Midcap IT firm KPIT Technologies, specializing in automotive software services, is confronting significant revenue challenges as global automobile manufacturers scale back their technology investments. The company recently disclosed a substantial revenue impact of approximately $65 million, highlighting the growing pressure on IT service providers in the automotive sector.
Revenue Challenges and Client Cutbacks
During its September quarter earnings call, KPIT revealed that $45 million of the $65 million revenue impact resulted from clients deprioritizing older programs across key markets including the United States, Asia, and parts of Europe. This development comes as automobile original equipment manufacturers (OEMs) become increasingly cautious about discretionary IT spending amid global economic uncertainties.
The company's constant currency revenue growth for Q2FY26 showed minimal sequential improvement at just 0.3%, while organic constant currency revenue actually declined by 2.3% due to client-led program delays. KPIT management anticipates flat to slightly positive sequential growth in the third quarter, with meaningful recovery expected only from Q4FY26 as large deal ramp-ups commence and client sentiment shows improvement.
Strategic Response and Deal Pipeline
KPIT is implementing multiple strategies to cushion the revenue blow. The company has secured a significant three-year deal from a European automaker and is expanding its presence in the commercial vehicle segment through its Caresoft acquisition. These moves represent critical components of the company's diversification strategy amid challenging market conditions.
Despite the current headwinds, KPIT's deal pipeline remains robust. The total contract value of deal wins increased by 12% year-on-year in Q2FY26 to $232 million, marking the seventh consecutive quarter where TCV exceeded $200 million. However, analysts have noted concerning trends in deal conversion rates.
Margin Pressure and Brokerage Outlook
The company's operational performance showed signs of strain with Q2FY26 Ebit margin declining by 60 basis points sequentially to 16.4%, falling below consensus estimates of 16.7%. This margin compression was driven by foreign exchange losses and amortization costs associated with the Caresoft acquisition. Further pressure on profitability is expected in the second half of FY26 due to planned wage hikes.
Financial analysts have adjusted their growth expectations for KPIT. According to Elara Securities (India), the company's remarkable revenue growth during FY22-25, which reflected its first-mover advantage in autonomous and electric vehicle software, is likely to moderate over the next two to three years from its historical compound annual growth rate of nearly 25%.
JM Financial Institutional Securities highlighted a significant shift in KPIT's business dynamics, noting that the company's previously strong book-to-bill conversion rate of almost 100% has deteriorated over the past four quarters, with the gap between TCV-implied revenues and actual revenues expanding to double digits.
Strategic Transformation and Valuation
KPIT is undergoing a fundamental strategic shift from being a traditional IT services provider to becoming an AI-driven, IP-led engineering solutions company. This transition, while potentially beneficial in the long term, comes at a challenging time for the organization and its stakeholders.
The market has already reacted to these developments, with KPIT's stock declining by 18% so far in 2025. While this correction has made valuations somewhat more reasonable, they remain elevated by traditional metrics. Elara Securities estimates that KPIT currently trades at approximately 38 times FY27 earnings, suggesting investors still see long-term potential despite near-term challenges.
The company's ability to navigate the current automotive industry downturn while successfully executing its strategic transformation will be critical for maintaining its competitive position in the evolving automotive software services landscape.
