KPIT: a high-growth automotive pure-play
KPIT published its Q1 FY20, its second quarterly earnings since it became an automotive ER&D pure-play, since the sale of its IT service business to Birlasoft, last year.
KPIT’s Q1 FY19 financials showed a great momentum: revenues were up 19.3%
In other words, KPIT is accelerating after a “soft” Q4 FY19 (+13.4%, and an EBITDA margin of 12.8%). The company is benefitting from its “digital” positioning, working around powertrains/ADAS/connected vehicles (~71% of revenues in Q1 FY20).
KPIT continues to see plenty of growth opportunities in the automotive ER&D service industry and has no intention of expanding to other verticals. However, KPIT is working on de-risking its profile and is involved in several initiatives.
At a strategic level, KPIT wants to focus on 25 key clients (out of a total of 60 active clients), mostly tier-one OEMs and several tier-one suppliers. The company is doing business with 17 of these 25 and believes it will open 3 additional accounts in the next six months
In doing so, KPIT is expanding its client base from passenger vehicles OEMs and tier-one suppliers to commercial vehicles manufacturers (we are guessing tuck and off-highway vehicle vendors) and new mobility services vendors (two-wheelers, shared mobility, last-mile logistics, and fleet vendors). The expansion is a work-in-progress, with KPIT still deriving approximately 73% of revenues from
KPIT wants to reduce its client concentration, which is high: the company derived 81% of its revenues from its T25 strategic accounts (which is 17 clients), with its largest client being a German automotive OEM (BMW in all likelihood). By comparison, Cyient, which is twice as big as KPIT, and more diversified, derives 44% of its revenues from its top ten clients.
Will be this client diversification be enough to de-risk its profile? The company certainly thinks so and has
Finally, KPIT is also aiming to improve its margins and guided the market for an EBITDA margin in the range of 14%-15% in FY20.