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MOSL: KPIT TECHNOLOGIES (Buy)-Strong Engineering traction but at the expense of margins

KPIT TECHNOLOGIES: Strong Engineering traction but at the expense of margins

(KPIT IN, Mkt Cap USD0.6b, CMP INR215, TP INR280, 30% Upside, Buy)

 

• Operating performance below estimate: KPIT's USD revenue/EBITA/PAT grew 8.3%/45.7%/32.7% YoY in 9MFY19. 3QFY19 revenue declined 1.7% QoQ in constant currency (3% miss). While Engineering SBU (43% of revenue) grew 6.4% QoQ, IT Business dragged with a decline of 7.5% QoQ due to completion of a few large projects. EBITDA margin shrank 60bp QoQ (excluding translation loss) - 110bp miss - due to weaker revenue. PAT declined 25% QoQ (+6% YoY) to INR656m, 14% below our estimate due to the operational miss.
• Segmental margin data come as a surprise: KPIT shared the 3QFY19/9MFY19 data of the IT and Engineering businesses. The key surprise for us was the 9MFY19 EBITDA margin in Engineering Services, which stood at 11.8% v/s 15.4% for IT Services. This pegs KPIT's Engineering margin below that of peers such as LTTS and TELX, contrary to the impression that Engineering had better profitability than IT. Management cited ramp-up in employees, investments in building solutions and hardware procurement nature of P&P as the key factors behind the same, while the gross margin remained strong. It expects the margin trajectory to improve, going forward.