Company Overview:

KPIT Technologies is a global partner to the automotive and Mobility ecosystem for making software-defined vehicles a reality. It is a leading independent software development and integration partner helping mobility leapfrog towards a clean, smart, and safe future. With 10000+ automobelievers across the globe specializing in embedded software, AI, and digital solutions, KPIT accelerates its clients’ implementation of next-generation technologies for the future mobility roadmap. With engineering centers in Europe, the USA, Japan, China, Thailand, and India, KPIT works with leaders in automotive and Mobility and is present where the ecosystem is transforming.

Industry Overview

The IT & BPM sector has become one of the most significant growth catalysts for the Indian economy, contributing significantly to the country’s GDP and public welfare. The IT industry accounted for 7.4% of India’s GDP in FY22, and it is expected to contribute 10% to India’s GDP by 2025. According to National Association of Software and Service Companies (Nasscom), the Indian IT industry’s revenue touched US$ 227 billion in FY22, a 15.5% YoY growth. According to Gartner estimates, IT spending in India is expected to increase to US$ 101.8 billion in 2022 from an estimated US$ 81.89 billion in 2021. Indian software product industry is expected to reach US$ 100 billion by 2025. Indian companies are focusing on investing internationally to expand their global footprint and enhance their global delivery centres. The data annotation market in India stood at US$ 250 million in FY20, of which the US market contributed 60% to the overall value. The market is expected to reach US$ 7 billion by 2030 due to accelerated domestic demand for AI. Exports from the Indian IT industry stood at US$ 149 billion in FY21. Export of IT services has been the major contributor, accounting for more than 51% of total IT export (including hardware). BPM and engineering and R&D (ER&D) and software products export accounted for 20.78% each to total IT exports during FY21. The ER&D market is expected to grow to US$ 42 billion by 2022.

POWERING SOFTWARE-DEFINED VEHICLES (SDVs) GLOBALLY:

KPIT is helping the Mobility ecosystem adopt CASE technologies and transition towards the future SDVs. KPIT is a scalable, dependable global partner to marquee vehicle makers across passenger and commercial vehicle OEMs and the supplier ecosystem across the vehicle domains. Some select examples and glimpses of how KPIT is powering the SDVs globally are:

• Teams located across three countries developed key solutions for Level 3 & 4 autonomous vehicles including fully automated parking for a global OEM.
• The Autonomous Driving team was instrumental in the development of a Level 3 ADAS vehicle enabling Japanese OEM to launch its first Level 3 ADAS vehicle.
• More than 5 million vehicles of leading global car OEMs use KPIT In-Vehicle Infotainment (KIVI) as their infotainment middleware
• Developing test automation tools to increase productivity and quality for an Electric Vehicle programme for a German OEM
• Strategic Partnership with US Tier-1 to develop next-generation electric mobility Technologies
• Global Vehicle manufacturers depend on KPIT to validate and test their Autonomous vehicles for billions of miles virtually to ensure that they are road worthy
• KPIT is a Software and engineering partner to global CV OEM. A decade strong relationship across continents and for multiple product lines.
• KPIT is a Software Development and Integration Partner for Charger Control Unit for a German OEM. A reduction of over 50% in TCO for the OEM is projected over the engagement period.
• SDV architecture for an OEMDeveloping the architecture for nextgen SDV for an OEM. Responsibilities spread across infotainment, linux, HPCs, OTA update solution integration, CI/CD and cloud.li>

Large deal pipeline strong:

KPIT’s deal pipeline continues to be strong. There are 10 client projects globally driven by different OEMs for Software Defined Vehicles and 7 of these are in KPIT’s pipeline. These projects are large with triple digit TCV potential and multi-year duration (4-5 years development and 2-3 years maintenance). Since KPIT is a dominant India-based ESP and has strategic relationships with its T-21 customers, we expect conversion of pipeline into deal wins. Company expects couple of mega deals to get converted in next 3-4 months.

Technical Strategy for price actions:

KPIT has shown strong price volume performance with highest volume in range of 620-730 so stock is trading in tight range since past few months since September and stock made cup and handle pattern with higher high and higher low pattern and made double bottom pattern at levels of 620 and now after sharp sell off stock managed for a come back and now trading above its important support level of 675 and Resistance of 730 any close above these levels will trigger price movement and stock is ready for a big breakout In coming sessions might be result season trigger the breakout and stock is poised to move towards levels of Rs 900.

Levers for margin expansion:

KPIT has been winning multiple large deals over the past few quarters and the deal pipeline is strong. Large deals will initially ramp up onsite, but we expect offshore shift as deals mature (4-5% offshore shift likely, which can give 80-100 bps margin benefit). Moreover, given strong fresher additions over the past few quarters, utilization would have come down. We expect utilization to normalize in FY24. Company tightened its margin guidance for FY23 at upper end 18.5-19% (vs. 18-19%) despite absorbing one-off impact (~140 bps impact on quarterly revenue); one-off impact will disappear in FY24. We see levers for margin expansion led by growth and efficiencies and expect EBITDA margin of 18.9/ 19.8/ 20.3% for FY23/ 24/ 25.

Daily sales Outstanding have reduced materially:

DSO have reduced materially over the past few years to 48 days in Q2FY23 (vs. 87 days in FY19). Multiple factors have led to reduction of DSO days: (1) enforcing strict credit period for clients, (2) changing billing cycle so that receivables are collected before quarter end, (3) enhancing invoice preparation processes for quicker billing, and (4) non-recourse factoring of receivables.

Our View:

Large deal pipeline is strong and we expect conversion of pipeline into deal wins. Company has been investing in both organic (creating middleware solutions for proactive GTM) and inorganic (SDV space) for market dominance. Recent acquisition of Technica is a strategic fit and will increase probability of large deal wins. Company has exhausted its cash chest and will now focus on integrating acquired entities and driving synergies. Furloughs are expected to be normal in Q3. We see levers for margin expansion. Expect 28% EPS CAGR over FY22- 25. We recommend Buy and Add Dips Company is sustaining and maintaining its margin in this tuff situation and will able to generate higher margins as the situation and cools down and we see the Interest Rate coming down from current peak.