MOSL: KPIT TECHNOLOGIES (Neutral)-Profitability resurrection pushed further ahead

KPIT Technologies: Profitability resurrection pushed further ahead

(KPIT IN, Mkt Cap USD0.4b, CMP INR134, TP INR140, 4% Upside, Neutral)

• Revenue beat driven by license sale: KPIT’s 1QFY18 revenue growth of 3.5% QoQ CC beat our estimate of 1.3%. Growth was primarily driven by ~50% growth in Products & Platforms, which included a one-time license sale of USD2m. Excluding this, revenue growth was largely in-line. The strong start to the year has resulted in an ask rate of -2% to 0% to achieve its guidance of 6-8%; hence we raise estimates towards achieving the higher end of the band.
• Margin improvement yet elusive: EBITDA margin declined by 100bp to 9.1%, a 200bp miss to our estimate of 11.1%, led by INR appreciation, visa expenses and higher subcontracting expenses. The company wasn’t able to make use of the multiple levers it has, especially utilization, as lateral hiring of ~150 employees was undertaken while overall growth momentum has been subdued. Adjusted PAT at INR530m declined by 1.4% QoQ. The quarter included an exceptional gain of INR25.5m, resulting out of the sale of minority stake in Sankalp Semiconductors.
• Operational inefficiencies continue to weigh upon profitability: While growth momentum has been soft, KPIT undertook aggressive fresher hiring in FY17, impacting margins by >300bp. While this provides potential tailwinds in the form of utilization, which is currently at 68%, visibility of revival has been lowered, as 2Q would be impacted by wage hikes to the tune of 225-250bp. This is expected to lead to two consecutive years of PAT decline; -20% in FY17E and -11% in FY18E.