KPIT Faces Reality Check Day Ahead Of Rival Tata Technologies’ IPO

The month-long rally in KPIT Technologies Ltd. came to a halt on Tuesday after a brokerage questioned the rationale for the outperformance.

Shares of the Pune-based autotech firm have rallied 36% over the past month without any commensurate fundamental catalyst, Kotak Institutional Equities said in a Nov. 20 note.

“ER&D spending by automotive clients is likely to remain elevated in the near term, but a more nuanced understanding is required to forecast evolution of the addressable market over the long term,” Kawaljeet Saluja, Vamshi Krishna and Sathishkumar S, analysts at Kotak Institutional Equities, said in the note.

The timing of the note is noteworthy as it comes a day ahead of the launch of the initial public offering of KPIT's crosstown rival Tata Technologies Ltd. According to its red-herring prospectus, the Tata Group company enjoyed a price-to-earnings ratio of 32.8-30.8X in FY23. That compares with that of KPIT at 80.31X.

Premium Valuations

Following its second-quarter results, KPIT Technologies raised its FY24 revenue growth guidance to 37% year-on-year in constant currency terms, as against 27-30% estimated earlier. Operational profitability is seen in excess of 20% as against 19-20% earlier.

Now, KPIT is trading at 59 times its estimated earnings for fiscal 2025. The stock price implies a compounded annual growth rate of 20% over the next decade with a consistent operational profitability of 20%. That implies a top line of $2.6 billion by FY33. To put that in context, the world's largest pureplay ER&D firm, Sweden's Afry AB, has a revenue base of $2.3 billion with diversified vertical presence.

“KPIT deserves premium valuations due to its strong capabilities in a high-growth vertical, although we disagree with the magnitude of the premium assigned,” Kotak Institutional Equities said in the note. “Our fair value of Rs 940 implies a multiple of 34 times on FY25 EPS.”

On Tuesday, shares of KPIT Technologies fell as much as 5.08% to Rs 1,541.50 apiece. This compares to a 0.42% advance in the NSE Nifty 50, as of 9:56 am.

The stock has risen 119% on a year-to-date basis. The total traded volume so far in the day stood at 2.7 times its 30-day average. The relative strength index was at 75, implying that the stock may be overbought.

Nine out of the 14 analysts tracking the company maintain a ‘buy' rating, one recommends a ‘hold' and four suggest a ‘sell', according to Bloomberg data. The average of 12-month analyst price targets implies a potential downside of 17.3%.

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