MOSL: KPIT TECHNOLOGIES (Neutral)- An all-round beat-Sustainable execution crucial for re-rating

​KPIT Technologies:An all-round beat; Sustainable execution crucial for re-rating

(KPIT IN, Mkt Cap USD0.5b, CMP INR148, TP INR160, 8% Upside, Neutral)

• Strong revenue beat: 2QFY18 revenue growth of 4.3% QoQ CC beat our estimate of 1%. Growth was driven by a strong pick-up in the overlapping vertical of Automotive & Transportation (43% of revenue; 12% QoQ) and the service line of Product Engineering Services (38% of revenue; +13% QoQ). Growth would have been higher by 150bp had it not been for the absence of a USD2m license sale from previous quarter. 13.7% YoY growth in 1HFY18 (~10% organic) puts KPIT on a strong footing after flat revenue in FY17.
  
• Margin improvement despite wage hikes: EBITDA margin at 9.9% was up 80bp QoQ, and above our estimate of 8.5%. Expansion was seen despite a wage hike and comes as a positive, especially after multiple quarters of disappointment. The 180-200bp negative impact of salaries was more than offset by [1] strong revenue growth, [2] absorption of freshers, [3] higher utilization (+140bp on offshore and +300bp on onsite), and [4] operational cost control. PAT at INR603m grew by 8.7% QoQ, led by the overall operational beat.
  
• But (the lack of) consistency is our issue: After two years of flat revenue, KPIT is well on its way to double-digit growth in FY18, led by strength in Engineering and stability in the IT business. Although margins improved this time around, the past few quarters have been glaring with inefficiencies, as the company dealt with fulfilling the intent of first ramping up investments and then rationalizing the pyramid (by hiring a large numbers of freshers) in the absence of growth.