KPIT: a high-growth automotive pure-play

/ September 1, 2019/ Automotive, Financials, India, KPIT

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% yoy at CC to USD 73m. The growth is all organic. Meanwhile, KPIT increased its EBITDA margin to 14.6%.

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 passenger vehicles.

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 an impressive FY20 guidance of revenue growth in the range of 16% to 18%. KPIT, despite its small size, is overperforming the market and overperforming a best-in-class vendor such as Alten, which grew its automotive revenues by 10% in H1 2019.

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.

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