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KPIT Cummins
Performance Highlights
(` cr) Net revenue EBITDA EBITDA margin (%) PAT 2QFY13 567 95 16.7 41 1QFY13 538 81 15.1 49 % chg (qoq) 5.4 16.4 157bp (16.4) 2QFY12 325 44 13.6 36 % chg (yoy) 74.5 113.1 301bp 11.5
ACCUMULATE
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code IT 2,159 534 0.6 142/68 125,465 2 18,636 5,666 KPIT.BO KPIT@IN
`121 `132
12 Months
For 2QFY2013, KPIT Cummins Infosystems (KPIT) reported a strong operational set of results. For FY2013, the management has maintained its guidance of 32-35% yoy growth in USD revenue, which is 2.5x more than Nasscoms guidance of 11-14% growth and includes ~US$45mn inorganic revenue from Systime. We maintain our Accumulate recommendation on the stock. Quarterly highlights: For 2QFY2013, KPIT reported a revenue of US$103mn, up 5.5% qoq. The overall volume growth stood at 4% qoq. In INR terms, the revenue came in at `567cr, up 5.4% qoq. The EBITDA and EBIT margins increased by 157bp and 166bp qoq to 16.7% and 14.6%, respectively, aided by improvement in Systime margins from 5% in 4QFY2012 to 14% in 2QFY2013 and a qoq decline in general and administrative (G&A) costs. The PAT came in at `41cr, down 16.4% qoq, negatively impacted by forex loss of `21cr. The management indicated that forex losses are expected to decline going forward at prevailing currency rates. Outlook and valuation: KPITs management has maintained its FY2013 USD revenue growth of a whopping 32-35% yoy, which is the strongest amongst its peers, even on the back of a strong 40% yoy revenue growth recorded in FY2012 because of the companys strengthening deal pipeline as well as incremental revenues from Systime. On the PAT front also, the company has maintained its guidance of 19-24% yoy growth to `173cr-180cr. The company is growing ahead of other IT companies in terms of revenues; and on the operational front, the companys performance has been improving since the last couple of quarters. Hence, we expect the companys revenue to post a CAGR of 21.2% and 24.3% in USD and INR terms, respectively, over FY2012-14E. On the EBITDA and PAT fronts, the company is expected to post a 26.2% and 28.1% CAGR respectively over FY2012-14E. We value the company at 11x FY2014E EPS of `12.0, which gives us a target price of `132. We maintain our Accumulate rating on the stock. Key financials (Consolidated)
Y/E March (` cr) Net sales % chg Net profit % chg EBITDA margin (%) EPS (`)* P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) FY2010 732 (7.8) 86 30.3 22.1 10.8 11.1 2.5 22.2 26.0 3.0 13.4 FY2011 1,007 37.6 95 10.6 15.1 5.7 21.2 1.6 15.7 15.5 2.0 13.4 FY2012 1,500 49.0 135 42.5 14.5 8.0 15.0 3.0 19.0 17.3 1.5 10.2 FY2013E 2,195 46.3 189 39.7 15.5 10.7 11.3 2.4 21.0 24.7 1.0 6.3 FY2014E 2,317 5.6 222 17.4 15.0 12.0 10.0 1.9 19.8 21.4 0.9 5.8
Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 26.2 13.6 26.7 33.5
3m 10.7
1yr 4.7
(0.2) 48.3
Ankita Somani
022-3935 7800 Ext: 6819 ankita.somani@angelbroking.com
Source: Company, Angel Research; Note: *FY2010 numbers not adjusted for bonus
2QFY13 567 370 197 102 95 11 83 3 (19) 5 66 19 47 1 1 41 2.5 16.7 14.6 7.4
1QFY13 538 351 188 106 81 11 70 4 3 3 72 18 54 1 (1) 49 2.8 15.1 13.0 9.0
% chg (qoq) 5.4 5.6 4.9 (3.8) 16.4 0.8 18.9 (2.8)
% chg (yoy) 74.5 73.6 76.2 51.9 113.1 (1.0) 153.2 168.0
% chg (yoy) 72.4 69.4 78.5 58.9 109.0 8.5 142.4 201.2
43 9 34 0 3
Robust performance
For 2QFY2013, KPIT reported a revenue growth of 5.5% qoq with revenue coming in at US$103.4mn. Onsite revenues grew by 7.6% and the volume growth onsite was ~9%. Offshore revenues grew by 2.9% and the offshore volume growth was ~3%. The overall volume growth stood at 4% qoq and revenue growth in constant currency (CC) terms came in at ~6% qoq. In INR terms, the revenue came in at `567cr, up 5.4% qoq.
35 30 25
(%)
80 70 60 50 40 0.4 2QFY12 3QFY12 4QFY12 1QFY13 qoq growth (%) 2QFY13 Revenue (US$ mn) 70.4 73.4 4.3 5.5
20 15 10 2.8 5 0
KPITs revenue performance came on the back of a modest growth across all its major strategic business units (SBUs). IES emerges as the companys primary growth driver: The integrated enterprise solutions (IES) SBU (contributed 45.9% to revenue) reported a robust 9.1% qoq growth in USD revenue, aided by revenue from Systime. The company is witnessing increasing traction for Oracles and JD Edwards offerings in the US market, driven by clients focus on leveraging and optimizing disparate systems within the enterprise. In emerging markets, the company is getting spends from clients preference towards evaluating and adopting cloud, analytics, mobility and social media solutions. The management indicated that a major upgrade rolled out in JD Edwards will drive demand for Systime services for at least a period of 18-24 months, with clients going for either new implementations or technology upgrades. Also, there are some attractive accounts at Systime which present crossselling opportunity to KPIT post the acquisition. The company managed to increase revenue traction from Systime to US$17mn from US$13mn in 4QFY2012. Also, the EBITDA margin of Systime moved up from 5% in 4QFY2012 to 14% in 2QFY2013. Auto and engineering SBU continues its momentum: The auto and engineering SBU (contributed 24.4% to revenue) posted an 8.6% qoq growth in USD revenue, with revenue coming in at US$25mn. In this SBU, demand for practices such as power train, infotainment, mechanical engineering and design services, in-vehicle networks and hybrid technologies was spread across geographies. The EBITDA margin of this SBU was 23%+ during 2QFY2013. SAP SBU sluggish: The SAP SBU (contributed 29.7% to revenue) registered a 1.9% qoq decline in its revenue. The EBITDA margin at SAP came down to ~7% from 10% in 4QFY2012 on account of investments in HANA, mobility and success factors, and increase in the bench during the quarter. The management indicated that normal utilization levels will return in four to five months. KPITs management also indicated that the company has a strong order pipeline in this SBU for solutions from utilities as well as auto industry verticals.
The companys anchor vertical, automotive and transportation (contributed 38.8% to revenue) registered a revenue growth of 3.3% qoq during the quarter. The company is witnessing modest traction in this vertical as automobile companies try to improve efficiency, safety and comfort as well as due to regulatory standards. Also, increased demand for smaller vehicles, especially in India and China, is one of the drivers of the building deal pipeline for this vertical. The energy and utilities industry vertical emerged as the primary growth driver for the company with revenues growing by 17.5% qoq, as SAP related work has yielded healthy traction in the recent quarters (quarterly revenue run-rate has doubled in the last four quarters in energy and utilities).
Geography wise, revenue from rest of world grew by 32.6% qoq. Revenue from Europe declined by 12.6% qoq, out of which ~6% of the decline was an impact of cross currency movement.
Onsite utilization declined marginally by 25bp qoq to 94.5%, while offshore utilization moved up by 62bp qoq to 74.7% during the quarter.
91.3
94.5 90.6
94.7
94.5
70 60 50
72.8
71.9
74.6
74.1
74.7
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
Onsite utilisation
Source: Company, Angel Research
Offshore utilisation
Margins decline
On the operational front, KPITs EBITDA and EBIT margin increased by 157bp and 166bp qoq to 16.7% and 14.6%, respectively, aided by improvement in Systime margins from 5% in 4QFY2012 to 14% in 2QFY2013. G&A costs declined during the quarter by 150bp qoq (G&A costs currently stands at 11.2% to revenue as against 12.7% in 1QFY2013). The management indicated that they expect to get 15.5%+ margins in FY2013.
35
(%)
25 13.6 15.3 15.8 13.7 4QFY12 EBITDA margin 15.1 13.0 1QFY13 2QFY13 EBIT margin 16.7 14.6 11.8 3QFY12
15
10.1 2QFY12
Gross margin
Source: Company, Angel Research
Client pyramid
KPIT added four new clients during 2QFY2013. The total active client base of the company stands at 176 as of 2QFY2013 as against 172 in 1QFY2013. The USD revenue from Cummins grew merely by 1.0% qoq to US$20.4mn. The management foresees revenue from the Cummins account to remain soft in the near term. The revenue from top 10 clients excluding Cummins grew by 8.0% qoq. Non-top10 clients revenue grew 6.1% qoq.
revenue to post a CAGR of 21.2% and 24.3% in USD and INR terms, respectively, over FY2012-14E. On the EBITDA and PAT fronts, the company is expected to post a 26.2% and 28.1% CAGR over FY2012-14E. We value the company at 11x FY2014E EPS of `12.0, which gives us a target price of `132. We maintain our Accumulate rating on the stock.
(`)
150 100 50 0
Oct-06
Oct-07
Oct-08
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Oct-10
Oct-11
Price
Source: Company, Angel Research
26x
20x
14x
8x
2x
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Apr-06
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Company Background
KPIT Cummins (KPIT), a mid-tier Indian IT company, specializes in the manufacturing segment, with a focus on automotive and industrial solutions and services. The company focuses on three areas of solutions enterprise services, auto and engineering and SAP. KPIT has been growing strongly, both organically and inorganically. The company has successfully acquired eight companies in eight years, which scaled up KPIT's revenue many fold.
Assets
Gross block - fixed assets
Accumulated depreciation
Net block
128
124
169
158
213
185
265
209
320
224
Capital work-in-progress
Goodwill
29
95
3
130
3
362
3
362
3
362
Investments
Loans and advances Current assets Sundry debtors Cash and bank balance Loans and advances Other current assets Less:- Current liabilities Sundry creditors Other liabilities Provisions Net current assets Total assets
75
139 105 68 64 43 23 181 503
22
62 438 147 60 53 176 106 49 367 1,001
35
62 487 227 88 53 198 86 72 499 1,170
50
62 514 342 104 53 212 63 76 662 1,363
10
(174)
(8)
(68)
(18)
(268)
129
(86)
(20)
(90)
(20)
Inc/(dec) in equity/premium
Dividends
145
(6)
128
(7)
(22)
(7)
(7)
(7)
131
(62)
104
103
100
(61)
(27)
80
(27)
115
167
105
105
208
208
147
147
227
227
342
11
Key ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BVPS Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS Cash EPS Dividend Book value Dupont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/Sales) Asset turnover ratio (Sales/Assets) Leverage ratio (Assets/Equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios (x) Asset turnover (fixed assets) Receivables days Payable days 1.9 79 67 1.6 67 45 1.7 81 50 2.0 81 50 1.8 81 50 26.0 47.6 22.2 15.5 29.2 15.7 17.3 35.3 19.0 24.7 49.7 21.0 21.4 44.2 19.8 0.8 0.8 0.2 1.5 1.3 22.2 0.9 1.0 0.1 1.4 1.2 15.7 0.7 1.1 0.1 1.5 1.4 19.0 0.7 0.9 0.1 1.9 1.3 21.0 0.7 1.0 0.1 1.7 1.2 19.8 10.8 14.7 -0.9 48.8 5.7 16.7 -0.9 73.9 8.0 10.6 -0.9 39.8 10.7 14.1 -0.9 50.2 12.0 15.7 -0.9 62.4 11.1 8.2 2.5 (0.7) 3.0 13.4 4.3 21.2 7.2 1.6 (0.7) 2.0 13.4 2.8 15.0 11.4 3.0 (0.7) 1.5 10.2 2.2 11.3 8.5 2.4 (0.7) 1.0 6.3 1.8 10.0 7.7 1.9 (0.7) 0.9 5.8 1.5 FY2010 FY2011 FY2012E FY2013E FY2014E
12
E-mail: research@angelbroking.com
Website: www.angelbroking.com
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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered
KPIT Cummins No No No No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Ratings (Returns):
13