KPIT Tech shares recover post 18% selloff. JPMorgan says Tata Technologies IPO, slow growth key derating catalysts – Business Today

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Shares of KPIT Technologies recovered some group on Monday after seeing an 18 per cent selloff earlier in the day after JPMorgan came out with an initiation report on the stock with a price target suggesting 44 per cent potential downside ahead.
JPMorgan initiated an ‘underweight’ rating on the scrip with a 12-month target of Rs 520, which was far lower than the average target of Rs 794 on the stock, based on 11 analyst recommendations. JPMorgan said it likes KPIT’s focus on fast-growing auto vertical but would wait for an attractive entry point.
Key derating catalysts for KPIT Tech include a slowing growth beyond FY24 to less than 20 per cent, with reverse discounted cash flow (DCF) ask rate at 24 per cent for the next 10 years. JPMorgan also cited scarcity premium going away with the announced IPO of Tata Technologies that generates 88 per cent of revenues from auto ER&D segment.
Based on growth expectations versus current valuations, JPMorgan pecking order stands at Persistent Systems, L&T Technology Services, Tata Elxsi, with KPIT Tech at the bottom of the order.
The stock fell 17.84 per cent to hit a low of Rs 759.90 on BSE, before closing the day at Rs 809.50, down 12.49 per cent.
JPMorgan said auto ER&D services is in the fast lane right now led by a shift towards electrical autonomous and connected vehicles. Even the uncertain macro has not caused a slowing in auto ER&D spend, it noted.
It said that OEMs’ urgency to invest in new age electric, autonomous and connected vehicles driving multi-year deal wins for service providers and a dearth of digital engineering talent in client geographies are driving increased offshoring where India’s share may increase to 33 per cent by FY32 from 25 per cent in FY22. These tailwinds should help companies such as KPIT Tech (100 per cent of revenues), Tata Elxsi (42 per cent) and L&T Technology Services (30 per cent), JPMorgan said.
The foreign brokerage said a combination of lower structural margin, single vertical presence and high client concentration and excessive valuations would drive underperformance for the stock. KPIT Tech would require to win large orders every year if it has to maintain its growth above 20 per cent in the years to come, it said.
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