Stock Fundamentals

KPIT Technologies: BUY

K. Venkatasubramanian | Updated on June 08, 2014

Forex fluctuation: KPIT has minimised risk by hedging exposure MASTERPIECE / SHUTTERSTOCK.COM


Wider footprint in Europe and Asia-Pacific can drive earnings for the company

Defensives such as IT have been shunned in recent months in preference to cyclicals. However, mid-cap IT stocks with fair growth potential are still attractive to buy. Among mid-tier IT services players, KPIT Technologies has been able to hold steady by focusing on segments such as manufacturing, automotive and energy and utilities.

That these segments have potential is borne out by the fact that all the top-tier players have experienced substantial growth in these verticals, with a large slice of the outsourcing pie waiting to be tapped. Investors with a two-year horizon can buy stock in KPIT Technologies. At ₹160, the share trades at 10 times its likely per share earnings for FY15. This multiple is much lower than what mid-tier peers such as Infotech Enterprises trade at, making it an attractive entry point.

Growth in most key segments, healthy customer additions and improving footprint in Europe and the Asia-Pacific are positives. A key high-margin integrated enterprise solution offering too has grown at a healthy pace in 2013-14. In FY14, the company’s revenues grew 20.3 per cent over the same period in 2012-13 to ₹2,694 crore, while net profits rose 25.1 per cent to ₹249 crore.

Last fiscal, KPIT Technologies did lag behind its peers in revenue growth (in dollar terms) as revenues from its SAP practice declined.

Key segments grow

But from the fourth quarter of the last fiscal and over the past few months, the company has indicated that revenue could pick up, with many contracts signed. Another concern was that its top client, Cummins, did not register any significant increase in traction last fiscal.

Cummins looks set to overcome these challenges and has guided that revenue growth might be in line with the overall industry’s at 12-14 per cent, in dollar terms, for FY15. The manufacturing and energy and utilities verticals grew at a healthy pace (23-41 per cent), faster than the overall revenue rate in FY14.

This suggests that KPIT Technologies has tapped the outsourcing market in the space quite well. The automotive segment, though, slowed down a bit during the fiscal, given the challenges relating to this vertical. The company added 15 clients during 2013-14, taking its total customer base to 198. The number of million-dollar customers, too, expanded and is now a healthy 80.

Geographically, while the US was lukewarm for KPIT Technologies, there was increased business from Europe and rest of the world (Asia Pacific, West Asia and Japan) the last fiscal. These two geographies now account for nearly 28 per cent of the company’s revenues. KPIT Technologies’ high-margin, integrated enterprise solutions offering (mainly, Oracle products), which accounts for nearly 40 per cent of its revenues, grew at a robust 37.7 per cent in FY14. Once its SAP unit also resumes its growth path, margins could grow substantially.

Increasing profitability

This is reinforced by the fact that the company has guided for a profit growth of 18-21 per cent, in rupee terms, for FY15.

The company’s revenue from onsite locations abroad has increased faster than offshore sales, indicating that revenue momentum will return. After the initial phase, most projects are offshored, enabling cost optimisation for KPIT Technologies. The company’s offshore utilisation, at 72.1 per cent, leaves room for improvement.

Though currency fluctuations may be a cause for concern, KPIT Technologies has minimised risks effectively by hedging three-fourths of its net forex exposure for the next two quarters, thus avoiding any long-term calls.

Published on June 08, 2014

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