homemarket Newsstocks NewsKPIT Technologies slumps over 7% as Kotak Institutional Equities sees up to 42% downside
KPIT Technologies slumps over 7% as Kotak Institutional Equities sees up to 42% downside
Kotak Institutional Equities finds the valuations of the stock to be excessive at 59 times the estimated forecast for the financial year 2025 (FY25E), extrapolating recent robust performance.
KPIT Technologies Ltd shares dropped more than 7% in trade on Tuesday after brokerage firm Kotak Institutional Equities initiated coverage on the stock with a 'sell' rating, with a lower price target.
The brokerage has set a target price of ₹940 per share, indicating a downside of 42% from the previous close of ₹1,622.3 apiece on Monday.
The software stock has given impressive returns of 36% in a month’s time without any commensurate fundamental catalyst. Kotak Institutional Equities finds the valuations of the stock to be excessive at 59 times the estimated forecast for the financial year 2025 (FY25E), extrapolating recent robust performance.
At the said valuations, KPIT Technologies’ current market price (CMP) implies a 20% US dollar revenue compounded annual growth rate (CAGR) over FY2023-33E at approximately 20% of the average earnings before interest and taxes (EBIT) margin in the stated period, compared to the present EBIT margin of 16%.
The brokerage firm noted that the entity relationship diagram (ERD) spends of automotive clients are likely to remain elevated in the near term, however, a more nuanced understanding is required to forecast the evolution of the addressable market over the long term.
Kotak Institutional Equities also believes that unrealistic growth expectations have been embedded in KPIT’s stock price, which implies an elevated growth of 20% in 10 years with a margin expansion to 20% at the EBIT level.
To put the size in context, the largest pure-play ERD player, AFRY, has a revenue base of $2.3 billion with a 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, stated Kotak.
Shares of KPIT Technologies were trading 7.48% lower at ₹1,501 per piece on BSE at 2:05PM.
(Edited by : Ajay Vaishnav)
First Published: Nov 21, 2023 5:15 PM IST
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