Silver lining visible - KPIT:: HDFC Securities

Please Share::

�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��

��

-->
Silver lining visible
We believe that KPIT is on the verge of a
turnaround on multiple fronts (growth, margin and
FCF generation). Among these, we see scope for a
strong improvement in EBIDTA margins (13.3% as
of 2QFY15) to be a key driver. Trimming
subcontracting expenses (~14% of revenues as of
2QFY15), improvement in SAP SBU margins
(currently at ~5%), room for an increase in
utilization and SG&A leverage could act as margin
drivers. We model an EBIDTA margin of 15/15.7%
for FY16/FY17E (vs. 13.5% for FY15E). A swing in
margin trajectory is likely to drive an EPS CAGR of
25% (FY15-FY17E). With minimal capex spend and
no major earn-out payments, we believe the
company would be FCF positive in FY15/FY16.
Valuations remain reasonable (10.1x FY17 EPS) and
risk-return appears to be favorable. Our TP is
revised upwards by 36% to Rs 240/sh (12x FY17E
EPS) on the back of rollover to FY17E and an
upgrade in P/E x (12x vs.10.5x earlier). We upgrade
the stock to BUY from earlier stance of NEUTRAL.
 Transition to cloud appears manageable : Our
recent interactions with the management indicate
that the company is well equipped to handle the
transition to cloud based offerings in both SAP and
Oracle Technologies. Mgt believes the worst is behind
for the SAP SBU (~22.5% of revenues), which
witnessed weakness in FY14. KPIT expects the SAP
SBU to clock an EBIDTA margin of 12% for FY16E (vs.
5% in 2QFY15).
 Automotive SBU to aid growth : We believe the
Automotive SBU (~30% of revenues) would emerge
as a major growth driver for the next three years.
Steep increase in electronic content in cars and
shortening product life cycles would be the drivers.
We expect the Auto SBU to grow by 26% for FY15E
driven by the Telematics deal.
 View : After a muted 8.2% USD revenue growth for
FY14, we believe KPIT is poised for a bounce back. We
model USD revenues to grow by 11.8% CAGR (FY14-
FY17E) led by traction in the Automotive /IES SBUs.
Owing to the completion of restructuring of business
around verticals, we see improvement in client
mining led by cross selling of services.
 KPIT currently trades at a ~25% discount to Mindtree.
We anticipate an EPS upgrade cycle on the back of
scope for margin improvement. We expect company
turning to FCF positive in FY15 which would be
another positive. Scope for monetization of IP assets
of the Automotive SBU could be additional triggers.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010658