KPIT Technologies Shares Jump As Goldman Initiates Coverage With A 'Buy'
Goldman Sachs set a price target of Rs 1,040 for KPIT Technologies, an implied upside of 74.9% over the next year.
Shares of KPIT Technologies Ltd. jumped after Goldman Sachs initiated coverage on the automotive software services firm with a ‘buy’, citing potential demand from electric vehicle to semiconductor makers.
KPIT Technologies will benefit from the next leg of customer additions coming from semiconductor makers and EV disruptors as it has already initiated pilot programmes with Lucid Group Inc., Rivian Automotive Inc., and Nio, among others, Goldman Sachs said. KPIT’s work with semiconductor companies to help them integrate their final products to varied operating system architectures among original equipment makers, is helping the company add more customers.
Goldman Sachs set a price target of Rs 1,040 for KPIT Technologies, an implied upside of 74.9% over the next year.
Shares of the company rose as much as 2.99% on Thursday. They pared some of the gains to trade 1.48% higher at 1 p.m. compared with a 1.2% decline in Nifty 50.
Of the eight analysts tracking the company, six maintain a 'buy' and two suggest 'hold', according to Bloomberg data. The average of price targets suggest a downside of 14.2%.
Glodman Sachs’ bet on the stock comes when KPIT Technologies expects to benefit from EV and alternative fuel transition globally, and in India as well.
Vehicles powered by batteries and hydrogen fuel cells will emerge as India's choice for mobility as the nation focuses on a greener future, Ravi Pandit, chairman at KPIT Technologies, said in an interview with BloombergQuint's Niraj Shah.
In the next decade and a half, India will enter a phase where clean fuels will power mobility, Pandit said. The fuel, he said, will be generated within the country.
He expects electric vehicles to dominate for travel within cities, and both hydrogen fuel and electric vehicles for inter-city transport.
According to Goldman Sachs, with electronics becoming a larger part of vehicle cost, KPIT Tech’s expertise is likely to find increasing demand. “Electronics, which were 27% of vehicle cost in 2010, currently account for around 40% and is poised to reach the 50% mark by 2030,” the report said quoting Deloitte.
KPIT works with more than 10 of the top 15 automotive original equipment makers globally, providing software and technology services which will add to the “only technological play” the company is focused on. The company is one of the very few software integrators which earns 100% of its revenue from auto tech end users and that will boost its capability to win an incremental share of contracts in the future, the report said.
The company aims to help lead India into the upcoming hydrogen fuel cell-based revolution and this will help its cause, Goldman Sachs said.
On Dec. 16, Sentient Labs, an innovation hub incubated by KPIT Technologies and working along with the Government of India's Council of Scientific and Industrial Research and National Chemical Laboratory, showcased a bus that runs on hydrogen fuel cells.
“We believe that the bus design which we demonstrated is highly efficient and can make the hydrogen economy possible in India,” Pandit told BloombergQuint.
The makers of India’s first hydrogen fuel cell prototype car are also working on technology to generate hydrogen via biomass or stored energy from the sun.
The company is using the aerobic microbial method to generate hydrogen, which they consider to be 25% more efficient to conventional hydrogen manufacturing methods.
But for KPIT, it's purely a technology play, Pandit said. They don’t want to be in the business of making hydrogen or hydrogen fuel cell buses; instead, they are focusing on the role of the core technology, he said.
Key Highlights From Goldman Report
What’s working for KPIT Technologies:
Connected autonomous shared and electric R&D spending at top 10 automakers, including KPIT customers, to triple to around $61 billion by FY26-end.
As a result of a 100% focus on automotive software, many of KPIT’s senior leaders have developed deep expertise in high entry barrier domains, which will aid its margin profile.
With electronics estimated to become 50% of the cost of a vehicle by 2030, KPIT’s expertise is likely to find increasing demand.
Steady increases in outsourcing visible in areas like pharmaceutical clinical trials, auto components, FMCG manufacturing and digital/cloud services. KPIT’s expertise makes it a candidate for such outsourcing.
Goldman sees KPIT’s sales/Ebitda/earnings per share to rise 21/26/29% rising annually over FY22 to FY25. It expects the present valuation discount to peers to narrow given the company’s superior EPS growth profile vs Indian competitors and comparable high-20% range of EPS growth potential versus global peers.
Key Risks
Attrition among skilled workforce.
Rapid shifts in powertrain technologies.
In-housing of technological functions by customers.
Nearly 55% of KPIT’s revenue comes from about 15-18% of total staff located onsite. Drastic visa regulations forcing higher onshore headcount could represent a drag on profitability.
If OEMs decide to consolidate their software projects among a smaller list of technology vendors, KPIT being a relatively smaller player may face some headwinds.
Rupee appreciation vs dollar may put pressure on revenue and margin as it earns nearly 95% of its revenue from non-rupee currencies.