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

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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 18.93 Domestic Institution 1.13 Foreign Institution 52.34 Non-institution 27.60 of which more than 1% Warhol 9.87 Fidelity Puritan Trust 4.56 KPIT vs Nifty 130 120 110 100 90 KPIT Capital efficiency & valuations Nifty 80 Jul-16 Nov-16 Mar-17 Jul-17 Particulars FY17 FY18E FY19E RoE (%) 14.3 12.5 14.2 EPS (`) 10.8 10.5 13.1 CEPS (`) 14.9 14.9 18.5 P/E (x) 12.0 12.3 9.8 P/BV (x) 1.6 1.5 1.3 EV/EBITDA (x) 6.5 6.3 4.9 Income growth (%) 3.0 7.4 8.4 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 230 250bps 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 +91-22 4224 5125 naushil.shah@trustgroup.co.in

Exhibit 1: Quarterly details ` mn 1QFY17 4QFY17 1QFY18 QoQ (%) YoY (%) Comments Revenues (in US$ mn) 119.8 128.3 134.4 4.8 12.2 Revenues 8,033 8,585 8,704 1.4 8.4 - Operating costs 7,176 7,714 7,909 2.5 10.2 EBITDA 856 870 795 (8.7) (7.2) EBITDA margin (%) 10.7 10.1 9.1 (101)bps (153)bps - Interest expense 56 0 26 5,995.2 (54.6) - Depreciation 188 248 190 (23.2) 1.4 + Other income, net (incl forex) 116 12 121 865.0 4.2 PBT 728 635 699 10.2 (3.9) - Taxes 177 97 170 74.4 (4.2) Tax rate to be ~24-26% Effective tax rate (%) 24.3 15.3 24.3 894bps (6)bps PAT 551 537 530 (1.4) (3.8) Net margin (%) 6.9 6.3 6.1 (18)bps (78)bps Reported profits 551 537 555 3.3 0.7 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) 537 550 2.4 587 595 1.4 Revenue 35,435 35,704 0.8 38,738 38,705 (0.1) EBITDA margin (%) 11.4 9.3 (185)bps 12.2 10.7 (145)bps EPS (`) 12.1 10.5 (13.2) 14.3 13.1 (8.4) Source: Trust Research Exhibit 3: Geographical wise Performance Geographical mix Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 US 69.7 67.0 69.6 68.9 67.5 67.2 70.1 68.1 63.9 Europe 16.7 18.2 17.5 18.0 18.4 16.2 14.4 16.4 18.8 RoW 13.6 14.8 13.0 13.1 14.1 16.6 15.5 15.5 17.3 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 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

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 ~750-1000 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) 585 578 586 592 604 608 616 629 635 Marketing (end of qtr) 192 198 205 223 234 242 248 256 258 Total (at qtr end) 10,839 10,659 10,559 10,910 11,288 11,666 11,881 12,110 12,261 Onsite utilization 87.1 91.2 90.2 90.5 89.0 89.6 89.2 89.3 89.4 Offshore utilisation 66.4 69.8 69.1 70.2 68.1 69.2 67.8 68.3 68.8 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 2 2 3 3 2 3 2 3 2 Total active clients 210 212 215 218 220 223 225 228 230 Customers with a run rate of $1mn+ 87 88 94 94 88 90 89 90 90 Top customer - Cummins (%) 14.2 14.2 14.1 13.9 12.8 13.1 12.6 12.7 12.5 Top 5 Clients (%) 30.7 29.7 27.2 26.8 28.1 27.8 27.2 27.1 NA Top 10 Clients (%) 42.2 41.5 39.4 39.3 40.3 38.6 38.9 38.0 NA Source: Company Exhibit 6: OPM was down 101bps QoQ 30 EBITDA margin SG&A (%) 25 20 15 10 5 Exhibit 7: DSO days were up 2 days QoQ to 76 90 85 80 75 0 70 Source: Company, Trust Source: Company, Trust 3

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 345 282 207 346 400 Depreciation 851 691 827 878 1,064 EBIT 3,065 3,933 2,867 2,797 3,464 Interest 279 165 136 76 31 PBT 2,786 3,767 2,731 2,722 3,433 Tax 115 845 606 642 824 PAT 2,671 2,922 2,125 2,080 2,609 Minority - - - 1 - Ex. ordinary (300) (113) 261 26 - Adj Pat 2,371 2,809 2,386 2,105 2,609 Key Parameters Per share (`) EPS 13.8 15.0 10.8 10.5 13.1 CEPS 18.1 18.6 14.9 14.9 18.5 BVPS 66.8 71.0 80.2 88.3 97.8 DPS 1.1 2.2 2.2 2.5 3.0 Payout (%) 9.5 17.4 23.9 27.9 26.8 Valuation (x) P/E 9.0 9.6 12.0 12.3 9.8 P/BV 1.9 2.0 1.6 1.5 1.3 EV/EBITDA 4.4 5.6 6.5 6.3 4.9 Dividend Yield (%) 0.9 1.5 1.7 1.9 2.3 Return ratio (%) EBIDTA Margin 11.9 13.5 10.5 9.3 10.7 PAT Margin 8.9 9.1 6.4 5.8 6.7 ROAE 20.9 21.8 14.3 12.5 14.2 ROACE 21.6 24.5 14.9 13.7 16.0 Leverage Ratios (x) Long Term D/E 0.1 0.1 0.1 0.1 0.0 Net Debt/Equity (0.2) (0.2) (0.2) (0.3) (0.3) Debt/EBITDA 0.3 0.4 0.3 0.3 0.2 Interest Coverage 9.7 24.1 19.6 32.4 99.0 Current ratio 1.5 2.1 1.9 2.2 2.3 Growth Ratios (%) Income growth 11.0 7.8 3.0 7.4 8.4 EBITDA growth (15.6) 21.9 (19.7) (4.5) 24.0 PAT growth 11.7 9.6 (27.3) (2.1) 25.5 Turnover Ratios F.A Turnover x 17 11 8 11 11 Debtors Days 84 78 81 83 83 Payable days 19 17 17 17 17 Balance Sheet (` mn) Equity Share Capital 376 376 376 376 376 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 1,117 917 717 Deferred tax liabilities (520) (620) - - - Other LT liabilities & prov 423 516 579 621 663 Current Liabilities 8,536 5,956 7,676 8,021 8,369 Short-term borrowings 3,677 498 2,217 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 225 118 118 118 118 Long-term loans & adv 1,266 1,510 1,548 1,663 1,803 Other non-current assets 125 53 832 68 74 Current assets 13,149 12,777 14,631 17,699 19,367 Current investments 590 0 0 - - Inventories 229 380 433 489 530 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 681 677 728 880 954 Other current assets 1,032 907 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 621 592 1,446 878 1,064 Interest Exp 279 165 136 76 31 Others (300) (113) 261 25 - 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 115 845 606 642 824 Net CF From Operations 3,171 4,183 1,309 3,232 3,020 Inc/(dec) in F.A + CWIP 1,130 1,822 1,944 171 1,350 (Pur)/sale of Investments (2,062) (2,369) 92 (0) - Others (279) (165) (136) (76) (31) CF from Invst Activities 652 382 (2,172) (247) (1,381) Loan Raised 67 (2,286) 1,163 (250) (250) Equity Raised (1,907) (1,455) 157 580 699 Dividend 253 508 508 (830) (949) CF from Fin Activities (2,093) (4,249) 811 2,156 690 Net inc /(dec) in cash 1,730 316 (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

Institutional Equity Team Names Designation Sectors Email ID's Desk-Number Naren Shah Head Of Equity naren.shah@trustgroup.in +91-22-4084-5074 Sales Trading & Dealing Rajesh Ashar Sales Trader rajesh.ashar@trustgroup.in +91-22-4224-5123 Dealing Desk trustfin@bloomberg.net +91-22-4084-5089 Research Team Binyam Taddese Analyst Rates & Credit Research binyam.taddese@trustgroup.in +91-22-4224-5037 Naushil Shah Analyst Technology, Media & Telecom naushil.shah@trustgroup.in +91-22-4224-5125 Tushar Chaudhari Analyst Commodities, Auto & Mid-caps tushar.chaudhari@trustgroup.in +91-22-4224-5119 Ritu Chaudhary Associate FMCG & Consumer Durable ritu.chaudhary@trustgroup.in +91-22-4224-5183 5

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TFCSPL and/or its associate/subsidiary companies and/or employees may have interests/positions, financial or otherwise of over 1 % at the end of the month immediately preceding the date of publication of the research in the securities mentioned in this report. TFCSPL is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. SEBI Reg. No. INH000001543. Analyst Certification: The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject company securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of TFCSPL research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues Disclosure of Interest Statement Analyst Ownership of Stock Served as Director or Employee Name of Company No No Stock Ratings are defined as follows :- Recommendation Interpretation Recommendation Expected absolute returns (%) over 12 months Buy More than 15% Hold 15% to -15% Sell Less than -15% Regional Disclosures (outside India): This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject TFCSPL or its associate/subsidiary companies to registration or licensing requirements within such jurisdictions. 6