KPIT Tech shares plunge 5% as JPMorgan sees 44% potential downside ahead

Shares of KPIT Technologies took a beating, falling over 5 per cent in Monday's trade as foreign brokerage JPMorgan initiated coverage on the stock with an 'underweight' rating and a 12-month target of Rs 520, which suggested a potential 43.78 per cent downside on the counter based on Friday's closing price.

This is against the average target price of Rs 794 based on 11 analyst estimates, as per publicly available data with Trendlyne.

JPMorgan said the key derating catalysts for KPIT are slowing growth beyond FY24 to less than 20 per cent, with reverse DCF ask rate is 24 per cent for the next 10 years. It also cited scarcity premium going away with the announced IPO of Tata Technologies that generates 88 per cent of revenues from auto segment.

Following the development, the scrip fell 5.31 per cent to hit a low of Rs 875.80 on BSE. JPMorgan said its price target accounted for lower structural margins, risks from single vertical, high client concentration, and excessive valuations.

The foreign brokerage said KPIT Tech would require to win large orders every year if it has to maintain its growth above 20 per cent in the years to come.

JPMorgan said auto ER&D services is in the fast lane right now led by a shift towards electrical autonomous and connected vehicles. Even the uncertain macro has not caused a slowing in auto ER&D spend, it noted.

OEMs' urgency to invest in new age electric, autonomous and connected vehicles driving multi-year deal wins for service providers and a dearth of digital engineering talent in client geographies are driving increased offshoring where India's share may increase to 33 per cent by FY32 from 25 per cent in FY22, it said.

"These tailwinds should help companies such as KPIT Tech (100 per cent of revenues), Tata Elxsi (42 per cent) and L&T Technology Services (30 per cent)," JPMorgan said.

The foreign brokerage said it likes KPIT's focus on fast-growing auto vertical but would wait for an attractive entry point.

In a February note, brokerage PhillipCapital said saw KPIT Tech as a long-term play on disruption in auto industry but felt rich valuations left limited upside potential for the stock. This brokerage suggested a target of Rs 680 on the stock.

On the earnings front, KPIT Tech logged a net profit of Rs 104 crore in the December quarter (Q3 FY23), up 48 per cent from Rs 70.3 crore in the same period a year ago. The company's revenue from operations stood at Rs 917.11 crore in Q3 FY23, a year-on-year (YoY) growth of 47 per cent from Rs 622.36 crore in Q3 FY22.

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