KPIT - CASE (connected, autonomous, shared, electric) - Focused Automotive Play

[Marathondreams]

News on ET Markets on 10th July

Describing engineering services companies specializing in automotive and software services as billion-dollar specialists, global brokerage Bernstein has initiated coverage on four players, including Persistent Systems and KPIT, with up to 30% potential upside.

Bernstein has an outperform rating for both stocks, setting a target price of Rs 5,920 for Persistent Systems, reflecting a 30% upside scope, and Rs 2,120 for KPIT, indicating a 25% upside potential.

“We believe ‘specialist’ engineering services focused on software and auto have a long headroom of growth. They have built differentiated IP, partnered with global innovators (e.g., Microsoft, Tesla), and have built strong sales and management capability,” Bernstein said in a report.

Here is Bernstein’s view on the companies:
Persistent Systems Persistent specialises in software services (90%+) collaborating with major clients such as Microsoft and Salesforce. It demonstrates strong growth leadership with a compound annual growth rate (CAGR) exceeding 20% and expanded profit margins.The company has a leadership in software product engineering (45% of revenue), and technology-led offering (cloud, AI, Salesforce), a strong management team, and a deep client base with an ability to win cost take-out deals.

Bernstein states that the company has been the fastest growing in IT services over the last 3 years (+30% CAGR), with its margins expanding from 12% in FY21 to 14.5% in FY24.

KPIT Technologies -Since its IPO in April 2019, KPIT has emerged as a dominant player in automotive services, achieving a growth rate of 50% CAGR. The company specializes in electrification, Advanced Driver Assistance Systems (ADAS), and body electronics, catering to major OEMs and tier suppliers such as BMW, GM, and Cummins.

KPIT has outperformed ER&D peers with its deep engagement with auto OEMs/Tier 1 (96% of revenue). ER&D intensity from auto OEMs has expanded from 3.6% to 4.5% led by acceleration in auto OEM investments across electric, autonomous, and electric vehicles.

The company’s EBITDA margins are stable at 20.5% and demonstrate pricing power.

Coforge and Tata Elxsi Coforge is a traditional IT services company with a focus on BFSI (55% share) and Bernstein expects larger IT services companies to be better positioned in traditional services and to gain market share over time. The recent acquisition of the testing company.

The recent acquisition of Cigniti is likely to see headwinds due to AI disruption. With this, the global brokerage firm has a market-perform rating for the stock with a target price of Rs 6,080.

Tata Elxsi has delivered the slowest growth among engineering peers, with a 17.1% revenue CAGR over the last 5 years. Revenue concentration is a key risk, with the top 5 clients accounting for 44% of revenue. Additionally, the stock appears expensive, trading at 50 times earnings (P/E), amid slowing growth momentum.

[akhidsabak]

Are these considered a decent renumeration to the CEO and directors?

[Deven]

Let’s find out…

Salary Plus incentives for top 3 people
(Fig in Cr and truncated)

KPIT: 6.6 (CEO), 6, 4.5
LTTS: 15.4 (CEO), 6.3, 10.3
Persistence: 3.8. 12.7 (CEO), 2

[Deven]

Annual Report - https://www.bseindia.com/xml-data/corpfiling/AttachLive/2adfaf3e-928d-457f-af6f-aa7ae7130b36.pdf

Must read, pages 1 to 30. Interesting…

[v1p1]

How KPIT Tech Is Planning To Disrupt The EV Industry

[Deenar_Toraskar]

Trying to gauge the opportunity with QORIX, the middleware JV with ZF. I have a question about QORIX and the automotive middleware stack if there is anyone here with expertise in the area that can comment add input it would be much appreciated.

1. What does automotive middleware do? This is from the last conf call from Anup Sable. Anything beyond this would help.

"QORIX is actually a product that goes in between the application and
in the literal sense the operating system. So many people call
operating system that includes the middleware. But the difference
between an operating system and middleware is the operating system
usually deals with making the capabilities of the hardware available
to the application, whereas a middleware handled many
functionalities that the application needs or multiple applications or
a system needs to make it work efficiently "

2. Are there competitors to QORIX or alternatives to using a middleware? What do companies use instead of QORIX or a middleware.

3. KPIT is going to provide integration related to the QORIX. What does ZF bring to the table Electric Drives? Electric Mobility - ZF. What market share does ZF have in electric drives? Who are its competitors

4. Will QORIX work with components such as Electric drives from other suppliers?

5. QORIX intends to deliver company’s first complete middleware software package for the Snapdragon Digital Chassis solution. Is it true that Qualcomm has a 80% marketshare of the automotive chip market?

6. Can anyone list auto OEMs that have decided to adopt the Snapdragon Digital Chassis solution?

7. KPIT has mentioned several times that there might be another partner in QORIX. Any idea as to who this might be? A chip manufacturer, an OEM, cloud provider, etc?

8. Who are likely Qorix customers? Large auto OEMs like Toyota/Ford/VW, middle tier ones like Honda or smaller regional players?

9. When are first cars using Snapdragon Digital Chassis solution being announced? When would revenues from QORIX flow in?

10. How does Qorix compare to AUTOSAR (both classic and adaptive). Is it a better version of Autosar that KPIT and ZF are trying to make the new standard? Quote" Qorix will utilize their AUTOSAR-compliant “Classic” and “Adaptive” stacks and “Performance” middleware that has been developed for the particular needs of future SDVs. " see Middleware - ZF

11. Some useful SDV schematics from Qualcomm

Past

Current

Future

[Deven]

There were query on salary of ceo of kpit.

MC CEO Pay Report: How much were India Inc top bosses paid in FY24?

10 cr is the average salary of indian ceo - reports indicates.

[sanni_kumar]

But it should not more then 15 % of the networth of the company. Am I right sir ???

[pranshukh]

10% fall despite good results. Is it because of announcement of fundraise via QIP? Or am I missing something else?

[desi.guru]

Jeffries downgraded Price Target from 2000 to 1900 but still maintains Outperform rating. I assume market is not taking fund raise very positively for now along with high PE. Many hifg PE companies are getting the hit and money seems to be moving to more reasonable (low PE) names now.

[suhagpatel]

I don’t think the fall in stock price has anything to do with fund raising. When the company is trading at such high valuations, a miss in earnings can easily bring down the stock by 10-15% in a day or two. If you look at the commentary of management also, they are acknowledging the slow down in Auto in Europe and they expect it to continue even in Q3.

We need to understand that KPIT got higher valuations due to delivering results Q after Q. Now when the growth slows down, the valuations will revert. Also one has to understand that KPIT is a focused ER&D player only on Mobility. What worked in their favor (compared to diversified players) during tailwinds will exactly work against them during headwinds.

Disc - Not invested.

[Marathondreams]

KPIT once again came out with stellar results. This is their 17th consecutive quarter of growth.

So no problems with the results. On the concall, management mentioned challenges their customers are facing. Due to this, although they have maintained their annual revenue guidance of 18-22% and margin guidance of 20-21%, they have mentioned that their revenue would be on lower side of the guidance and margin would be at higher side of the guidance. (due to customer requests of offshoring some work to reduce cost). Also management mentioned that due to uncertain environment in Europe, their customers are taking longer to decide on any new projects. This could potentially impact their FY 26 revenue guidance.

This is the primary reason for the fall in the stock price today. But I feel this is great opportunity to accumulate (which is what I am doing) such a high quality stock. Also they are looking for few acquisitions (reason for QIP) which can strengthen their product offerings. Considering external environment in Europe, I think it is smart move as they will get much better bargains now.

Disclosure - Top holding in my PF. High conviction bet. Holding for last 4 years and adding more in every fall like today.

[Deven]

@Marathondreams

This could potentially impact their FY 26 revenue guidance.

You nicely put all this points, however FY 26 is not discussed in TV interview and concall. Management said they will provide FY 26 guidance at the end of Fy 25 however due to pipeline order thay are confident on FY 26. The matter of lower end of guidance is due to european client and it’s matter of 1-2 quaters. Mt. Tikekar also said the decision can’t be postpone longer by car maker.

As per me market is over reacting. I have added today and it’s highest holding of my PF. Disc: views are baised.

[Marathondreams]

You are right. FY 26 revenue guidance was not provided by the management but it was my conjecture based on the commentary so far

[Deven]

The company reiterated its guidance range but stated that revenue will likely fall on the lower end of the guidance of 18% to 22% year-over-year constant currency revenue growth. This is attributed to clients being cautious and delaying project implementation. However, profitability is likely to be on the higher end of guidance (20.5% plus) due to offshoring and other factors that reduce costs for clients.

The company has won many deals, but the implementation has been delayed, especially by European original equipment manufacturers (OEMs).

OEMs are being cautious due to global economic uncertainty and are unsure when deals will be realized.

To ensure projects are delivered at a lower cost to clients, the mix of projects has shifted, specifically with an increase in offshoring.

The company expects that demand will pick up in the medium term and that there are significant growth opportunities.

The company believes it can at least double its revenue with its current clients.

[Deven]

KPIT and FY26 Guidance

Market has concern on FY 26, below note is taken from yesterday’s concall and Four TV interview management has today morning.

Kpit is reluctant to provide specific guidance for FY26 revenue growth at this time. They typically give guidance at the end of the fiscal year.

However, they expresses optimism about FY26, citing a strong pipeline and deep conversations with clients. They believe the growth will come from existing T25 clients as well as new clients.

They believe they can at least double their revenue with their current client base and areas of focus.

Management believes that the delays in projects and the reconfiguration of client priorities will last only 1-2 quarters. They do not think clients can afford to delay programs for much longer.

Growth in the commercial vehicle sector is expected to come back in 2026. The number of vehicles being sold will increase in 2026 compared to 2025, meaning OEM build volume will increase. This should translate into increased business for Kpit Tech.

Overall, Kpit remains optimistic about its long-term growth prospects, including FY26. While there is some short-term uncertainty, the company believes its strong pipeline, deep client relationships, and focus on cost reduction will lead to continued success.

[Arka]

It Will End The Year At The Lower End Of Its 18-22% Guidance Band: KPIT Tech | CNBC TV18

Watch the management interview

It Will End The Year At The Lower End Of Its 18-22% Guidance Band: KPIT Tech | CNBC TV18

[Arka]

KPIT | Management Commentary

[Sid_Mathew]

ishmohit (@ishmohit1) on X

[Deven]

Learnt a lot from Ishmohit, however I have different views, Below is the same I posted in response from his twit.

They just said they may meet at the lower end of guidance, that is 18% growth and in the same tone they said they will be able to improve margin slightly. The picture is presented as they won’t grow. How many ER&D co may grow at 18%?