Birlasoft Ltd. share price target

Increase earnings est on margin reset and maintain NEUTRAL of KPIT with TP of Rs 250, 13x FY20E (12x earlier). KPIT Tech (KPIT) posted strong revenue and operating performance. Rev came at USD 150mn, 6.4/17.1% QoQ/YoY. Growth was led by PES (36.3% of rev) which grew 12% QoQ. EBITDA% came at 12.7%, +186bps QoQ (adjusted for one-time expense of Rs 129mn) supported by offshore-led growth. APAT at Rs 0.76bn was supported by lower ETR.

Impressive Performance; FY19E Revenue Outlook Fairly Conservative KPIT Technologies (KPIT) has delivered a strong performance in 4QFY18. Its revenue grew by 6.4% QoQ and topped US$150mn-mark (3.4% above our estimate) led by robust 12% QoQ growth (USD terms) in Product Engineering business. Revenue from Products & Platforms segment also grew by a healthy 49.9% QoQ, though this business typically shows volatility on quarterly basis. While revenue from Digital Transformation business grew by 6.3% QoQ, ERP business saw subdued growth (IES: up 0.3% QoQ & SAP: down 2.1% QoQ). Its EBITDA margin expanded by 53bps QoQ on higher utilisation and cost control measures. Notably, adjusting for one-time cost...

24 May 2018 4QFY18 revenue growth of 6.5% QoQ was above our estimate of +2.8%, primarily driven by strength in Product Engineering (+11% QoQ) and Products & Platforms (+49% QoQ). IT Services business remained sluggish, with SAP declining by 3% and IES remaining flat QoQ. 60bp QoQ to 11.4%, largely in-line. However, the quarter included expenses related to the demerger of the Engineering business and the merger with Birlasoft. Excluding these, EBITDA margin was at 12.7% (+190bp QoQ). PAT of INR838m was up 35% QoQ (est. KPIT guided for 8-10% revenue growth in FY19, despite the strong exit to FY18, implying a CQGR of 0.8-1.5%, which is much lower than the 4% achieved in FY18.

Board of Directors of KPIT Tech has approved a composite scheme for (a) amalgamation of Birlasoft (India) with KPIT (proposed merger); and (b) demerger of engineering business of KPIT into KPIT Engineering Ltd (KEL), and remaining KPIT-Birlasoft (IT Services business).

Maintain NEUTRAL with TP of Rs 195, 12x Dec-19E EPS. KPIT Tech has re-structured its business to create two entities of IT services and ER&D; (separate listing), by first merging with Birlasoft to create ~USD 700mn rev entity, and later demerging the ER&D; segment (USD 200mn rev) from it. Despite value unlocking by demerging the ER&D; business (higher growth/margin and better valuations), the deal is EPS neutral (but, 15% accretive assuming full acceptance in open offer).

US$ revenues declined 0.4% QoQ to $141.2 million and were below our 1.6% growth and $144 million estimate. Constant currency revenues were flat sequentially Revenues in rupees declined 0.4% QoQ to | 912.8 crore and were below our estimate of 1.7% growth and | 932 crore EBITDA margins expanded ~100 bps QoQ to 10.8% and were way above our 9.9% estimate. Margin expansion was on the back of lower cost of material consumed, which declined ~66% sequentially...

Background: KPIT Technologies is leading product engineering and IT consulting partner with FY17 revenue of INR 33.2bn. In 3QFY18 revenue share amongst verticals: automotive & transportation (44.11%), manufacturing (28.99%) & Energy & Utilities (18.28%) and others (8.62%). It operates in five main business segments: Integrated Enterprise Solutions (26.8%), Product Engineering Services (38.95%), Product and Platform (3.84%), SAP (19.98%) and Digital Transformation (10.34%). KPIT derives 12.17% of its revenue from Cummins, which is the largest client. The company has 12,211 employees spread across more than 10 countries to cater services to 237 clients. The company's...

In-line Performance; Value Unlocking on the Cards KPIT Technologies (KPIT) has delivered in-line performance in 3QFY18 with revenue remaining flattish (-0.4% QoQ) at US$141.2mn. Whist revenue from Product Engineering business grew by 2.8% QoQ, revenue from other segments i.e. IES, Products & Platforms, SAP, Digital and Transformation sequentially declined by 0.8%, 8.3%, 3% and 2.8%, respectively. EBITDA margin expanded by 98bps QoQ owing to higher utilisation and cost control. Despite 77.7% QoQ decline in other income owing to forex losses, KPIT's net profit grew by 3.3% QoQ on the back of lower effective tax rate. From vertical perspective, revenue from Energy & Utilities and...

KPIT announced a merger with Birla soft and a subsequent demerger of its Engineering business, effectively implying creation of two separate businesses- the combined KPIT-Birla soft entity and the Engineering entity. As part of the deal, shareholders of Birla soft will receive 22 equity shares of the combined KPIT-Birlasoft entity for every nine shares of Birlasoft. Share count at Birlasoft was 31.4m, implying that the swap ratio would lead to creation of ~77m shares, 39% of current equity base. At CMP of INR208 as on 29th January 2018, this implies EV of INR13b (USD200m) for Birlasoft, after adjusting for net cash of INR3b (USD47m) on the company's balance sheet.

Maintain NEUTRAL with a TP of Rs 140, 10x Sep-19E EPS (9x earlier). KPIT Tech posted a strong beat on revenue and margins in 2Q. Revenue came in at USD 142mn, 5.7% QoQ based on 4.3% QoQ CC. EBITDA% came in at 9.9%, +72bps QoQ. This was supplemented by utilisation/productivity improvement and realisation increase, which mitigated the impact of wage hike (-180bps margin impact).