in SAP business. We upgrade the stock to BUY given
supportive valuations capture a majority of negatives and that growth
acceleration could drive upgrades. We now value the stock at 14x – in line
with peer group – FY16E EPS estimate of | 17.5 and raise the target price
to | 250 vs. | 160 earlier.

LINK
http://content.icicidirect.com/mailimages/IDirect_KPIT_Q3FY15.pdf

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