Why KPIT Technologies Is Poised To Catch Up With Tata Elxsi

Tata Elxsi Ltd. and KPIT Technologies Ltd. are two mid-sized Indian IT firms that provide similar services to global automotive manufacturers. Yet, their stocks have had contrasting 10 months.

Since it was spun off and listed in April last year from CK Birla Group’s Birlasoft Ltd., shares of KPIT Technologies have fallen 8 percent, reducing its market capitalisation to Rs 2,600 crore. Tata Elxsi gained 11 percent during the 10 months and is now valued at Rs 6,500 crore.

KPIT Technologies’ stock underperformed despite generating higher revenues and a better growth forecast. Analysts expect the company to narrow the gap on better growth prospects and low valuations.

• KPIT Technologies reported a revenue of Rs 1,892 crore in financial year ended March 2019.
• Its revenue, however, jumped 11 times over the year-ago period to Rs 1,599 crore in the first nine months of the ongoing financial year, aided by a low base.
• Analysts from Axis Capital and Investec expect KPIT Technologies’ top line to grow at an annualised rate of 11 and 14 percent, respectively, from FY19 to FY22.
• Tata Elxsi had reported a revenue of Rs 1,597 crore in 2018-19.
• But its top line fell 1.8 percent year-on-year to Rs 1,171 crore in the April-December period of the 2019-20 fiscal.
• Spark Capital and B&K Securities expect Tata Elxsi’s revenue to expand at a compounded annual growth rate of 8 percent over the same three-year period.

Spark Capital estimates Tata Elxsi’s margin to contract 520 basis points year-on-year at 20.8 percent for the fiscal ending March 2020. Investec expects KPIT Technologies’ margin to expand 260 basis points over last year to 14.1 percent during the fiscal.

Tata Elxsi’s operating margin fell to 20 percent in the first nine months of 2019-20 from 26.5 percent a year ago, while KPIT Technologies’ dropped to 13 percent from 21.4 percent.

Analysts, however, estimate Tata Elxsi to generate higher return on capital employed—measured by taking EBIT as a ratio of working capital, equity and debt employed—than KPIT Technologies for the ongoing financial year.

Valuations And Consensus

Tata Elxsi trades at 28 times its estimated FY20 earnings based on Spark Capital’s earnings per share forecast of Rs 36. KPIT Technologies trades at 16 times based on Investec’s EPS estimate of Rs 5.8 for FY20. That’s a discount of 43 percent to its peer.

The average of 12-month analysts targets compiled by Bloomberg suggest an upside of 33 percent for KPIT Technologies against a potential 10 percent decline for Tata Elxsi.

If the forecasts hold, KPIT Technologies should be able to narrow the valuation gap.