KPIT. 1QFY18 Result Update. Profitability does it again, looking for sustenance. Sector: Technology CMP: ` 130. Recommendation: Hold

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1 KPIT 1QFY18 Result Update Profitability does it again, looking for sustenance Sector: Technology CMP: ` 130 Recommendation: Hold Market statistics Current stock price (`) 130 Shares O/S (cr.) 19.7 Mcap (` cr) 2,567 52W H/L (`) 147/106 6m avg. volume 824,474 Bloomberg KPIT.IN Shareholding pattern Promoters Domestic Institution 1.13 Foreign Institution Non-institution of which more than 1% Warhol 9.87 Fidelity Puritan Trust 4.56 KPIT vs Nifty KPIT Capital efficiency & valuations Nifty 80 Jul-16 Nov-16 Mar-17 Jul-17 Particulars FY17 FY18E FY19E RoE (%) EPS (`) CEPS (`) P/E (x) P/BV (x) EV/EBITDA (x) Income growth (%) EBITDA growth (%) (19.7) (4.5) 24.0 PAT growth (%) (27.3) (2.1) 25.5 KPIT s 1QFY18 revenue increased 4.8% QoQ in US$ terms at US$134.4mn (constant currency growth of 3.5%). EBITDA margin was at 9.1%, down 101 bps QoQ. Recurring PAT was at `529mn. Amid robust revenue growth momentum, upcoming investments and multiple pressure points, KPIT provided a cc revenue growth guidance of 6-8% for FY18 (they are guiding to the higher end). We are unable to see sustainability on the margins front. We maintain our Hold rating on the stock. Disappointing profitability performance: KPIT s 1QFY18 revenue increased 4.8% QoQ to US$134.4mn, cc growth of 3.5%. In terms of industry verticals, Automotive increased by 3.5% QoQ while Energy & Utilities grew by 5.2%. Manufacturing vertical declined 1.2%. Amongst SBUs, DT was flattish QoQ and IES grew 6% respectively while PES increased by 3.8% (organically). During the quarter, KPIT had ~US$2 mn worth technology license revenues which will not repeat in Q2. Products & Platform SBU increased by 48.5%. The exchange movement impacted EBITDA margin by 110bps during the quarter. Other Key details 1) Amongst geographies, US declined by 1% on a QoQ basis while Europe and APAC grew by 18% (includes revenue from MicoFuzzy) and 16% respectively. 2) There was a 5.6% QoQ growth in the top customer account. The 20 top strategic accounts constituted 51.5% of the total revenues and grew 13.3% QoQ. Similarly the 40 top strategic accounts contributed 60.6% of the revenues and had a QoQ growth of 7.7%. 3) The overall digital revenues for KPIT now stand at ~17%. Digital revenues have been growing at ~25-30%+ for KPIT. 4) Cash at Mar-end was Rs4.6bn (compared to Rs4.7bn in Dec 16). 5) Wage hikes would be kicking in the next quarter and KPIT anticipates an OPM hit of bps in 2Q. KPIT still has some margin levers going ahead. KPIT believes the employee pyramid correction is done; some benefit will accrue in 2Q onwards. Revenue growth with profitability is a focus for FY18, with Growth, utilization improvement and nonbillable cost management will be the 3 key levers for profitability improvement going ahead. While 2HFY17 saw a focus on higher utilisation, we expect FY18 to see more hiring-led growth. FY18 to see higher growth compared to FY17. KPIT guided to a cc revenue growth guidance of 6-8% for FY18 in Q1 After a good Q1 on the revenue front, it is guiding for the higher end of the guidance band. KPIT is looking at several margin levers to provide a buffer to the margin during the year. KPIT has added 50 account managers during the last 6 months which has resulted for higher costs for the quarter. Deal wins showing traction: Over recent quarters, KPIT won deals across Engineering, SAP, JDE, EPLM, and ES. There was an increased traction in the areas of AMS & IMS combined, around SAP, Oracle, BI and ES. These opportunities seen were across all geographies, including Europe and Asia. Their investments in SBU & IBU and focus on large deals will start showing results. KPIT s Strategic Client Engagement team is focusing on winning large annuity deals. Valuation and view: We model 11.2% growth in FY18E and 8.3% US$ revenue growth in FY19E. SAP SBU would start seeing normalized business from FY18, while Integrated Enterprise Solutions is looking positive. Margins would be on an upward trajectory. We maintain our Hold rating on the stock on compelling valuations. ANALYST Naushil Shah naushil.shah@trustgroup.co.in

2 Exhibit 1: Quarterly details ` mn 1QFY17 4QFY17 1QFY18 QoQ (%) YoY (%) Comments Revenues (in US$ mn) Revenues 8,033 8,585 8, Operating costs 7,176 7,714 7, EBITDA (8.7) (7.2) EBITDA margin (%) (101)bps (153)bps - Interest expense ,995.2 (54.6) - Depreciation (23.2) Other income, net (incl forex) PBT (3.9) - Taxes (4.2) Tax rate to be ~24-26% Effective tax rate (%) bps (6)bps PAT (1.4) (3.8) Net margin (%) (18)bps (78)bps Reported profits Source: Company Exhibit 2: Change in estimates ` mn FY18E Includes US$2mn technology license revenues which will not repeat in Q2 KPIT has margin levers like people productivity, span of control and employee pyramid to gain expansion FY19E Old New %Chg Old New %Chg Revenue (US$ mn) Revenue 35,435 35, ,738 38,705 (0.1) EBITDA margin (%) (185)bps (145)bps EPS (`) (13.2) (8.4) Source: Trust Research Exhibit 3: Geographical wise Performance Geographical mix Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 US Europe RoW Total Source: Company LOB wise Performance: %. In terms of industry verticals, Automotive increased by 3.5% QoQ while Energy & Utilities grew by 5.2%. Manufacturing vertical declined 1.2%. Amongst SBUs, DT was flattish QoQ and IES grew 6% respectively while PES increased by 3.8% (organically). 2

3 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 Human Resources: In Q1FY18, there was a net increase of 151 people. KPIT plans to add ~ fresh graduates in FY18. Exhibit 4: Employee strength at KPIT Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Development team - Onsite (avg) 1,564 1,568 1,635 1,643 1,651 1,634 1,664 1,664 1,692 Development team - Offshore (avg) 8,514 8,416 8,190 8,279 8,553 8,986 9,238 9,048 9,608 Onsite FTE 1,362 1,430 1,474 1,486 1,470 1,464 1,483 1,485 1,513 Offshore FTE 5,654 5,870 5,655 5,813 5,826 6,214 6,267 6,183 6,614 Development (at qtr end) 10,062 9,883 9,768 10,095 10,450 10,816 11,017 11,225 11,368 General (end of qtr) Marketing (end of qtr) Total (at qtr end) 10,839 10,659 10,559 10,910 11,288 11,666 11,881 12,110 12,261 Onsite utilization Offshore utilisation Source: Company, Trust Research Client details: Amongst geographies, US declined by 1% on a QoQ basis while Europe and APAC grew by 18% (includes revenue from MicoFuzzy) and 16% respectively. Exhibit 5: Client details Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Clients Added Total active clients Customers with a run rate of $1mn Top customer - Cummins (%) Top 5 Clients (%) NA Top 10 Clients (%) NA Source: Company Exhibit 6: OPM was down 101bps QoQ 30 EBITDA margin SG&A (%) Exhibit 7: DSO days were up 2 days QoQ to Source: Company, Trust Source: Company, Trust 3

4 Financials Income Statement (` mn) Revenues 29,899 32,264 33,234 35,704 38,705 Op. Expenses 26,328 27,922 29,747 32,374 34,578 EBITDA 3,571 4,342 3,487 3,330 4,127 Other Income Depreciation ,064 EBIT 3,065 3,933 2,867 2,797 3,464 Interest PBT 2,786 3,767 2,731 2,722 3,433 Tax PAT 2,671 2,922 2,125 2,080 2,609 Minority Ex. ordinary (300) (113) Adj Pat 2,371 2,809 2,386 2,105 2,609 Key Parameters Per share (`) EPS CEPS BVPS DPS Payout (%) Valuation (x) P/E P/BV EV/EBITDA Dividend Yield (%) Return ratio (%) EBIDTA Margin PAT Margin ROAE ROACE Leverage Ratios (x) Long Term D/E Net Debt/Equity (0.2) (0.2) (0.2) (0.3) (0.3) Debt/EBITDA Interest Coverage Current ratio Growth Ratios (%) Income growth EBITDA growth (15.6) 21.9 (19.7) (4.5) 24.0 PAT growth (27.3) (2.1) 25.5 Turnover Ratios F.A Turnover x Debtors Days Payable days Balance Sheet (` mn) Equity Share Capital Reserves & Surplus 12,585 13,432 15,465 16,990 18,900 Total Shareholders Fund 12,961 13,808 15,841 17,366 19,276 Minority Interest Non- current liabilities 683 1,569 1,696 1,538 1,380 Long term Borrowings 780 1,673 1, Deferred tax liabilities (520) (620) Other LT liabilities & prov Current Liabilities 8,536 5,956 7,676 8,021 8,369 Short-term borrowings 3, ,217 2,167 2,117 Trade payables 1,308 1,233 1,311 1,419 1,516 Other cur liabilities & Prov 3,551 4,225 4,148 4,435 4,737 Total Liabilities 22,181 21,333 25,214 26,925 29,026 Assets Non- current Assets 3,336 4,531 6,465 5,110 5,542 Fixed assets 1,720 2,850 3,968 3,261 3,548 Goodwill 5,696 4,025 4,117 4,117 4,117 Non-current investments Long-term loans & adv 1,266 1,510 1,548 1,663 1,803 Other non-current assets Current assets 13,149 12,777 14,631 17,699 19,367 Current investments Inventories Trade receivables 6,979 6,861 7,843 8,412 9,120 Cash & bank balances 3,638 3,953 3,902 6,058 6,748 Short-term loans & adv Other current assets 1, ,724 1,859 2,015 Total Assets 22,181 21,333 25,214 26,926 29,026 Cash flow Statement PBT 2,786 3,767 2,731 2,722 3,433 Depreciation , ,064 Interest Exp Others (300) (113) CF before W.cap 3,386 4,412 4,574 3,700 4,527 Inc/dec in W.cap 100 (617) 2,659 (174) 683 Op CF after W.cap 3,286 5,029 1,915 3,874 3,844 Less Taxes Net CF From Operations 3,171 4,183 1,309 3,232 3,020 Inc/(dec) in F.A + CWIP 1,130 1,822 1, ,350 (Pur)/sale of Investments (2,062) (2,369) 92 (0) - Others (279) (165) (136) (76) (31) CF from Invst Activities (2,172) (247) (1,381) Loan Raised 67 (2,286) 1,163 (250) (250) Equity Raised (1,907) (1,455) Dividend (830) (949) CF from Fin Activities (2,093) (4,249) 811 2, Net inc /(dec) in cash 1, (51) 3,902 6,058 Op. bal of cash 1,908 3,638 3,953 6,058 6,748 Cl. balance of cash 3,638 3,953 3,902 2,722 3,433 4

5 Institutional Equity Team Names Designation Sectors ID's Desk-Number Naren Shah Head Of Equity Sales Trading & Dealing Rajesh Ashar Sales Trader Dealing Desk Research Team Binyam Taddese Analyst Rates & Credit Research Naushil Shah Analyst Technology, Media & Telecom Tushar Chaudhari Analyst Commodities, Auto & Mid-caps Ritu Chaudhary Associate FMCG & Consumer Durable

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