Shares of KPIT Technologies Ltd fell 6 per cent in Tuesday's trade, as a report by Kotak Institutional Equities talked about unrealistic growth expectations that are embedded in the KPIT Tech stock price. The multibagger stock, which is up 121 per cent year-to-date, fell 5.50 per cent to hit a low of Rs 1,533 on BSE.
KPIT Tech shares trade at rich valuation 59 times FY2025E earnings per share, Kotak Institutional Equities said adding that stock price implies elevated growth of 20 per cent over a period of 10 years with margin expansion to 20 per cent on average at the EBIT level. The implied absolute revenue size for KPIT Tech works out to $2.6 billion by FY2033, it said.
"To put the size in context, the largest pure-play ERD player, AFRY, 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 premium assigned. Our Fair Value of Rs 940 implies multiple of 34 times on FY2025," Kotak said.
KPIT Tech shares are up 36 per cent over the past month and that "without any commensurate fundamental catalyst," Kotak said. The domestic brokerage said the automotive clients’ ERD spends are 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.
"Valuations are excessive at 59X FY2025E, extrapolating recent robust performance. The current market price implies 20 per cent dollar revenue CAGR over FY2023-33E ($2.6 billion absolute revenue size by FY2033E) at 20 per cent average EBIT margin (current EBIT margin stands at 16 per cent) over this period," Kotak said.
Kotak said most OEMs are currently targeting the launch of new models based on new centralized vehicle architectures by 2026. This involves a shift from monolithic technology architecture to microservices architecture (MSA) for ease of maintenance/upgrades, it said.
Effort, it said, involved is higher in development of new hardware and middleware layers as code needs to
be written in low-level language. "However, once these layers are standardized, much of incremental activity would be in software layer such as development of cloud-native applications/services, data analytics (capturing, containerising and cleaning) to generate training data sets for autonomous driving applications and enabling V2X communication. Pure-play ESPs such as KPIT need investments in these areas as compared to broad-based IT services providers, to participate in such opportunities," Kotak said.