KPIT Tech to fully own Technica — here's how the Street is reading it

Pune-based KPIT Technologies' shares continued to rise for a third straight session on Thursday, shrugging off overall weakness in the market tracking global peers, boosted by its acquisition of four companies of Germany's Technica group. Goldman Sachs maintained a 'buy' rating on KPIT with a target price of Rs 900 — which implies upside potential of 50 percent from Wednesday's closing price.

The KPIT Tech stock jumped 8.4 percent to touch Rs 649.3 at the strongest level of the day, taking its cumulative gain in three back-to-back sessions to 13.6 percent.

According to the brokerage, Technica’s revenue and EBITDA for 2021 represent 16 percent and 17 percent of KPIT Tech's for the year ended March 2022.

"The proposed acquisition could expand KPIT’s capabilities in ongoing vehicle operating system architecture shifts and bolster skill sets in self driving cars, vehicle to anywhere connectivity, ADAS and infotainment systems. The transaction could also support KPIT’s positioning in auto network/Cloud-related technologies where the company has been looking to expand its expertise," Goldman Sachs said.

KPIT Tech will pay a cash consideration of 80 million euros for acquiring Technica Engineering, Technica Electronics Barcelona, Technica Engineering Spain and Technica Engineering. It will fully own the Technica group after the transaction, which is expected to be closed by October-end.

The Pune-based company expects the transaction to be earnings per share accretive on closure. It said the four firms have leadership in automotive in production-ready system prototyping, automotive ethernet products and tools for validation.

According to Goldman Sachs, KPIT's cash consideration for Technica implies 10 times on an embedded value-to-EBITDA basis. The embedded value-to-EBITDA ratio is a valuation multiple used to determine the fair market value of a company.

Technica's revenue grew at an annualised rate of 24 percent from 2019 to 2021 relative to KPIT Tech’s growth guidance of 18-21 percent for the year ending March 2023, Goldman pointed out.

The brokerage will look out for disclosures on the following:

Synergy potential from the deal

Rationale for the seller

Funding mechanism/payback periods

Potential new client relationships from the transaction

KPIT shares have given a return of close to 16 percent in the past one month, a period in which the Nifty50 benchmark has gained about half a percent and the Nifty IT — whose 10 constituents include TCS, Infosys and Wipro — dropped 8.8 percent.

Indian equity benchmarks Sensex and Nifty50 fell close to one percent on Thursday amid weakness in financial and oil & gas shares, though strength in FMCG stocks lent some support.