KPIT Tech, Cyient, Persistent: HSBC initiates coverage on three Tata Tech peers

HSBC Global Research has initiated coverage on three domestic IT service providers amid renaissance in the Indian engineering research and development (ER&D) software ahead of Tata Technologies' much awaited IPO. These three companies are peers of Tata Technologies, as per the Tata group firm’s draft red herring prospectus. Among the three, HSBC has 'buy' rating on Cyient and KPIT Technologies and 'Hold' on Persistent Systems.

As digital content in cars continues to rise, automakers are boosting spending on software and bringing the spend in-house, noted HSBC. "We see this as a huge positive for Indian ER&D players including Cyient, KPIT Technologies and Persistent Systems," added the global brokerage firm.

The 'softwarisation' of cars is seen benefitting Indian IT services, said HSBC. "The growing share of digital content in cars is leading to higher spending by auto companies on software development. This isn’t their core competency, so we expect a material rise in IT outsourcing," it added while citing a huge positive for homegrown ER&D players.

HSBC expects research and development (R&D) spending growth to be driven by outsourcing. It estimated that total R&D spending by the top-100 global companies could rise 6 per cent in 2023, down from 11 per cent in 2022, and then it cited expectations of further moderation in growth of 5 per cent in 2024.

"We think the R&D spending outlook for hi-tech and software in 2024e is strong, and believe the recent weakness in this business as reported by Indian companies could reverse. We expect ER&D outsourcing to grow faster than traditional Indian IT services over the medium term," it said the overseas brokerage firm in its maiden report on the three stocks.

HSBC Global Research has given a 'buy' rating on Cyient with a target price of Rs 2,294 and KPIT Technologies with a target price of Rs 1,535, while it has suggested to 'hold' Cyient with a target price of Rs 5,355. Here's what HSBC said about these stocks:

KPIT Technologies
KPIT is in the middle of a once-in-a-generation investment cycle by auto OEMs. The auto specialist benefits from surging demand for software related to electrical vehicles (EV), autonomous driving and connected vehicles, said HSBC. It has cited risks such as client and business concentration and structurally lower margins for the company.

Kotak Institutional Equities pegs KPIT Technologies' revenue for July-September 2023 period at Rs 1,159.5 crore, up 55.7 per cent on a year-on-year (YoY) basis. It sees Ebitda at Rs 224.4 crore, increasing 62.4 per cent YoY. EBIT margins may increase 80 basis points (bps) at 19.4 per cent, it said adding that PAT is seen at Rs 133.8 crore, up 60 per cent YoY.

"We expect investor focus on indications of any mega deals, commentary on demand and sustenance at elevated levels, growth drivers, any white-spaces need to be addressed, evolution of competitive landscape as new connected vehicle platforms and implications on pricing over medium-term," it said.

Cyient
Cyient is on the cusp of a phase of sustained growth, driven by an investment up-cycle in its aerospace, mining, rail transportation and energy segments coupled with a de-risked revenue profile, HSBC said. The company has addressed past growth issues. It sees an R&D slump and a stable Indian currency as key risks for the company, it said.

IIFL Securities sees Client's revenue at Rs 1,754.20 crore, rising 25 per cent YoY in September 2023 quarter, while EBITDA is seen to increase Rs 255.2 crore, surging about 53.7 per cent YoY with EBITDA margins coming in at 14.6 per cent. Net Profit of Cyient can rally 64 per cent on a yearly basis to Rs 180.7 crore in Q2FY24.

"We forecast Cyient's revenue to grow 3 per cent cc QoQ, primarily due to sequential pick up in DLM revenues. We expect Ebit margins to be flat QoQ, on the back of productivity benefits and cost saving initiatives which will offset muted revenue growth," it added with an eye to watch out for deal wins, update on FY24 revenue/margin guidance and outlook for key verticals.

Persistent Systems
HSBC believes that the IT firm can continue to deliver strong growth and it also has a good balance between well-mined clients and a diversified customer base. However, it sees punchy valuations and exposure to struggling business segments as concerns. Sustained slowdown in banking/financial services segment is the key risk for Persistent Systems, as per the brokerage firm.

HDFC Securities expects Persistent Systems to clock a net revenue of Rs 2,403 crore for the September quarter, up 17.3 per cent YoY. It sees with an Ebitda of Rs 334 crore, up 11.8 per cent YoY. The brokerage expects Ebitda margins to improe 31 bps to 13.9 per cent. Adjusted PAT may jump 19.7 per cent to Rs 263 crore in the second quarter of the current financial year, it said.

The domestic brokerage firm sees Persistent Systems leading the growth within the mid-tier IT space. "We expect the vertical divergence in performance to persist with communication & hi-tech and BFSI trailing while manufacturing is expected to lead", it said. HDFC Securities currently has a buy rating on the stock with a target price of Rs 6,660.

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