KPIT Technologies
BSE SENSEX
36,034
S&P CNX
11,050
30 January 2018
Company Update| Sector: Technology
CMP: INR219
TP: INR250 (+14%)
Neutral
KPIT to merge with Birlasoft, demerge Engineering
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
KPIT IN
200.2
223/105
16/60/33
41.3
0.6
242.0
81.1
Merger with Birlasoft; Demerger of Engineering:
KPIT announced a merger with
Birlasoft and a subsequent demerger of its Engineering business, effectively
implying creation of two separate businesses – the combined KPIT-Birlasoft entity
and the Engineering entity. As part of the deal, shareholders of Birlasoft will receive
22 equity shares of the combined KPIT-Birlasoft entity for every nine shares of
Birlasoft.
Implied EV of ~USD200m for Birlasoft:
Share count at Birlasoft was 31.4m,
implying that the swap ratio would lead to creation of ~77m shares, 39% of current
equity base. At CMP of INR208 as on 29
th
January 2018, this implies EV of INR13b
(USD200m) for Birlasoft, after adjusting for net cash of INR3b (USD47m) on the
company’s balance sheet.
Engineering business to demerge, process to take more than a year:
Post the
merger with Birlasoft, the Engineering business will be listed and shareholders of
KPIT-Birlasoft will receive one share in the Engineering entity for every one share
held in the combined entity. The entire process is likely to take more than a year,
with the merger likely completing by end-FY19 and the demerger of Engineering
Services taking place in early FY20.
Combined entity to be ~USD500m IT Services business:
Revenues at Birlasoft are
USD140m, with an EBITDA margin of ~14%. This implies USD700m revenues for the
merged entity with a 10.9% EBITDA margin (80bp higher than KPIT). IT Services will
be ~USD500m business and Engineering Services run-rate will be USD200m+.
Financials Snapshot (INR b)
2018E 2019E 2020E
Y/E Mar
Sales
36.3 39.3
42.9
EBITDA
3.7
4.2
4.5
PAT
2.4
2.7
3.4
EPS (INR)
12.0 13.3
17.2
EPS Gr. (%)
0.8 10.5
29.1
BV/Sh. (INR)
89.4 102.6 119.8
RoE (%)
14.3 13.8
15.4
RoCE (%)
15.6 16.2
18.6
P/E (x)
17.4 15.7
12.2
P/BV (x)
2.3
2.0
1.7
Shareholding pattern (%)
As On
Dec-17 Sep-17 Dec-16
Promoter
18.9
18.9
16.7
DII
6.5
6.5
1.1
FII
50.0
48.4
57.4
Others
24.5
26.1
24.8
FII Includes depository receipts
Stock Performance (1-year)
KPIT Tech.
Sensex - Rebased
200
175
150
125
100
A positive development with potential to unlock value
Since the SaaS-ification of application offerings hurt the ERP segment, it
weighed heavily on KPIT’s Sparta and Systime acquisitions, and overall
financials have been subdued ever since. Additionally, the company has failed
to derive any material synergy benefits from cross-selling – with hardly any IT
services clients in the automotive segment and hardly any engineering clients
in other industries. The core engineering business (currently 39% of revenue)
has been growing in double-digits and has a superior margin profile (mid-teens
v/s 10% for the overall company).
Against this backdrop, we see the demerger as a positive development not only
from the point of view of unlocking the value of the attractive engineering
business, but also channelizing the bandwidths of different businesses under
separate companies and leadership.
Zinnov placed KPIT in the leadership zone for automotive engineering ratings in
2017 on its capability/scalability matrix. The demerger brings these capabilities
in limelight, and thus, harbors potential to unlock value.
Ashish Chopra – Research Analyst
(Ashish.Chopra@MotilalOswal.com); +91 22 6129 1530
Sagar Lele – Research Analyst
(Sagar.Lele@MotilalOswal.com); +91 22 6129 1531
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.

KPIT Technologies
Moving to SOTP valuation basis for changed contours of business
Given the changed contours of the business, we change our valuation
methodology to SOTP, separately valuing the IT Services and Engineering
businesses, even though the scheme becomes effective only in FY20.
In the IT Services business, we expect 6-7% revenue growth with ~10% EBITDA
in KPIT’s IT business (72%), and 12% growth with ~14% EBITDA margin in the
Birlasoft component (29%). This drives 7.5% revenue CAGR and 11.5% average
EBITDA margin. We discount future earnings thus generated by 12x, at a
discount to midcap peers due to lower overall growth and margins.
We expect 15% revenue CAGR in Engineering Services, with the EBITDA margin
picking up to 14%. Comparable companies such as CYL, ELXI and LTTS have been
ascribed P/E multiple between 13x and 24x, and we ascribe the high-growth
engineering business a multiple of 18x, at the midpoint, below LTTS’ 21x and
Tata Elxsi’s 24x.
Adding cash as another INR17 per share, we arrive at a price target of
INR250/share, implying an upside of 14%. Given limited upside on our target, we
maintain our
Neutral
rating on KPIT, but will recommend buying into any
material correction.
Exhibit 1: Break-up by business
FY18
Birlasoft
KPIT Total IT
140
348
488
14.0%
1,264
12.0%
1,084
64.5
824
9.0%
2,020
7.0%
1,571
64.5
1,194
10.4%
3,284
8.4%
2,655
64.5
2,018
Combined IT
FY19
Birlasoft
KPIT Total IT
157
372
529
12.0
7.0
8.4
14.0% 10.0% 11.2%
1,438 2,439 3,877
12.0%
8.0%
9.2%
1,232 1,951 3,184
65.5
65.5
65.5
937 1,483 2,420
Engineering
Birlasoft
169
12.0
14.0%
1,577
12.0%
1,351
66.5
1,027
FY20
KPIT Total IT
398
568
7.0
7.3
10.5% 11.5%
2,782 4,359
8.5%
9.5%
2,252 3,603
66.5
66.5
1,712 2,739
FY19
FY20
244
280
15.0
15.0
11.0% 13.0% 14.0%
1,504 2,076 2,610
9.0% 11.0% 12.0%
1,231 1,757 2,237
64.5
65.5
66.5
935 1,335 1,700
Source: Company, MOSL
FY18
212
USD m
Revenue
YoY (%)
EBITDA margin
EBITDA (INR m)
EBIT margin
EBIT
INR/USD
EBIT * [1-t] (INRm)
Exhibit 2: Price target of INR250/share based on SOTP valuation
SOTP Valuation
FY20 Operating PAT - INR m
FY18-20 CAGR (%)
Multiple (x)
Target mcap (INR m)
Shares issued
nosh (m)
Value per share (INR)
Target price (INR)
CMP (INR)
Upside (%)
IT
2,739
16.5
12
32,864
76.3
274
120
249
219
13.8
Source: Company, MOSL
274
112
274
17
Engg
1,700
34.8
18
30,607
4,772
Cash
30 January 2018
2

KPIT Technologies
Exhibit 3: Comparable companies
CMP
(INR)
Cyient
L&T Technology Services
Tata Elxsi
Average PE (x)
628
1,278
1,083
EPS (INR)
FY19E
41.2
52.7
40.6
FY20E
47.1
61.7
45.9
FY19E
15.2
24.3
26.7
PE (x)
FY20E
13.3
20.7
23.6
19.2
Source: Company, MOSL
Exhibit 4:
1-year forward P/E band
P/E (x)
Min (x)
20.0
15.0
10.0
5.0
0.0
Avg (x)
+1SD
Max (x)
-1SD
Exhibit 5:
1-year forward P/B band
P/B (x)
Min (x)
6.0
Avg (x)
+1SD
Max (x)
-1SD
12.8
9.9
6.9
2.0
15.4
14.7
4.5
3.0
1.5
0.0
3.9
2.5
1.9
0.5
1.2
2.0
30 January 2018
3

KPIT Technologies
Financials and valuations
Income statement
Y/E March
Sales
Change (%)
Cost of Services
SG&A Expenses
EBITDA
% of Net Sales
Depreciation
Interest
Other Income
PBT
Tax
Rate (%)
Minority Interest
PAT
Extraordinary
Net Income
Change (%)
FY13
22,386
50.3
14,640
4,096
3,650
16.3
466
154
-170
2,860
766
26.8
-86
2,009
-13
1,996
51.7
FY14
26,940
20.3
18,180
4,528
4,233
15.7
540
287
-74
3,332
941
28.2
0
2,391
98
2,489
24.8
FY15
29,899
11.0
21,473
5,155
3,271
10.9
851
279
345
2,486
114
4.6
0
2,371
0
2,371
-4.7
FY16
32,243
7.8
21,859
5,982
4,402
13.7
691
152
248
3,806
830
21.8
0
2,976
0
2,976
25.5
FY17
33,234
3.1
23,549
6,199
3,486
10.5
827
136
207
2,730
606
22.2
0
2,124
261
2,385
-19.9
FY18E
36,272
9.1
25,744
6,869
3,659
10.1
794
100
349
3,114
741
23.8
0
2,372
0
2,372
-0.5
FY19E
39,330
8.4
27,296
7,859
4,176
10.6
870
86
318
3,538
885
25.0
0
2,654
0
2,654
11.9
(INR M)
FY20E
42,886
9.0
29,809
8,615
4,462
10.4
222
69
399
4,570
1,142
25.0
0
3,427
0
3,427
29.1
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Minority Interest
Loan & other long term liabilities
Capital Employed
Fixed Assets
Other LT assets
Curr. Assets
Debtors
Cash & Bank Balance
Loans & Advances
Current Liab. & Prov
Net Current Assets
Application of Funds
E: MOSL Estimates
FY13
386
9,976
10,362
270.2
1,602
12,235
2,005
5,785
8,005
4,673
1,921
1,412
5,597
2,409
12,235
FY14
377
12,360
12,736
-
1,549
14,285
2,161
5,994
10,122
6,743
1,908
1,471
6,949
3,173
14,285
FY15
377
12,577
12,954
-
1,211
14,165
2,328
5,088
13,149
6,979
4,228
1,942
8,536
4,613
14,165
FY16
383
13,424
13,807
-
2,189
15,996
2,850
4,025
12,777
6,861
4,333
1,583
5,956
6,821
15,996
FY17
384
15,440
15,823
18.1
1,696
17,538
3,968
4,117
14,631
7,843
3,902
2,886
7,676
6,956
17,538
FY18E
387
17,455
17,842
28.0
1,479
19,349
4,287
4,176
16,597
8,002
5,277
3,317
8,002
8,594
19,349
FY19E
387
20,109
20,496
28.0
879
21,402
4,217
4,176
19,119
8,590
6,969
3,560
8,590
10,529
21,402
(INR M)
FY20E
387
23,536
23,923
28.0
279
24,230
4,795
4,176
21,965
9,392
8,681
3,893
9,392
12,574
24,230
30 January 2018
4

KPIT Technologies
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout %
Valuation (x)
P/E
Cash P/E
EV/EBITDA
EV/Sales
Price/Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC
Turnover Ratios
Debtors (Days)
Fixed Asset Turnover (x)
FY13
10.6
12.5
52.2
0.9
8.5
FY14
12.9
14.9
64.6
1.1
8.6
FY15
11.8
16.3
65.7
1.2
10.1
18.5
13.4
11.8
1.3
3.3
0.5
23.0
30.5
27.2
76
11.5
20.5
27.5
23.0
91
12.9
18.4
16.8
20.4
85
13.5
FY16
14.1
17.5
69.0
1.5
10.6
15.5
12.5
9.0
1.2
3.2
0.7
21.0
24.3
26.2
78
12.7
FY17
11.9
14.8
79.2
2.0
16.8
18.4
14.8
11.3
1.2
2.8
0.9
14.3
15.9
16.4
86
9.8
FY18E
12.0
16.0
89.4
2.0
16.6
17.4
13.1
9.8
1.0
2.3
0.9
14.3
15.6
15.8
81
8.8
FY19E
13.3
17.6
102.6
2.0
15.0
15.7
11.9
8.1
0.9
2.0
0.9
13.8
16.2
17.4
80
9.3
FY20E
17.2
18.3
119.8
2.0
11.7
12.2
11.5
7.0
0.7
1.7
0.9
15.4
18.6
21.2
80
9.6
Cash Flow Statement
Y/E March
CF from Operations
Cash for Working Capital
Net Operating CF
Net Purchase of FA
Free Cash Flow
Net Purchase of Invest.
Net Cash from Invest.
Proc. from equity issues
Proceeds from LTB/STB
Dividend Payments
Cash Flow from Fin.
Net Cash Flow
Exchange Diff/Cash from sub.
Opening Cash Bal.
Add: Net Cash
Closing Cash Bal.
E: MOSL Estimates
FY13
2,286
-1,083
1,204
-1,730
-526
-1,769
-3,499
1,706
1,192
-145
2,753
458
-3
1,838
458
1,921
FY14
2,760
-1,730
1,030
-2,023
-994
112
-1,912
75
951
-197
829
-53
57
1,921
-53
1,908
FY15
3,150
880
4,029
-1,184
2,845
85
-1,099
0
-610
0
-610
2,320
-184
1,908
2,320
4,228
FY16
3,462
-2,103
1,360
-1,214
146
0
-1,214
0
318
0
318
464
-3,034
4,228
464
4,333
FY17
3,024
-566
2,458
-1,944
514
0
-1,944
0
-674
0
-674
-160
-3,310
4,333
-160
3,902
FY18E
4,142
-263
3,879
-1,113
2,766
0
-1,113
0
-399
0
-399
2,367
-4,029
3,902
2,367
5,277
FY19E
4,241
-243
3,997
-800
3,197
0
-800
0
-686
0
-686
2,511
-3,857
5,277
2,511
6,969
(INR M)
FY20E
4,691
-332
4,358
-800
3,558
0
-800
0
-669
0
-669
2,889
-4,215
6,969
2,889
8,681
30 January 2018
5

Explanation of Investment Rating
Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
Expected return (over 12-month)
>=15%
< - 10%
< - 10 % to 15%
Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
KPIT Technologies
*In case the recommendation given by the Research Analyst becomes inconsistent with the investment rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures to make the recommendation consistent with the investment rating legend.
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KPIT Technologies
No
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investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule
15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S.,
MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of
this chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore, may not be subject
to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
For Singapore
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a subsidiary of Motilal
Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the
Securities and Futures Act (Chapter 289), as amended from time to time. In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Disclaimer:
The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced
in any form, without prior written consent. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial
instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in
this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of
independent judgment by any recipient. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document
(including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including
those involving futures, options, another derivative products as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy,
completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the
views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval.
MOSL, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform
investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this
into account before interpreting the document. This report has been prepared on the basis of information that is already available in publicly accessible media or developed through analysis of MOSL. The views expressed are those of the analyst, and
the Company may or may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or
published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such
distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all
jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or representatives shall
be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.
The person accessing this information specifically agrees
to exempt MOSL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSL or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSL
or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring Centre, 2nd Floor, Palm
Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080 1000. Compliance Officer: Neeraj Agarwal, Email Id:
na@motilaloswal.com,
Contact No.:022-30801085.
Registration details of group entities.: MOSL: SEBI Registration: INZ000158836 (BSE/NSE/MSE); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser: INA000007100.
Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP000004409) offers wealth
management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Commodities Broker Pvt. Ltd. offers Commodities Products. * Motilal Oswal Real
Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products
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