KPIT Technologies Ltd: Stock Plummets 6% After Kotak’s ‘Sell’ Rating

Shares of KPIT Technologies Ltd took a nosedive on Tuesday, dropping 6 per cent in response to a report by Kotak Institutional Equities. The report highlighted unrealistic growth expectations embedded in the stock price, prompting Kotak to recommend a ‘Sell’ rating with a target price of Rs 940. The multibagger stock, which had seen an impressive 121 per cent increase year-to-date, fell 5.50 per cent to hit a low of Rs 1,533 on the BSE. KPIT Tech shares are currently trading at a rich valuation of 59 times FY2025E earnings per share, according to Kotak Institutional Equities. The stock price implies an 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.

Kotak’s report stated, “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 a multiple of 34 times on FY2025.” The report also noted that KPIT Tech shares have surged 36 per cent over the past month without any commensurate fundamental catalyst.

Kotak Institutional Equities expressed concerns about the excessive valuations at 59X FY2025E, extrapolating from recent robust performance. The current market price implies a 20 per cent dollar revenue CAGR over FY2023-33E, with a projected $2.6 billion absolute revenue size by FY2033E at a 20 per cent average EBIT margin (current EBIT margin stands at 16 per cent) over this period. The report also highlighted the need for a more nuanced understanding to forecast the evolution of the addressable market over the long term, especially with regards to the automotive clients’ ERD spends.

Furthermore, Kotak pointed out that most OEMs are currently targeting the launch of new models based on new centralized vehicle architectures by 2026. This shift involves a move from monolithic technology architecture to microservices architecture (MSA) for ease of maintenance and upgrades. The effort involved is higher in the 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 the incremental activity would be in the software layer, such as the development of cloud-native applications/services and data analytics for autonomous driving applications.

In conclusion, Kotak’s report raised concerns about the excessive valuations and unrealistic growth expectations embedded in the KPIT Tech stock price, leading to the ‘Sell’ rating with a target price of Rs 940. It remains to be seen how the market will respond to these insights and whether investors will adjust their positions in light of this analysis.