Changing into Higher Gear

KPIT Technologies is not your typical Indian back-office IT firm. KPIT has developed competence in automotive electronics that puts it ahead of competitors. It has partnerships with over 180 corporations and OEM's in this vertical alone. Here are KPIT's future revenues drivers:

Growing demand for automotive technology. Auto manufacturers are obsessed about improving fuel efficiency and developing vehicles with varied electronic devices. The increasing use of technology has resulted in a typical vehicle in the US carrying electronic equipment worth $3200, up from under $1500 only 10 years back. The market for automotive technology is estimated at $200 billion this year.

Advantage automotive competency. The growth in automotive technology usage shows in its topline which accounts for 25 per cent its revenues. The company has a whole host of offerings that cater to the vertical including AUTOSAR, powertrain, infotainment, vision systems.

SAP improvement. The SAP SBU brings in a quarter of KPIT's revenues. SAP revenues declined 10 per cent in FY14 because of changing product mix and delays in deal finalization. KPIT utilized the time to develop its offerings in Asia and Europe and improving capabilities in SAP's database software HANA. Q2FY15 saw a turnaround in SAP revenue with a 10 per cent growth (q-o-q).

Higher Margins. EBIDTA margins jumped 236bps on a q-o-q basis because of improved profitability in the SAP business and other revenues. SAP margins recovered to single digit from breakeven levels in Q1. The company is also looking to rationalise low-margin, non-core projects to improve profitability.

Risks. SAP revenue turnaround has to show sustained growth for KPIT's performance to hold up. Slowdown in the US and Europe and rupee appreciation are real risks for KPIT.

Outlook and Valuations. KPIT has guided FY15 revenues of $500mn (FY14 revenues at $444 million). PAT growth guidance is at 18-21 per cent. KPIT has managed annual earnings growth of 27.5 per cent in the last three years. With the demand for automotive electronics growing and SAP revenues turning around, KPIT appears set for a better outlook than last financial. At the current price, KPIT trades at an inexpensive 13 times its ttm earnings Buy.