We attended the Investor Day of KPIT Technologies. In our view KPIT is not just diversifying its revenue base (from PV to adjacencies including trucks, off-highway, micro mobility etc.) but its AI led solution approach of delivery has a potential to further increase its ER&D industry leading margins (with its mid-term growth outlook post FY27E includes targeting double digit Sales growth with EBITDAM target of 22-24%). While in FY27E, we expect Sales growth to remain tepid (considering two its largest SDV programs are coming to an end in 1HFY27E with one being planned ramp down and second being a surprise as per KPIT; but this revenue blip will be largely compensated by growth in newly acquired accounts as per KPIT) with KPIT’s expectation of EBITDAM of 20.5-21.2% in FY27E. We currently have a LONG rating with Mar’27 TP of Rs1,265 which is set at 1-year fwd. PE of 33.5x wgt. avg. dil. EPS of Rs.37.7.
Key takeaways of Investor Day are as follows:
KPIT started accelerating its investments for the next leap of AI driven growth
- KPIT is now doubling down to increase its wallet share and growth by quickly pivoting and investing in AI led growth to be driven by products and solutions rather than just by input/manpower-based delivery efforts.
- It is expanding into adjacencies (looking to create strong base in off-highways, CV & micro mobility beyond its current high focus and success on PV sub-segment of Mobility) and new markets (including India, China, Southeast Asia, Middle East & Africa besides current high focus on Europe, US & Japan)
- Above expansion is looking to achieve by pivoting to product, solution & platform-based offerings which are based on helping clients to solve business problems and/or achieve business outcomes faster, better and cheaper. It currently has 10+ solutions and 5 products.
- To achieve the above objectives, i) KPIT has started increasing its investment across all the layers of mobility offerings/solutions including chip to E/E architecture to Middleware to Application and to cloud stack and ii) it has now created/creating rich portfolio of next generation mobility intelligence products (like “Beacon” for AI-first development, integration and validation; designed for enterprise scale & deterministic output in safety-critical mobility engineering and aligned to automotive-grade processes & standards with human in loop principles). These solutions/platform/products it is creating to help clients design and launch offerings faster, better and cheaper across various segments/domains of mobility including a) digital cockpit, b) vehicle diagnostic, c) propulsion, d) defect triaging, e) platform validation, f) cyber security and g) after sales amongst others.
- It is quickly pivoting to fixed price engagement model of delivery vs. T&M (with target to FP project contribution to 80% vs. current levels of 68% in 4QFY26 / 55% in 4QFY21).
- Despite increasing base, it is looking to spend 3-5% of its Sales on R&D even in coming years. Also, it will continue to acquire capabilities by doing capability-based M&As in future as well (like N-Dream, Cymotive amongst others). Also, it is looking invest in creating ecosystem of complementary partners (like it did with Microsoft, Salesforce amongst others)
KPIT’s expansion strategies aiming to increase wallet share and profitability
- KPIT is now doubling down to increase its wallet share (from current 10% to 20% within its target set of clients with target to increase its wallet share by 10-15% p.a. by doing deeper penetration across top clients). This, they are not just targeting within its current T-25 clients (largely from PV sub-segment of Mobility) but now within T-40 clients operating across PV, Trucks and Off-highway segments.
- Executing above growth strategies, KPIT has added 13 new clients in FY26 (thanks to Caresoft M&A as well) including 3 from PV, 4 in Trucks, 6 in Off-highway across various markets including India, China, Southeast Asia besides US, Europe and Japan. Within Off-highway it has added clients within mining, agriculture, construction sub-segments and hence same will also help KPIT to increase its addressable market in the long term in our view.
- KPIT, through its expansion & AI/Solution led growth strategies mentioned above, continues to target to further increase its profitability by increasing its revenue per employee by pivoting to non-linear delivery model (Human + AI + Product + Solution + Platform approach)
KPIT’s medium term outlook targeting higher Sales growth and EBITDAM
- FY27E outlook: i) As per KPIT, FY27E looks more promising than FY26 in terms of revenue growth visibility and market opportunity, ii) but two of its clients’ largest SDV programs are coming to an end in 1H (with one being planned ramp down and second being a surprise as per KPIT); this revenue blip will be largely compensated by growth in newly acquired accounts; as per KPIT continuation of these programs would have resulted in 4%-5% sequential growth, ii) as per KPIT, solid growth is expected from Commercial (On & Off-Highway), USA, India, China, Connected Vehicle, Autonomous Driving & Aftersales Transformation, iii) growth acceleration seen in 2HFY27E led by Products and Solutions as per KPIT, iv) KPIT expect FY27E EBITDAM of 20.5-21.2% post increased investments in AI, Products & Solutions, competency development and new markets with its target to grow 30% yoy growth in solution and product led sales in FY27E.
- Mid-Term outlook: i) KPIT is targeting for sustainable double-digit growth post FY27E (given its expansion strategies which is poised to offer high growth opportunities) with growth to be driven by wallet share increase, new accounts win, expansion in new markets and adjacencies, ii) KPIT is targeting EBITDAM of 22-24% and iii) KPIT is targeting more than 50% of its revenue share to be achieved from solution and products (with target sales contribution from same at 60% in FY29E) vs. 15% in FY26.
