In this research report, we will look at KPIT Technologies Share Price Target after looking into its business, its results and its future growth prospect. We will understand what KPIT Technologies Ltd Product are ? We will then see what company is doing to grow in future.
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Company Overview:
KPIT Technologies is leading is a global technology company providing software solutions that help mobility companies leapfrog towards autonomous, clean, smart and connected future.
The major focus areas of the company are – power train (Conventional and electrical), autonomous technology (vision and control systems), connectivity and diagnostics.
For instance, if BMW is using a battery supplied by Panasonic or an electric motor that is supplied by ZF, in this situation KPIT writes the software that integrates the supplier electronics to BMW’s vehicle operating system.
The company’s focus sub verticals are Passenger cars, commercial and Off-highway vehicles and New Mobility. KPIT derives 84% of its revenue from strategic top 21 clients.
The company has 8,245 employees to cater services to 60 clients. KPIT is globally present in 14 countries across America, Europe and APAC.
Products & Services:
Autonomous Driving & ADAS, Electric and conventional powertrain, Connected Vehicles, Vehicle Diagnostics, Automotive Open System Architecture (AUTOSAR) & Communication and Diagnostics
Subsidiaries & Revenue Breakup:
As on 31st Mar 2022, the company has 15 subsidiaries and 3 Associate/JV companies.
Key Rationale:
Global Expansion:
Currently, KPIT has a presence and fair spread across geographies, with Europe being the largest (40% share), followed by the US at 39% and ROW at 21%, as of FY22.
The company expended its presence in 14 countries with 25 locations. KPIT is focusing on global delivery with integrated teams located across India, Germany, US, China, Japan, Korea, and Thailand.
It could continue to invest in Germany and US centers to strengthen its presence in these geographies. In the past few years, the company has invested heavily in Europe through acquisitions and partnerships with technology companies.
Niche Offerings:
KPIT is focused on auto engineering, termed as mobility instead of auto. The company is focused on passenger cars at present, apart from commercial vehicles, tractors and heavy equipment as well as shared mobility like OLA and UBER.
KPIT is focused entirely on the mobility industry with its niche offerings in the power train, autonomous and connectivity categories.
Growth is expected to be driven by electric powertrain (~37% of revenue), autonomous (19% of revenue), battery management systems and development of IPs.
KPIT has a team of 500 engineers in Germany with 85-90% local staff.
Financial Performance:
The company’s 3-year Revenue and PAT CAGR stood at 56% and 51% for the period of FY20-FY22.
The cash & cash equivalents stood at Rs.1000 crs as of FY22. FCF will remain positive, going forward, even after factoring in annual capex.
Because of cost rationalization efforts, KPIT could see growth in profitability as well as better return ratios in the future.
Q4FY22 Financial Performance:
In Q4FY22, KPIT tech secured TCV deals of $125mn, majorly from American region. Furthermore, KPIT has entered a deal offering next generation ECU platforms to a European OEM (TCV of Euro70+ mn with 80%+ of revenue estimated over next 5 years).
The active client base has strengthened to 60 against 58 in 3QFY22 while strategic T21 client revenue has diversified to ~84% from 83%. In-line to the set target, the company managed to reasonably lower its attrition rate in 4Q and aims it to further lower to ~16% in FY23 from 25% in FY22.
The robust demand momentum has compelled KPIT to onboard new talent (~2,000 freshers to be hired in FY23) along with emphasizing on lateral entries.
Amongst verticals, PV & CV segment reported modest growth 2.4%/8.1% QoQ while other segment reported robust growth of 17% QoQ. KPIT reported broad based growth amongst practices except powertrain which lowered by 12.1%.
Investment Rationale:
Cash as % of Networth
After the de-merger, the Group started the year with a cash balance of Rs.270 crs and ended the year with Rs.1000 crs as on 31st Mar 2022 with literally zero debt.
In addition, Cash flow generated during the last 3 years was Rs.1500 crs. Almost 76% of the net worth of KPIT is represented by Net Cash. The Company has a clear road map on the usage of cash.
The amount will be strategically used for Inorganic growth and it will enable KPIT to expand its presence in collaboration with other disruptors to scale the business in different domain.
As a very low-debt company one can expect the ROE of the company to improve and remain above 20% going forward.
This is largely driven by higher margin profile in the field of evolving CASE technology led automotive development, talent development, R&D and technological adoption.
Industry Analysis:
The global automotive industry is getting disrupted from digitization/ automation/electrification and new business models led by new age automotive players like Tesla and technology companies like Google, Apple etc. venturing into digital mobility space.
To keep pace with the disruptions, existing automotive companies have raised their R&D investments focusing on technologies of Autonomous, Electrification, Connected, etc. Global Auto ER&D spending grew 5% YoY to US$ 158bn in CY19 as per Zinnov.
In latest report of Goldman Sachs, the R&D spend in CASE (Connectivity Autonomous Shared Electric) by top global automakers to grow by 25% annually over CY20-CY25 (FY21-FY26). R&D spend in CASE by Top 10 automakers to triple from FY21-FY26.
Spending by top R&D automakers seen at USD61bn as per the top Industry experts. As per the company, currently electronics usage in the car accounts for 30% and poised to reach 50% by 2030, which give larger scope for software integration from a range future CASE technologies clients can include, Mobility disruptors, Semiconductor manufacturers, Tech Giants, 5G Telecom providers,
While the global vehicle production CAGR is expected to be around 3-4%, and the growth CAGR for the automobile software is anticipated around 14%.
As per McKinsey’s analysis, while the global automotive market is set to grow by 3% CAGR over the next decade (2020-2030), software development and verification and validation services will see faster 9-10% CAGR, mainly due to increasing usage of software in vehicles driven by the development and adoption of autonomous driving (ADAS, Level 1-5 autonomy) connected cars (for infotainment, telematics, V2V, V2X), and electrification of powertrain (EVs).
Growth Drivers:
Within the next 10 years, almost all cars in mature markets will have some form of connectivity, largely due to availability of faster communication networks and rising consumer preferences towards connected features. Covid-19 might just have provided a desperately needed boost to the auto sector.
The statement is simple and logical – people tend to give much more importance to personal hygiene and restrict interaction with unknown people in a pandemic situation – leading to higher purchases of private vehicles while avoiding public transport.
Penetration rates for autonomous cars may reach a level between 5% and 26% in 15-20 years as necessary economics, regulations and technology fall into place.
The share of electric cars in new cars sold can reach the level of 35-45%, led by China and Europe.
Outlook:
The company with its niche offerings, established position in automobile engineering, and mobility solutions supported by good relationships with top global original equipment manufacturers (OEMs), plans to launch more products, which could contribute to growth, going forward.
KPIT tech is assertive on generating CC revenue growth & EBITDA margin in the range of high teens bolstered by robust volume growth of ~25% for FY23. The management anticipates that the evolving landscape of mobility industry to auger well for KPIT tech, being one of the front runners, due to its long-standing expertise.
With robust demand in the industry, KPIT is likely to exceed its moderate target of FY23 & following years, as evidenced by its track record in FY22.
Higher utilization, pyramid rationalization and cost optimization could lead to strong profitability growth and better return ratios for the company.
Valuation:
KPIT Technologies Share is expected to persevere its earnings growth trajectory given the key growth levers such as flourishing TCV deal size, strategic end-to-end client engagement model, healthy cash reserves, zero debt status & robust demand environment.
Furthermore, its expertise in mobility industry, a high growth potential industry, will drive the revenue growth over the longer horizon.
At CMP, KPIT Technologies Share is trading at a decent valuation of 32x FY25E EPS. Hence, we recommend a BUY rating in the KPIT Technologies Share with the target price (TP) of Rs.673, 40x FY25E EPS.
Hope you liked our Article on “KPIT Technologies Share”, please read our other research report on “Divi’s Labs Share“
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