Why Goldman Sachs thinks KPIT Tech still has upside after five-fold jump in a year

Software company KPIT Technologies Ltd’s shares have clocked five-fold returns in the last 12 months on the back of strong order inflow coupled with a bullish guidance for the current fiscal year.

Shares of Pune-based KPIT Tech were quoting at Rs 605.55 apiece, up 1.91% from the previous close even in a weak market on Thursday, with the benchmark indices down 1.5% amid a worldwide sell-off. The stock has risen over 400% from the lows of Rs 126.80 in the past 52 weeks.

Now, investment bank Goldman Sachs has initiated a ‘buy’ rating on the stock and sees an upside of 75% from current levels. Goldman has set a 12-month price target of Rs 1,040 apiece.

It said the company’s stock is starkly undervalued at 51 times its one-year forward price-to-earnings (P/E) compared with its closest peer Tata Elxsi, which trades at 75 times whereas the global peer group trades around 63 times for a similar long-term growth profile in the high 20% EPS growth range.

Goldman expects KPIT’s revenue, operating income, and earnings per share (EPS) to grow by 21%, 26%, and 29%, respectively, per annum, over FY22-25.

It also expects KPIT’s present valuation discount to peers to narrow given the company’s superior EPS growth profile versus Indian competitors and comparable high 20% range of EPS growth potential versus global peers.

Growth areas

Goldman said that, although there is a long runway for growth among the existing customer base, KPIT has initiated pilot programmes with electric vehicle companies like Lucid, Rivian and Nio.

KPIT is also increasingly working with semiconductor companies to help them integrate their final products to varied operating system architectures among OEMs.

Domain expertise

Unlike many peers, as a consequence of the 100% focus on automotive software, many of KPIT’s senior leaders have developed deep expertise in domains with a high entry barrier. These include autonomous driving, vehicle to anywhere connectivity, digital clusters or dashboards, and battery management system enhancement. These domains support the future margin profile of the company, Goldman said.

KPIT’s expertise in integration of electronic control units in automobiles is likely to find increasing demand. As the role of software and electronics expands in the auto industry, manufacturers will resort to more outsourcing in order to expand focus on core areas like vehicle operating system architecture, Goldman said.

Key risks

Goldman highlight a number of risks that can impact KPIT. It pointed the high levels of attrition among a relatively scarce and skilled talent pool as a key challenge.

Rapid shifts in powertrain, battery, autonomous and connected technologies; any slowdown in auto-technology outsourcing and customers bringing tech functions in-house; and vendor consolidation could also a challenge.

In addition, adverse changes in visa regulations in developed markets and the Indian rupee’s appreciation versus key customer currencies including the euro, US dollar, British pound sterling, and the Japanese Yen could hurt, too.