C O M P A N Y

R E P O R T

India 31 Oct 2012 Sector: IT/TECH

BSE Code CMP(31 Oct) Nifty Shares (m) Market Cap (Rs m)

KPIT Cummins

Rs 123.9

A shining star in mid-cap IT sector

KPIT 142/68 18,430 2 73.8% Rs mn

532400
124 5,597 179.02 22,181

NSE Code 52W H/L Sensex Face Value(Rs) Free Float

Share holding as per 30 Sep 2012

KPIT Cummins (KPIT) has the most well defined business model amongst mid-cap IT companies. Deep domain expertise in 3 key verticals, and strengths in two key horizontals - Oracle and SAP, has helped KPIT to outgrow peers on a sustained basis. With a strong financial performance in H1 FY13, the company is set to maintain its growth leadership. At an expected 8xFY14 earnings, KPIT is attractively valued. We expect the stock to hit a price of Rs 150 by Sep13 based on a 12x forward PE. We expect KPIT to continue to command a premium over midcap peers. Set to outgrow peers in FY13 KPIT has grown faster than peers in IT mid-cap space in recent years, reporting growth of 41% in 2011 and 43% in 2012 and CAGR 50% from 2003-2009. It is expected to outgrow peers in FY13 as well; KPIT should convincingly cross its current year guidance of 32-35% growth. Vertical strengths explain growth outperformance With increasing electronics in vehicles, automotive engg services outsourcing to India is set to grow. Automotive engg services off-shoring is expected to reach $6.4bn with CAGR of 18% in FY11-20. KPIT is largest 3rd Party Vendor for Automotive Electronics in India. Similarly, Energy and Utilities verticals are also expected to see strong tech spends. Inorganic strategy has worked well

26.22% 33.46%

Promoter FII DII Others

13.58%

26.74%

150 120 90 60 30 Sep-11 Aug-12 Sep-12 Feb-12 Nov-11 Dec-11 May-12 Mar-12 Jun-12 Oct-12 25,578 3,906 2,618 15.3 14.6 25.1 31.2 8.5

KPIT Cummins

Sensex

Consolidated Financials
FY'11 Sales EBITDA PAT EBITDA (%) EPS (Rs) ROE(%) ROCE(%) P/E Ratio(x) EV/EBITDA(x) EPS 9,870 1,484 946 18.4 10.8 32.4 26.6 15.6 9.3 10.8 FY'12 15,000 2,166 1,454 14.4 8.1 22.1 23.5 15.3 10.2 8.1 FY'13E 21,861 3,226 2,011 14.8 11.2 24.7 30.7 11.0 6.8 11.2 FY'14E

KPITs inorganic moves have worked well, allowing it to develop domain expertise in new areas. Company has achieved strong growth through ramping up services offering in Oracle and SAP through inorganic expansion like CPG and SYSTIME. Q2 FY13 results show strong performance from Systime, where EBITDA margins have expanded from 5.5% during acquisition to 14%. Outperformed all IT mid cap stocks for 1 yr, 6 month and 3 month stock performance & top line growth The Company gave return of almost 50% in last 6 month and 1 year period, outperforming all the peers. It has consistently outperformed Nifty and NSE-IT index through-out the year. KPIT Cummins grew highest among almost all mid-cap IT stock in FY11 and FY12. Revolo, profitability improvement

Couple of key performance drivers for the stock will be what happens to Revolo and profit margins. If Revolos commercial 5.6 launch turns out a success, it will add significant value to 14.6 company. Also the margins levers such as fixed price projects, Rs mn improved employee mix and increased off-shoring can further boost KPITs profitability.

Four-s reports are available on BLOOMBERG, Reuters, Thomson Publishers and Market Publishers

Company Report: KPIT Cummins

31 Oct 2012

Investment Rationale
Fastest growing mid-cap IT player KPIT Cummins is the fastest growing mid-cap IT player in India. KPIT grew at an outstanding CAGR of 50% in the period 2003-2009. It has maintained superior performance with USD revenue growth of 41% in FY11 and 43% in FY12. Consistently growing at CAGR of above 40% It has witnessed similar growth in its bottom line too. In FY12 it registered PAT growth of 54% to Rs 1,449mn, along with 43% growth in EBITDA and EPS growth of 47% y-o-y. These numbers are better than almost all other mid-cap IT peers.
Company Name Hexaware Technologies Infotech Enterprises Mindtree Ltd NIIT Technologies Persistent Systems Polaris FT KPIT Cummins FY12 Rev 15,347 15,707 19,537 16,068 10,339 16,568 15,138 Rev Growth in Fy12 37% 29% 27% 29% 28% 21% 52% Rev Growth in Fy11 3% 22% 12% 35% 32% -2% 35%
(Rs mn)

EBITDA 3,354 2,866 3,315 3,005 2,580 2,730 2,304

PAT 2,670 1,514 2,185 1,964 1,418 2,023 1,450

This extraordinary growth is the result of successful execution of its chosen strategy of vertical focussed growth and successful inorganic expansion. This growth is driven by three major verticals, Auto & transportation, Manufacturing and Utilities. While working in these verticals the company has developed strong horizontal service offerings in Auto & Electronics, IES and SAP. Differentiated vertical-focus strategy driving growth While the rest of the IT industry started talking about vertical-focus in the last 2 years, KPIT very early on decided to focus on a few select verticals to be able to compete better. This company can be considered as the pioneer of this differentiating strategy among the IT mid-caps. The company has focused from early days on automotive and manufacturing verticals. This has resulted in deep domain expertise in its focus verticals. KPIT Cummins is the largest 3rd party vendor for automobile electronics in India. KPIT has developed a strong domain expertise in the manufacturing segment and specifically in automobile sector. In its last more than 20 years of operations it has
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Vertical-focus strategy sets it apart

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Company Report: KPIT Cummins

31 Oct 2012

been working mainly in its niche segment i.e. Automotivemanufacturing. This resulted in high domain expertise and strong clientele in the segment. This gives KPIT advantage among not only their Indian competitors but also with most of their global competitors. Till now, KPIT has developed technology solutions for more than 120 global automotive companies which include 8 out of top 10 global original equipment manufacturers (OEMs).

Successful inorganic growth strategy KPIT Cummins has successfully kept firing the growth engine by supporting strong organic growth with carefully chosen inorganic acquisitions. These acquisitions have helped the company to grow at a rapid space of 40-50% CAGR in the last decade, resulting in one of the fastest growing company in the mid-cap IT space. It has also been successful in smooth integration of these acquisitions. Through these acquisitions it has developed expertise in various services offering in the likes of ERP implementation, Oracle and SAP services. These acquisitions were done with focus on gaining ground in terms of geography entry, or service offering expertise or gaining important client clusters. For example, KPIT has developed expertise in SAP practice with the successful acquisitions of Panex Consulting and Sparta Consulting whereas Oracle practise has been strengthened with recent CPG and Systime acquisition. It did 10 such strategic acquisition in the last decade with focus on driving the growth through strong practice offerings in SAP, ERP and Auto electronics and developed strong client base across the globe.

Highly effective inorganic growth track record

Systime has given scale in Oracle If one takes the example of latest acquisition, SYSTIME ($50mn rev), the largest acquisition till date by KPIT, it gives KPIT strong Oracle practice, with JDE specialisation. This has helped KPIT improve its offering to its key manufacturing clients as clients in this industry prefer JDE solutions. Systime is the largest JD Edwards solution provider globally. It also gave the company foothold and strong client base in Brazil where Systime has good chunk of revenue coming.

Innovation focused and R&D driven company Unlike most IT companies in India, KPIT invests significantly in R&D. The investment in these efforts has now increased to ~3% of its revenue. From these initiatives, the Company has applied for 40 patents in last 18 months.
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Company Report: KPIT Cummins

Innovation to lead non linear growth

31 Oct 2012

KPIT has many innovation based R&D projects, designed to develop new technologies and solution for their customers. This has resulted in growing revenue contribution from its non-linear projects. It has a department named Center for Research in Engineering Services and Technology (CREST), which is totally dedicated to these initiatives. It focuses on research in areas such as System engineering, parallel computing, program analysis tool, security and surveillance and Energy. These R&D initiatives are again industry focussed which helps the company to maintain its edge in the industry and provide best service with IP led solution to its customers.

Revolo a unique R&D initiative Revolo is one of the key results of this initiative. Revolo is plug-in, parallel hybrid solution for the automobiles which converts a regular vehicle into hybrid vehicle. It has filed 16 patents till date for Revolo only.

Robust performance in H1 FY13 Top line expands strongly The company has given strong results in H1FY13 with revenue growing by 72% yoy from Rs 6,411mn in H2FY12 to Rs 11,054mn driven by revenue growth from latest acquisition, Systime, and strong momentum in all verticals. This was supported by outstanding growth in the US market where it grew by almost 100% from Rs. 4,243mn in H1FY12 to Rs 8,434mn in H1FY13, whereas it witnessed a flat European market with 11% growth and in ROW it grew by 35%. Manufacturing and energy & utilities verticals grew at strong 265% and 127%, respectively, in H1FY13 whereas Automotives vertical grew at 30%. All the SBUs showed good growth in this period with 94% growth in IES and 77% growth in SAP SBU and 53% growth in Auto & engg. Its PAT grew by good 60.8% from Rs. 605mn in H1FY12 to 974mn in H1FY13. The company also witnessed strong growth on client level with top client account (Cummins) growing by 60% whereas top 5 clients grew at 60% and top 10 clients account grew by 55%. The company added 7 new customers in this period and has 69 >$1mn clients compared to 59 at the start of the year.

Strong H1 performance sets the tone

Increases margins as well, helped by Systime The company has also managed to push up the EBITDA margin from 13% to 14% despite lower EBITDA margins of Systime. Systime has

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Company Report: KPIT Cummins

Systime margins are moving up

31 Oct 2012

also shown strong performance, with 11.6% and 15.7% revenue growth q-o-q in Q1 and Q2FY13, respectively, along with EBITDA margin improvement from 5.5% at the time acquisition to 14% in Q2FY13.

Q2 FY13 Net Sales Total Expenditure EBITDA Other Income Operating Profit Interest Exceptional Items PBDT Depreciation PBT Tax Profit After Tax Minority Interest Shares of Associates Net Profit 5,672 4,943 729 22 752 32 55 774 114 660 191 468 -12 5 461

Q2 FY12 3,250 2,808 442 109 552 11

% Change 74.5 76.0 65.0 -79.5 36.3 199.9

Q1FY1 3 5,383 4,576 806 30 837 30 27

% Change 5.4 8.0 -9.6 -25.8 -10.2 8.2 104.7 -7.1 0.8 -8.4 3.6 -12.5 0.4 147.9 -10.1

H1 FY13 11,055 9,500 1,554 34 1,589 62 81 1,608 228 1,380 376 1,004 -25 -5 974

H1 FY12 6,412 5,575 837 132 969 19 0 950 210 740 159 581 -4 28 606

% Change 72.4 70.4 85.8 -74.2 63.9 224.3 100.0 69.3 8.5 86.5 137.1 72.7 -482.2 -119.1 60.8 (Rs mn)

541 116 425 88 338 -1 28 365

43.2 -1.0 55.2 118.3 38.8 -936.4 -82.4 26.4

834 113 720 185 536 -12 -10 513

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Company Report: KPIT Cummins

31 Oct 2012

Peer Benchmarking
Strong top-line performance

Company Infotech Hexaware Persistent NIIT Mindtree Average KPIT

Market Cap 21,252 32,005 18,792 16,468 27,505 23,204 21,765

EV 21,746 32,005 18,869 16,593 27,576 23,358 22,954

Sales 15,531 14,505 10,003 15,765 19,152 14,991 15,000

Sales 3 yr CAGR 20% 8% 19% 17% 16% 16% 24%

EBITDA 2,691 2,513 2,244 2,701 2,930 2,616 2,166

PAT 1,614 2,670 1,418 1,972 2,185 1,972 1,454

(Rs mn)
KPIT has shown significant growth in last few years over its peers. It has 3 yr CAGR for sales of 24% despite having not so good performance in FY10 due to recessionary environment. KPIT grew faster than most of the mid-cap IT company in the period with decent performance on margins level. Such strong growth was showcased earlier too by KPIT when it grew 50% CAGR in 20032009 period and above 40% growth in FY11 and FY12.

Better growth than peers

Scope to improve profitability

FY12 Margins Company Infotech Hexaware Persistent NIIT Mindtree Average KPIT EBIDTA 17% 17% 22% 17% 15% 18% 14% PAT 10% 18% 14% 13% 11% 13% 10%

KPITs profit margins are on the lower side amongst its peers. Its profitability was also recently impacted by acquisition of Systime. Systime was a strategic acquisition, but it had the lower margins (5.5%) compared to companys margins. The key will be to push up
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Company Report: KPIT Cummins

31 Oct 2012

Strong balance sheet helps in inorganic strategy

the margins of the business coming from such low margin acquisitions while striving for the growth through these acquisitions. Higher margins can also be achieved by various operational levers such as offshoring, pyramid restructuring etc. In H1 FY13, Systimes margins have started moving up. Systime margins have expanded substantially with 10% and 14% EBITDA margin in Q1 and Q2 FY13, respectively.

Liquidity ratios on Par

Current Ratio (x) Company Infotech Hexaware Persistent NIIT Mindtree Industry Average KPIT FY10 2.57 2.08 2.10 1.81 1.79 2.07 2.39 FY11 6.19 2.84 1.88 1.93 2.47 3.06 1.82 FY12 4.81 2.15 1.82 1.74 1.75 2.45 1.39 Cash Ratio (x) FY11 3.16 1.56 0.40 0.32 0.21 1.13 0.77 FY12 2.36 1.01 0.45 0.41 0.16 0.88 0.30

The company has strong balance sheet with strong cash ratio and current ratio. Due to strong performance in the past, the company has managed to continue the inorganic expansion without much strain on its balance sheet.

Debt Equity (x) Company Infotech Hexaware Persistent NIIT Mindtree Average KPIT FY11 0.04 0.01 0.02 0.01 0.03 0.02 0.05 FY12 0.04 0.00 0.01 0.01 0.01 0.01 0.17

Interest Coverage (x) FY11 137.15 10.57 NA 92.86 266.50 126.77 28.40 FY12 299.28 74.02 NA 60.85 447.00 220.29 23.50

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Company Report: KPIT Cummins

31 Oct 2012

Valuation
Valuation: Growth momentum to drive valuation up The company is continuing its growth momentum from last two years into this year. Revenues grew 72% in yoy in H1 FY13 and 74% yoy in Q2FY13. The Company is expected to maintain this growth momentum in the rest of the year and should easily cross its higher range of guidance of 35% this year. Given the strong growth environment in its focus verticals, the Company is expected to carry forward this momentum to the next year. We expect KPIT to overshoot its guidance of 35% growth in FY13 and to achieve about 17% growth in FY14.
TTM Sales 17,363 17,672 22,047 11,659 22,480 19,643 Price (Rs) 112 188 660 478 120 124 Market Cap 33,160 20,961 27,145 19,120 11,917 22,181 Price /BV 3.1 1.7 2.9 2.0 1.0 2.8 EV/ EBITDA 6.8 4.1 8.1 5.9 3.1 7.9 MCap/ Sales 1.9 1.2 1.4 1.6 0.5 1.1
(Rs mn)

Company Name Hexaware Technologies Infotech Enterprises Mindtree Ltd Persistent Systems Polaris FT KPIT Cummins

PE 10.0 10.3 9.3 11.4 5.0 11.8

Premium valuations imply one year price target of Rs 150 We expect KPIT to command a premium over peers Although company is traded at premium compared its peers, it will continue to demand this premium based on its growth prospects and vertical growth strategy. Currently stock is trading at Rs 124, implying a PE of 10.9x and 8.4x for FY13 and FY14, respectively. We expect KPIT to reach 150 by Sep13 based on a forward PE of 12x Sep13. We believe KPIT deserves a continuing premium over the midcap space. 1 yr forward PE band chart 160 140 120 100 80 60 40 20 0
16x 13x 10x

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Company Report: KPIT Cummins

31 Oct 2012

KPITs Business
Differentiated Strategy : Strong Vertical Focus KPIT has organised its efforts around 3 key verticals: auto and transportation, manufacturing and energy and utilities. KPIT tries to provide industry specific holistic solutions to its clients with best in class service offerings. Differentiated strategy sets company apart With high domain expertise, the company is in a position to provide full range of services to its customers. The company is also investing in R&D to develop and maintain domain excellence in automotive segment.

Revenue Spread Verticals

71.38% 11.22% 1.68% 15.72%

Automotive & Transportation Manufacturing Energy & Utilities Others

Automotive and transport vertical contributed more than Rs 10.7bn, i.e. 71% of FY12 revenue, up from Rs 6.39bn or 64.77% of revenue in FY11. The contribution from Manufacturing increased from 10.48% in FY11 to 11.22% in FY12. This largely helped drive 41% and 43% growth in FY12 and FY11, respectively.

Increased outsourcing in Auto industry With increasing competition in the Auto industry, OEMs are facing intense pressure to bring in the new models at a quicker pace, with increased electronics in them. This has worked as a booster to the outsourcing industry as outsourcing helps in bringing down the total time required to develop the product and bring it in the market. Outsourcing helps OEMs and other auto vendors to bring down the lead time in product development and imparts flexibility to them to easily adjust to market dynamics. Also growing electrification of the vehicles and its increasing criticality in product success has further

Auto industry more inclining towards outsourcing

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Company Report: KPIT Cummins

31 Oct 2012

pushed the outsourcing market in auto engineering and Auto industry.

Technology development in Automotive space to drive top line With focus on fuel efficiency, safety, cost cutting and hybrid technology increasing, auto companies are more and more incorporating electronics into their vehicles. As OEMs are not looking to get into technology development, especially IT, which is not their core domain, this development mainly gets outsourced to companys working in this domain. KPIT has benefitted in this trend with increasing projects from Auto OEMs. As per Nasscom, the engineering services space is currently exploding, thanks to robust growth across Europe, Asia and the US. According to the report, the total engineering services market was worth $746 billion in 2004 and will touch $1,100 billion by 2020. Of this the outsourced component could be worth around $200 billion. Currently, the engineering services outsourcing (ESO) market is worth around $15 billion with India garnering a healthy 12%share. Automotive is second largest contributor in this with 19% share

Technology development in Auto to push for more electrification of vehicles

US market on the recovery path US constituted around 70% of revenue in FY12; its share increased to 76% in Q1FY12. With US economy showing signs of recovery, prospects US car sales are expected to improve going forward.

US Auto Sales (in mn)

16 15 14 13 12 11 10 9 8

Source:Ycharts.com, Bureau of Economic Analysis and Four-S

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Company Report: KPIT Cummins

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With improving US car sales numbers, KPIT is expected to get good demand from its US based clients along with Japan and emerging markets with improving overall sector condition.

Increasing electronics in Automotives As the technology is developing, more and more electronics is used in automotives to improve vehicles safety, fuel efficiency. Powertrain, infotainment, interiors, tele/diagnostics. As per databeans, roughly 25% of vehicle cost accounts for electronic products which goes up-to 30% in luxury cars. This will soon reach to 50%. Micro controllers based ECUs are increasing in vehicles with increasing features in the vehicle. ECUs per vehicles range from 25 to 35 in an average vehicle to as many as 70 in luxury cars up from single digit micro controllers few years back. The automotive microcontroller market is expected to expand to Rs. 328bn ($7 billion) by 2015.

Increasing electronic components in vehicle, booster for KPIT

Niche specialisation in other focused verticals driving the growth KPIT is now expanding into emerging verticals like Energy & Utilities and Industrial equipments. Energy & Utilities vertical is expected to attract large technology investments in the coming years which the company looking to leverage with domain specialised offerings. In cognizance with this core sector strategy, KPIT has recently moved out of BFSI sector which contributed around 2% to its revenue. This niche specialisation helps the Company to win larger deals with the existing and new customers and improves customer mining. Company moving ahead should also improve the profitability with plans to improve business mix and increase in offshore services.

Emerging focus vertical: Utilities

IT investment in Utilities on rise With increasing concerns all over the world over climate changes and environment issues, and depleting natural conventional energy resources, there is rising demand in improving overall efficiency in this sector with the help of information technology. The opportunities vary from smart grid applications to billing solutions to customer management. For utilities vertical, north America is a vital vertical, where the company will gain advantage with its strong presence through Sparta Consulting. Sparta Consulting is one of the fastest growing SAP services partners in North America, having received the 2012 SAP Partner Impact Award as the SAP Services Partner of the Year for Momentum in North America. Sparta has delivered over 250
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Huge opportunity in utilities sector

Company Report: KPIT Cummins

31 Oct 2012

successful projects based on SAP solutions, which have included over 25 leading energy and utilities companies.

Strong positioning in horizontal SBUs pushing up the growth IES, Automotive & Engg and SAP constitute companys key SBUs.

IES (INTEGRATED ENTERPRISE SOLUTIONS) IES is the largest SBU in the company contributing 40% revenue to companys top-line and is largely driven by Oracle practice. It grew 57% last year along with new customers deal worth $60mn. IES includes ERP implementation, support and e-biz. In IES, Oracle is the key practice which includes Business Intelligence (BI), Manufacturing Execution Systems (MES), JD Edwards (JDE), Oracle Transportation Management (OTM) and Supply Chain Management (SCM). Through organic skill developments and acquisitions KPIT has strengthen its offering. It is third largest partner in Oracle in North America in Industrial manufacturing and eight largest across the industries. With latest Systime acquisition, the Companys standing is further strengthened in Oracle-JDE offering.

IES: Enterprise consulting

Auto & Engineering KPIT is the largest third party vendor for automotive embedded electronics in India. With 50% growth from last year A&E contributes 26% of revenue. Auto & Engg is the highest margin SBU in the company with margins ranging in 19-20%. With increasing electronics in Automotives the company is getting good traction from Powertrain, Infotainment, AUTOSAR, MEDS, Diagnostics and Telematics. This is niche market service line offering from KPIT with high domain expertise, offering embedded software and automotive electronics related practices to OEMs and tier I & II vendors. To further improve its competence in the vertical lot of R&D work is done in this SBU which results in IP based solutions to its clients.

Auto & engg: Strong domain expertise

SAP KPIT has strong presence in SAP ERP implementation services for energy and utilization sector along with manufacturing sector with North America as major geography. The SAP SBU grew 57% last year with the company getting traction across the industries. The SAP SBU is seeing good traction in Core ERP implementation, Business Intelligence (BI) & Analytics, Customer Relationship

SAP: strong pipeline with many multimillion deals

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Management (CRM), Human Capital Management, Mobility and Application Maintenance & Support (AMS) projects. It closed three deals in SAP with more than $20mn size last year. With technology reset happening with in SAP company sees good opportunity HANA, mobility and Success factors in the coming days. The company is also looking to increase non linear business in SAP by developing industry specific templates targeted for mid size business in its focused industries. These templates can be deployed at much lower cost and time than traditional methods. SAP is lowest margin SBU in the company with Q2FY13 margins at 7%. Increased bench due to shift in technology and more onsite implementation projects are one of the key reasons for lower margins.

Revenue Distribution: SBU wise

3% IES 31% 40% Auto & Engg SAP Semiconductor Solutions Group

26%

Revolo: A hybrid solution Revolo is a major output of the Companys R&D efforts. This could be a major lever to push up non linear revenue for the company in the near future. Revolo is a plug-in, parallel hybrid solution for the automobiles which converts a regular vehicle into hybrid vehicle using companys innovative development in power-train technology. It has filed 16 patents till date for Revolo only. Revolo: Opportunity to create hybrid kit market The solution will be developed and manufactured by 50:50 JV between KPIT and Bharat Forge. Here KPIT will license its technology whereas Bharat forge will bring in support for manufacturing and distribution. As per Automotive Research Association of India (ARAI) tests, this technology improves fuel efficiency by 40-50% and reduces green house gas emission by 30%. The kit can be fitted to a vehicle in 4-6 hrs at the cost of 65k-150K depending on type of vehicle. The Company is currently doing testing on 200 vehicle fitted with the kit
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Company Report: KPIT Cummins

and should come up with results near the year closing.

31 Oct 2012

After testing and concluding govt regulatory requirements the company should be able to launch the product in FY14 commercially. Revolo was earlier expected to launch in FY13 but due to battery problems it got delayed. The company expects Rs 3-5bn revenue from this product.

Revenue Distribution: Geographically Though KPIT has strong presence across globe, it has strong dependency on US market like many other IT cos. Another reason for this could be attributed to its large client Cummins, based out of USA, which attributes 20-22% of revenue. In FY12, the US market contributed almost 70% of companys revenue, up from 67% in FY11 and 60% in FY10. This is working in favour of the company, as the US economy and auto & manufacturing sector is showing the signs of recovery. Geographical Revenue Spread

US is the key market

69.56%

18.20% 12.24%

USA Europe Rest of World

Emerging market showing strong growth

Due to lower European market exposure, the Company is comparatively sheltered from current European crisis. It is looking to further diversify its geographical reach by gaining market share in emerging market like APAC, China and Brazil. The emerging market grew 56% in FY12 with growth coming from countries like India, China, Japan and Korea. To support good growth in China in automotive business, KPIT has set up a subsidiary in China. Similarly it has set up subsidiaries in Brazil and Netherlands too to strengthen its operations in Latin American nations, Scandinavian and other European regions. With the acquisition of Systime it has good positioning in the Brazil market of JDE offerings.

Successful inorganic strategy to plug gaps in business model The company has successfully implemented its inorganic growth strategy to plug in gaps in its customer offerings. With 10
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Company Report: KPIT Cummins

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acquisitions in as many years the company has managed to increase its top line by 28x in the last 10 years. With these acquisitions company has increased its foothold geographically and improved its client base.

Revenue growth strongly supported by acquisitions

16000

Strategic acquisitions playing big role in exponential growth

14000 12000 10000 8000 6000 4000 2000 0

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Consol Revenue Standalone revenue
(Rs mn)

KPITs acquisitions are driven by any of the 3 considerations: domain expertise, geographical presence, or service expansion. Be it Cummins at the initial stage which gave them auto-mfg domain expertise or be it the latest $50mn SYSTIME acquisition which has strong hold in Oracle and JDE practice.

Acquisitions

Company Cummins Infotech Panex SolvCentral Pivolis

Year 2002 2003 2005 2005 2006 2008 2009 2010 2010 2010

Size $1mn $ 7.2 Mn $ 3.5 Mn $ 1.5 Mn $ 6.2 Mn $ 1.0 Mn $ 3.5 Mn $ 4.0 Mn $ 11 Mn $ 50 Mn

Rationale Anchor Customer Cummins, Vertical Focus - Manufacturing SAP Practice, Anchor Customer BI Practice, Anchor Customer Direct Presence in France, Geography Auto Electronics Domain, Auto OEM & Tier I Customers MEDS Practice SAP Practice, US Geography presence in SAP Vehicle Diagnostic & Telematics, German Frontline Oracle Consulting Oracle Consulting, JDE Specialist

10 years: 10 acquisition

CG Smith Harita TVS Sparta Consulting In2Soft CPG SysTime

With these acquisitions KPIT has developed a strong offering in SAP, Auto engg and Oracle. This helps KPIT in cross-selling their Enterprise application services to their existing customer.

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Company Report: KPIT Cummins

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Though these acquisitions have boosted companys growth, organically also the company has shown good growth. Organically company has grown at 40% rate for last few years.

SYSTIME acquisition SYSTIME is the largest acquisition till date of KPIT Cummins in its decade long acquisition history. At the time of acquisition in 2010, SYSTIME had revenue of $50mn. Systime is the world's largest JD Edwards solution provider, with manufacturing industry focused offerings. This has further strengthened manufacturing and energy & utilisation vertical of company as JDE is highly preferred in these verticals. With Systime's strong client base in manufacturing sector, including large manufacturers such as France's Lafarge SA and U.S.-based industrial gases maker Praxair Inc, it provides strong cross-selling opportunity to the company. This acquisition adds-up to the companys Oracle-based consulting and services business, making it a $125mn business for FY12. Also company gets head-start in emerging geography, Brazil, where Systime is an established player. Although Systime has lower EBITDA margins compared to companys margins, KPIT could improve those with operational levers like offshoring, pyramid restructuring and other cost cutting majors. Also it represents good cross-selling opportunity to KPIT and Systime customers. Strong and diversified customer portfolio KPIT has strong client portfolio with more 176 active clients and 69 clients with run rate more than $1mn. It has been adding 3-4 active clients every quarter from different verticals and service portfolio. Include values in the chart below
180 175 170 165 160 155 150 145 140 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2Fy13
No. of Active Customers Customers with run rate of >$1Mn
152 155 159 163 165 169 172

Systime: Biggest bet till now

65 48 40 40 51 54 59

69

80 70 60 50 40 30 20 10 0

176

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Company Report: KPIT Cummins

31 Oct 2012

Dependency on its top client, Cummins, is also drastically come down in last 1-2 years. From almost 25% business coming from Cummins in Q3FY11 it has come down to 19.7% in Q2FY13.

Strong growth potential with $1bn target for FY17 32-35% growth expected in FY13 The company has the guidance of 32-35% growth in FY13 which is better than most of major-mid cap IT companies expected growth in current environment. KPIT plans to achieve this with maintaining edge in auto, mfg and utility sector and driving the growth with service offering with domain expertise as a differentiator. The company has recently (in last 9 months) closed 3 $20mn+ deals and expects similar deal flow from their focused verticals in the future. The company more than doubled the growth the top-line in last two years from $154mn in FY10 to $309mn in FY12 with major boost coming from SAP and auto segments.

Company expected to outperform its guidance

FY17 vision to reach $1bn KPIT has set a vision to become $1bn revenue company by FY17, with target to achieve EBITDA margin of 18% up from 14.5%. With strong vertical focused growth and best in class practices in Auto embedded, SAP and Oracle, company should achieve the target with the help of inorganic means and organic growth.

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Operational performance

Focus on productivity improvement, Systime margins improve The company is showing positive developments in productivity factors. Systime had EBITDA margins of 5.5% at time of acquisitions compared to the companys 15% which had impacted on companys margins. But as Systime integration is happening one can see positive trend in its margins. In Q4FY12 without SYSTIME EBITDA margin was ~17%, but SYSTIME itself had margin of 10%, bringing down overall EBITDA margin to 16%. With continued successful integration and increased offshore revenue from SYSTIME the productivity should move up. Also the company also has other levers available with them to increase the margins. By flattening the organisation pyramid further i.e. increasing fresher/experience ratio and improved utilisation on organisational level could further increase in profitability of the company.

Systime integration pushing its margins up

Improvement in the utilization visible Utilisation

100% 95% 90% 85% 80% 75% 70% 65% 60% Q3FY11 Q4FY11 Q1 FY12 Q2FY12 Q3FY12 Q4 FY12 Q1 FY13 Onsite Utilisation Offshore Utilisation 67.6% 69.9% 71.2% 72.8% 71.9% 74.3% 74.1% 89.1% 90.2% 90.7% 91.3% 90.6% 94.5% 94.7%

Utilisation rate seen uptrend

KPIT is on the mid to lower side of utilisation level if one compares it to its peers (NIIT 78-79%, Polaris 80%, Persistent 73%, Mindtree 72%). But the company is trying to improve this shortcoming with increasing utilisation on both onsite and offshore side. Companys efforts are getting some positive results as offshore utilisation has gone up from 67.6% in Q3FY11 to 74.1% in Q1 GY13 and 89.1% onsite utilisation in Q3FY11 to 94.7% in Q1 FY13. Although company is showing this positive trend, it still has plenty of
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Company Report: KPIT Cummins

ground to catch to come close to its top peers. Increased Off-shoring required

31 Oct 2012

Off-shoring to improve margins

KPIT has high amount revenue coming revenue coming from onsite which is in the ratio of 52-53% in recent quarters. This ratio has been on growing trend lately increasing from 43% in Q4 FY11 to more than 53% in Q2 FY13. This growth is has major contribution from SAP SBU which had most of the project in the implementation phase. Also acquired company has more onsite revenue compared to any KPIT. In the coming days company is expected to improve onsite:offshore revenue ratio with increasing offshoring. And existing onsite implementation project going into maintainance phase will also help. Onsite Revenue
55% 53% 51% 49% 47% 45% 43% 41% 39% 37% 35% Q4FY11 Q1 FY12 Q2FY12 Q3FY12 Q4 FY12 Q1 FY13 Q2 FY13
43% 44% 47% 48% 52% 53% 54%

Improvement in organisational pyramid The Company can also use some other majors to improve the productivity such as flattening the organisational pyramid. As of now it has more laterals working in the projects and fewer freshers as compared to its peers. Company is looking to improve this ratio with increasing fresher recruitment.

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Company Report: KPIT Cummins

31 Oct 2012

Financial Annexure
Profit & Loss Statement
Income Statement Gross Sales FY'08 5,835 FY'09 7,932 FY'10 7,316 FY'11 9,870 FY'12E 15,000 FY'13E 21,861 FY'14E 25,578

Employee Cost Other Operating Expenses Sales, Admin & General Expenses Miscellaneous Expenses

2145 2051 818 87

2634 2362 970 706

2654 1982 945 390

5300 1772 1198 117

7718 3116 1789 211

11361 4360 2608 307

13160 5101 3051 360

Total Expenses

5,102

6,672

5,971

8,386

12,834

18,636

21,672

EBITDA Depreciation EBIT Other Income Financial Expenses Profit before tax and Exceptional Items Exceptional Items Profit before tax Tax Profit after tax before minority interest Minority Interest Reported net profit

733 255 478 218 94 602 (13.72) 588 76 512 1 513

1,260 436 823 30 76 778 778 120 658 0 659

1,345 308 1,037 56 33 1,061 1,061 169 892 0 892

1,484 411 1,073 67 38 1,103 1,103 155 948 -2 946

2,166 445 1,721 138 73 1,786 100.45 1,886 437 1,450 -31 1,454

3,226 445 2,781 -120 73 2,587 2,587 623 1,965 -46 2,011

3,906 445 3,461 80 73 3,467 3,467 849 2,618 0 2,618

(Rs mn), consolidated financials

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Company Report: KPIT Cummins

31 Oct 2012

Balance Sheet
Balance Sheet Shareholder's Equity Share Capital Reserves and Surplus ESOPs Total equity capital 184 2,454 2,638 156 1,475 1,631 174 3,697 3,871 183 5,849 6,032 359 6,766 7,125 359 8,777 9,136 359 11,395 11,754 FY'08 FY'09 FY'10 FY'11 FY'12 FY'13E FY'14E

Liabilities Secured Loans Unsecured Loans Minority Interest Total Liabilities and Owner's Equity 5 3,508 858 7 3 2,819 1,185 4,979 1,108 9 6,314 115 158 4 1,186 326 8,641 4 650 460 10,250 4 650 460 12,868

Assets Goodwill on consolidation Gross Block Less: Depreciation Net Fixed Assets Work-in-progress Investments Inventory Debtors Cash and Bank Balance Other Current Assets Loans and Advances Total Current Assets Deferred Tax Asset Current Liabilities Provision Total Current Liabilities Net Current Assets Total Assets 5,626 629 4,997 207 1,432 740 52 478 2,702 (42) 546 287 833 1868 7032 2,489 1,042 1,447 348 0 1,776 1,671 67 383 3,896 (60) 2,716 97 2813 1083 2819 3,464 1,278 2,186 286 747 1,388 1,052 58 619 3,117 (51) 1,076 230 1306 1811 4979 4,241 1,678 2,563 316 1,258 2,288 2,080 363 216 4,947 (55) 2,517 200 2716 2231 6314 7,445 2,155 5,290 185 1,234 4,380 1,473 320 579 6,752 27 4,220 628 4847 1905 8641 8,189 2,370 5,819 320 1,200 4,498 2,283 333 972 8,086 50 4,613 474 5087 2999 10388 9,172 2,418 6,755 400 1,531 5,263 3,201 399 1,262 10,124 50 5,398 595 5992 4132 12867 (Rs mn)

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Company Report: KPIT Cummins

31 Oct 2012

Cash Flow Statement

Cash Flow Statement Net Profit/(Loss) before Tax Adjustments

FY'08 602 273

FY'09 778 441

FY'10 1,061 432

FY'11 1,103 365

FY'12 1,886 415

FY'13E 2,587 324

FY'14E 3,467 409

Operating Cash flow before Wcap Change in WC Cash Generated from Operations before taxes Direct Taxes Paid Operating Cash flow- A

875 -390

1,219 113

1,493 -169

1,467 -574

2,301 -870

2,912 -1,074

3,876 -1,439

485 -44 441

1,332 -141 1,191

1,324 -213 1,110

894 -249 645

1,432 -268 1,163

1,838 -331 1,507

2,437 -400 2,038

Cash Flow from Investing Activities

-301

-669

-1,366

-675

-2,828

-750

-800

Cash from Financing activitiesC Change in Cash= A+B+C Opening Balance Closing Balance

-22 117 625 742

182 704 740 1444

-132 -388 1,444 1056

1,043 1,013 1,056 2069

1,084 -581 2,069 1846

-320 437 1,846 2283 (Rs mn)

-320 918 2,283 3201

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Company Report: KPIT Cummins

31 Oct 2012

Ratios
Ratios EPS CEPS DPS Valuation Ratios P/E Ratio EV/EBITDA EV/Sales Profitability (%) EBITDA margin Pretax margin Net margin Return on avg. Equity Return on avg. Capital employed Growth Ratios (%) Revenue growth EBITDA growth Net profit growth Activity/Turnover Ratios Asset turnover Working Cap turnover Debtors turnover Debtor Days Payables turnover Payables Days Liquidity Ratios Current Ratio Cash Ratio Solvency Debt Equity Leverage Ratio Net Debt / EBITDA Interest Coverage 0.3 2.7 0.2 5.1 0.7 1.7 -0.4 10.9 0.3 1.3 0.0 31.8 0.0 1.0 -1.2 28.4 0.2 1.2 -0.1 23.5 0.1 1.1 -0.5 38.0 0.1 1.1 -0.7 47.3 3.2 0.9 1.4 0.6 2.4 0.8 1.8 0.8 1.4 0.3 1.6 0.4 1.7 0.5 1.9 6.0 8.1 44.8 21.4 17.1 5.9 5.4 4.9 73.8 4.9 75.1 4.0 5.1 4.6 78.9 3.9 94.6 2.7 4.9 5.4 68.0 5.5 66.4 4.1 7.3 4.5 81.1 4.5 82.0 4.9 8.9 4.9 74.1 4.9 73.7 4.2 7.2 5.2 69.6 5.1 71.4 35.9 71.8 32.3 -7.8 6.8 36.4 34.9 10.3 3.9 52.0 45.9 53.7 45.7 48.9 38.3 17.0 21.1 30.2 12.6 10.1 8.8 30.1 14.7 15.9 9.8 8.3 30.9 26.1 18.4 14.5 12.2 32.4 26.6 15.0 11.2 9.6 19.1 19.0 14.4 12.6 9.7 22.1 23.5 14.8 11.8 9.2 24.7 30.7 15.3 13.6 10.2 25.1 31.2 11.8 8.4 1.1 3.0 1.2 0.2 10.1 6.8 1.2 15.6 9.3 1.4 15.3 10.2 1.5 11.0 6.8 1.0 8.5 5.6 0.9 FY'08 6.6 5.7 0.7 FY'09 8.4 15.3 0.6 FY'10 11.4 14.1 0.7 FY'11 10.8 7.4 0.7 FY'12 8.1 6.5 0.7 FY'13E 11.2 8.4 0.8 FY'14E 14.6 11.4 1.0

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Company Report: KPIT Cummins

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31 Oct 2012

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