Company Name – KPIT Technologies Limited (KPIT) Current Share Price – INR 763 (January 31, 2023) Market Cap – INR 20,914 cr |
1. What is interesting about the stock?
Remember the scene from the 2004 movie I, Robot where the lead character Will Smith steps into his car and is riding to the crime scene while reading a magazine with the car in self-drive mode! Such scenes at the time were considered science fiction but today these scenes are no longer part of fiction and are easily acknowledged to be how the future will look like when humans won't be required to drive their cars themselves.
Although many of the cutting-edge applications of auto technology are still in development, the market potential and demand for these technologies are undeniable. Anything from electrification to autonomous driving, all these applications have the potential to entirely change the way vehicles work and usher in a new age of land mobility.
Step in KPIT Technologies. This is the only tier 1 technology company in India that has gone all-in on the auto technology sector and has fully focused all of its resources and capabilities on developing this technology niche.
KPIT identifies itself as an independent software integrator for global automotive leaders.
In 2018, KPIT merged with Birlasoft and immediately spun off to form an IT company and an automotive technology company. The IT business is now under Birlasoft while all the auto technology business is now solely under KPIT.
The company offers solutions that are divided into 6 major segments which are:
The vast majority of the company’s business is involving passenger cars, which accounted for 79% of revenues, and commercial vehicles accounted for 21% of revenues in Q3FY23. The company’s business is export dominated with 35% revenue from the USA, 57% from the EU, and 18% from Asia in Q3FY23.
Industry Overview
Electronics and technology are now increasingly becoming more dominant in their value share in vehicles with electronics costs per car also rising steadily from 27% in 2010 to 40% in 2020 and are expected to reach 45-50% by 2030.
According to IHS Markit, almost 40-50% of the R&D budget for a leading and Tier 1 automaker in the world is expected to be dedicated to software & software-related feature development.
This highlights the rising importance of technology and electronics in the auto sector and is also the reason why global electronics giants like Sony and Apple are also announcing plans to enter the auto sector in the future seeing the vast potential in this market.
The direct competitors of KPIT in India are:
Tata Elxsi
L&T Technology Services
Tech Mahindra
KPIT acquired Technica Engineering, a company specializing in production-ready system prototyping (combination of network system architecture, hardware prototyping, and integration), automotive ethernet products, and tools for validation for Euro 80 million and a variable consideration of Euro 30 million in October 2022. Technica Engineering is headquartered in Munich and has a presence in Spain, Tunisia, and the USA, with a team of 600+ engineers. The annual revenue of Technica at the time of acquisition was ~ Euro 100 million with an EBITDA margin of ~20%.
Key MOATs
The biggest strength of the company is its domain-specific focus on the auto technology space vs other rivals who are also into other technology spaces like BFSI and electronics.
The future of the automotive tech industry is very bright with every area of a car becoming a potential area for technological disruption. With the rise of IoT, 5G, and electrification, technology is widely expected to continue to increase in importance in the auto sector and thus the market for KPIT’s offerings is also expected to grow in time.
The company already has a presence in all the major auto-producing economies in the world like the USA, Germany, South Korea, China, Japan, and 8 other nations. It already counts some of the world’s leading automakers like BMW, GM, Cummins, Honda, and many others as its customers. This is a big strength for the company as its wide global presence and association with many global players already establishes its credentials as a global auto technology company and makes winning new customers and contracts easier for them.
2. Key Historical Financials
FY21 performance saw a blip which was due to the adverse of COVID-19 on the company and the auto sector in general
Revenue growth of 19% in FY22 with EBITDA margin at 18%. Revenue grew at 47% on a YoY basis in Q3FY23 with an EBITDA margin of 19%. However, the organic revenue growth on a constant currency basis was 25% in Q3FY23 - the remaining growth was contributed by exchange rate movement and Technica consolidation
Cash flow conversion (CFO/EBITDA) is quite healthy in FY22 and ROE/ROCE is more than 20%.
Management has guided towards 18-21% revenue growth in FY23 (constant currency) with an EBITDA margin of 18-19%
3. What is my view on company valuation?
KPIT has seen a rise in its share price of 7x in the last 5 years vs Tata Elxsi (6.6x) and LTTS (2.5x).
The Company currently trades at a P/E (TTM) of 60x vs 58x of Tata Elxsi, & 32x of LTTS.
In terms of EV/EBITDA, KPIT is trading at close to 33x vs 41x of Tata Elxsi, & 19x of LTTS.
The growth of the company is expected to maintain its current momentum with the global auto sector getting back on track after COVID-19 and the subsequent raw material and semiconductor supply shocks. The sector growth is expected to be accelerated with more and more automakers looking to jump onto the electric and connected vehicles bandwagon before slowly building up to more complex technologies like connected vehicles and autonomous driving. Thus, KPIT can be expected to maintain a robust revenue and earning growth rate (organic) of ~25% in INR or ~20% in USD while the company’s addressable market grows.
Considering the elevated price levels for the entire IT industry, the current valuation seems expensive (implied PEG ratio of 2.5x), and investors can look into the company more seriously if it provides a significantly lower valuation than current levels.
4. What are the risks to the investment analysis?
Risks to the analysis are:
The company's sole operating area in the automotive industry is both its strength and weakness. This focus, while increasing the company’s commitment to developing this niche, also limits the company’s scope of operations and increases industry concentration risk related to the auto sector. This is a risk that its local rivals Tata Elxsi & LTTS are shielded from as they operate in multiple domains like media & communications, finance, medical devices, etc.
The company faces tough competition not only from ER&D companies worldwide but also from international automakers and it may also face competition from global giants like Sony & Apple in the future when they step into the auto sector.
Given that the company operates in the technology space, there is always the threat of disruption and obsolescence if it is not able to keep up with industry developments.
About the Author
I have over 6 years of experience in the Investment sector and have been an active prop trader in European Bond Futures in the past.
I graduated from the Master of Finance Program at Cambridge University in 2016 after completing my Bachelor of Engineering program at Jadavpur University, Kolkata in 2011.
I am an insignificant public investor & have an avid interest in following emerging trends both in technology and other fast-evolving sectors. I am also a lifelong learner and relish the chance to learn something new all the time.
Disclosure
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.