KPIT - Steady margin improvement :: HDFC Securities

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Steady margin improvement
KPIT’s 3QFY15 results were above expectations on
USD revenues, EBIDTA margin and PAT. However,
weaker cash flow from operations owing to working
capital blockage weighed on its balance sheet.
KPIT retained its revenue guidance of USD 498mn for
FY15 which implies a growth of 12% YoY. This implies
a 4% QoQ growth required for 4QFY15. Recovery in
SAP (~23% of revenues) and strong traction in
Automotive, led by ramp up in Telematics deal, is
driving growth for FY15. EBIDTA margins (13.9% for
3QFY15 up 50bps QoQ) also appear to be on the
mend. This is being driven by improvement in SAP
SBU margins and lower subcontracting expenses.
With the completion of major re-organization of
business around verticals, we see scope for better
client mining in FY16 as a growth driver.
We foresee an EPS upgrade cycle aided by recovery
in growth and margin improvement. We believe that
valuations remain reasonable (10.5x FY17E EPS), and
at a 25% discount to Mindtree. Retain BUY with a TP
of Rs 240/sh (12x FY17 EPS).
 3QFY15 Highlights : Revenues at USD 126.1mn were
up 1.1% QoQ and above our expectation (USD
125.5mn). ITS revenue for the quarter stood at USD
4mn (vs. USD 6.5mn in 2QFY15). EBIDTA margin at
13.9% was up 50 bps QoQ, and above our expectations
(13.4%). Improvement in SAP SBU margins and lower
revenues from the Telematics hardware component
enabled a margin expansion. PAT at Rs 653mn was 3%
above our estimates owing to the margin beat.
 Valuation and View : SAP service line (~23% of
revenues) is showing a steady improvement in growth
as well as EBIDTA margins (~8% for 3QFY15 vs. 5% for
2QFY15). The Automotive vertical is witnessing a
strong momentum. We expect this SBU to grow by 29%
YoY for FY15 aided by the Telematics deal. We model
consolidated USD revenues to grow at 12.1/13.3% for
FY15/FY16E. We model an EBIDTA margin of 15/15.5%
for FY16/FY17E (vs. 13.6% in FY15E). Weak cash flow
from operations has led to an increase in net debt on
balance sheet which stood at Rs 1,350mn for 3QFY15
(vs. Rs 968mn in 2QFY15). FCF/EBIDTA is at 11%
(9MFY15), which is below the industry average of ~40-
50%. Improvement in FCF could be the next big trigger
for a P/E re-rating. Retain BUY with TP of Rs 240/sh.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010889