kpit cummins, 30th january 2013
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7/29/2019 KPIT Cummins, 30th January 2013
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Please refer to important disclosures at the end of this report 1
EBITDA 88 95 (6.7) 58 52.1
EBITDA margin (%) 15.7 16.7 (100)bp 15.3 35bp
Source: Company, Angel Research
For 3QFY2013, KPIT Cummins Infosystems (KPIT) reported in-line revenue
numbers but operational performance of the company disappointed. Growth was
sluggish due to lower billing days and shut downs of 2-3 days across the
organization. For FY2013, the Management has maintained its USD revenuegrowth guidance of 32-35% yoy, which is 2.5x more than Nasscoms guidance of
11-14% growth and includes ~US$45mn inorganic revenue from Systime.
For 3QFY2013, KPIT reported revenue of US$103.5mn,
almost flat qoq. In INR terms, the revenue came in at `563cr, down 0.7% qoq.
The companys EBITDA margin declined by 100bp qoq to 15.7%, due to loss of
billing days, and lower realization rates as a result of change in business mix
(decline in revenues from SAP SBU). The adjusted PAT came in at `60cr, up 47%
qoq, aided by other income of `8cr as against loss of `19cr in 2QFY2013.
KPITs Management has maintained its FY2013 USDrevenue growth guidance of a whopping 32-35% yoy (US$408mn-418mn), which
is the strongest amongst its peers. On the PAT front, the company has revised its
guidance upwards to 35-38% yoy growth to `196-200cr. The company is
growing ahead of other IT companies in terms of revenue; and on the operational
front, the companys performance has been improving since the last three
quarters. KPIT has reiterated its positive tone and does not witness any delay in
decision making. Hence, we expect the companys revenue to post a CAGR of
21.8% and 28.5% in USD and INR terms, respectively, over FY2012-14E. On the
EBITDA and PAT fronts, the company is expected to post a 31.6% and 32.0%
CAGR over FY2012-14E. The stock is currently trading at 9.0x FY2014E EPS of
`12.8. We value the company at 11x FY2014E EPS, which gives us a target priceof `140.
% chg (7.8) 37.6 49.0 48.9 10.9
% chg 30.3 10.6 42.5 50.4 15.9
EBITDA margin (%) 22.1 15.1 14.5 15.8 15.2
P/E (x) 10.7 20.3 14.4 10.6 9.0
P/BV (x) 2.4 1.6 2.9 2.3 1.8RoE (%) 22.2 15.7 19.0 22.2 20.5
RoCE (%) 26.0 15.5 17.3 25.9 23.1
EV/Sales (x) 2.8 1.9 1.4 0.9 0.7
EV/EBITDA (x) 12.8 12.8 9.8 5.6 4.8
Source: Company, Angel Research; Note: *FY2010 numbers not adjusted for bonus
CMP `115
Target Price `140
Investment Period 12 Months
Stock Info
Sector
Net debt (`cr) (41)
Bloomberg Code KPIT@IN
Shareholding Pattern (%)
Promoters 24.3
MF / Banks / Indian Fls 10.7
FII / NRIs / OCBs 30.3
Indian Public / Others 34.6
Abs. (%) 3m 1yr 3yr
Sensex 7.3 16.0 22.2
KPIT Cummins (4.3) 53.1 108.3
BSE Sensex
Nifty
Reuters Code
Face Value (`)
IT
Avg. Daily Volume
Market Cap (`cr)
Beta
52 Week High / Low
2,065
0.6
2
19,991
6,050
KPIT.BO
142/73
162,536
022-3935 7800 Ext: 6819
ankita.somani@angelbroking.com
Performance Highlights
3QFY2013 Result Update | IT
January 29, 2013
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KPIT Cummins Infosystems | 3QFY2013 Result Update
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Exhibit 1:3QFY2013 performance (Consolidated)
Cost of revenue 371 370 0.1 249 48.7 1,091 675 61.7Gross profit 193 197 (2.2) 130 48.7 577 345 67.3
SGA expenses 104 102 2.0 72 45.9 313 203 54.3
Depreciation 12 11 2.9 13 (11.7) 35 34 0.7
EBIT 76 83 (8.0) 45 71.2 229 108 112.9
Interest expense 4 3 20.6 2 160.9 11 4 184.8
Other income 8 (19) 11 (8) 24
Exceptional item (9) 5 - (1) -
PBT 71 66 6.9 54 30.8 209 128 63.0
Income tax 18 19 (4.6) 13 42.4 56 29 94.8
PAT 52 47 11.6 41 27.2 153 99 53.8
Minority interest 2 1 1 4 1 349.6
Share in profit of ass. - 1 1 (1) 3
EPS 2.7 2.5 6.4 2.3 17.7 8.0 5.6 42.3
EBITDA margin (%) 15.7 16.7 (100)bp 15.3 35bp 15.8 13.9 189bp
EBIT margin (%) 13.6 14.6 (107)bp 11.8 178bp 13.7 10.6 318bp
PAT margin (%) 10.5 7.4 307bp 10.5 (5)bp 9.0 9.7 (75)bp
Source: Company, Angel Research
Exhibit 2:Actual vs Angel estimates
Net revenue 565 563 (0.4)
EBITDA margin (%) 17.2 15.7 (154)bp
PAT 57 60 4.2
Source: Company, Angel Research
Disappointing operational performance
For 3QFY2013, KPIT reported revenues of US$103.5mn, almost flat qoq. Growth
during the quarter remained sluggish as volume growth remained flat qoq due to
lower billing days and shut downs of 2-3 days across the organization; without the
loss of billing days, revenue growth would have increased by 3%. Onsite revenues
grew 1.6% qoq while offshore revenues declined by 1.9% qoq during the quarter.
In INR terms, the revenue came in at `563cr, down 0.7% qoq.
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Exhibit 3:Trend in revenue growth (qoq)
Source: Company, Angel Research
KPITs revenue performance came on the back of a decent growth in its major
strategic business units (SBUs).
The integrated enterprise
solutions (IES) SBU (contributed 48.7% to revenue) reported a robust 6.1% 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 andsocial 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. Systime registered a healthy revenue growth of 7.15% qoq to reach
US$18.2mn and margins were maintained at 14% in 3QFY2013.
The auto and engineering SBU
(contributed 23.4% to revenue) posted a 4.2% qoq de-growth in USD revenue, with
revenue coming in at US$24mn, due to loss of billing days. In this SBU, demand
for practices such as power train, infotainment, mechanical engineering & design
services, in-vehicle networks and hybrid technologies was spread acrossgeographies.
The SAP SBU (contributed 27.9% to revenue) registered a 5.8%
qoq decline in its revenue. The impact of loss of billing days was maximum on SAP
SBU due to relatively higher proportion of onsite revenues. The Management
indicated that good momentum is seen across practices such as mobility, analytics,
customer relationship management (CRM) and success factors, especially in
geographies like APAC, India and China. KPITs Management also indicated that
the company has a strong order pipeline in this SBU for solutions from utilities as
well as auto industry verticals. This SBU saw revenue decline for the second
consecutive quarter and it may still be two quarters away from a pick up as KPITcontinues to make investments to cater to the changing market demands in the
segment.
73.4
95.4 98.1
103.4 103.5
4.3
29.9
2.85.5
0.0 0
5
10
15
20
25
30
35
40
50
60
70
80
90
100
110
3QFY12 4QFY12 1QFY13 2QFY13 3QFY13
(%)
(US$mn)
Revenue (US$ mn) qoq growth (%)
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KPIT Cummins Infosystems | 3QFY2013 Result Update
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Exhibit 4:Revenue growth (SBU wise)
Integrated enterprise solutions 48.7 6.1 87.7
Auto and engineering 23.4 (4.2) 19.6SAP 27.9 (5.8) 18.0
Source: Company, Angel Research
The companys anchor vertical, automotive and transportation (contributed 40.3%
to revenue) registered a revenue growth of 3.9% qoq during the quarter. The
company is witnessing modest traction in this vertical as automobile companies try
to improve efficiency, safety and comfort and adhere to regulatory standards. Also,
increased demand is being witnessed for infotainment and power train and in-
vehicle networks. Smaller vehicles, especially in India and China, is one of the
drivers of the building deal pipeline for this vertical. The Management indicated
that more traction is expected in the alternative fuel vehicle market, mainly hybrids,
as consumers show more inclination towards fuel-efficient vehicles. The
manufacturing industry vertical emerged as the primary growth driver for the
company with revenues growing by 4.8% qoq.
Exhibit 5:Revenue growth (Vertical wise)
Automotive and transportation 40.3 3.9 34.0
Manufacturing 34.0 4.8 60.0
Energy and utilities 14.2 (7.2) 83.5
Others 11.5 (14.5) (3.6)Source: Company, Angel Research
Geography wise, revenue from Europe grew by 15.2% qoq while the US
geography saw a decline by 2.1% qoq. The Management indicated that APAC
presents the highest growth opportunity in the coming years while in US, the
company observes a mixed scenario in terms of customer spends. Europe is
expected to move slowly. There is good momentum witnessed by the company
from Latin America and China.
Exhibit 6:Revenue growth (Geography wise)
U.S. 74.7 (2.1) 49.3
Europe 13.9 15.2 3.0
Rest of the World 11.4 (1.7) 52.9
Source: Company, Angel Research
Hiring and utilization
During the quarter, KPITs total employee base witnessed a net addition of 175
employees, taking its total employee base to 8,286. Onsite as well as offshore
utilization declined by 165bp and 185bp qoq to 92.8% and 72.9%, respectively
during the quarter.
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KPIT Cummins Infosystems | 3QFY2013 Result Update
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Exhibit 9:Margin profile
Source: Company, Angel Research
Client pyramid
KPIT added two new clients during 3QFY2013. The total active client base of the
company stands at 178 as of 3QFY2013 as against 176 in 2QFY2013. The USD
revenue from Cummins declined by 3.0% qoq to US$19.8mn. Cummins expects
CY2013 to be a similar year as C20Y12 and while the Management sees some
growth challenges in the first half, they remain cautiously optimistic for the second
half of the year. We expect revenue from the Cummins account to remain soft in
the near term. KPITs revenue from top 10 clients excluding Cummins grew by
8.8% qoq.
Exhibit 10:Client metrics
Top client-Cummins 23.9 19.5 20.6 19.7 19.1
Top-10 client billing 47.1 42.2 44.0 43.7 45.2
No. of customers added 2 4 3 4 2
No. of active customers 165 169 172 176 178
Customers with run rate >US$1mn 54 59 65 69 72
Source: Company, Angel Research
Outlook and valuation
KPITs Management has maintained its FY2013 USD revenue growth guidance of
a whopping 32-35% yoy (US$408mn-418mn), 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. This guidance includes ~US$45mn of inorganic revenue in
FY2013 from Systime. On the PAT front also, the company has revised its
guidance upwards to 35-38% yoy growth to `196-200cr. The company is growing
ahead of other IT companies in terms of revenue; and on the operational front, the
companys performance has been improving since the last three quarters.
KPIT has reiterated its positive tone and does not witness any delay in decision
making. The company sees an increase in discretionary spend and improved
pipeline driving growth in FY2014 in both the enterprise IT services and auto
34.2 33.6 34.9 34.7 34.2
15.3 15.8 15.116.7 15.7
11.813.7
13.014.6 13.6
5
15
25
35
45
3QFY12 4QFY12 1QFY13 2QFY13 3QFY13
(%)
Gross margin EBITDA margin EBIT margin
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engineering services. Hence, we expect the companys revenue to post a CAGR of
21.8% and 28.5% in USD and INR terms, respectively, over FY2012-14E. On the
EBITDA and PAT fronts, the company is expected to post a 31.6% and 32.0%
CAGR over FY2012-14E. The stock is currently trading at 9.0x FY2014E EPS of`12.8. We value the company at 11x FY2014E EPS, which gives us a target price
of `140.
Exhibit 11:Key assumptions
Revenue growth-USD terms (%) 32.4 12.0
USD-INR rate 54.5 54.0
Revenue growth-INR terms (%) 48.9 10.9
EBITDA margin (%) 15.8 15.2
Tax rate (%) 26.6 26.0
EPS growth (%) 36.0 17.4
Source: Company, Angel Research
Exhibit 12:One-year forward PE
Source: Company, Angel Research
0
50
100
150
200
250
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
(`)
Price 22x 17x 12x 7x 2x
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KPIT Cummins Infosystems | 3QFY2013 Result Update
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Exhibit 13:Recommendation summary
HCL Tech Accumulate 692 765 10.6 20.7 13.1 13.6 1.5 22.9Hexaware Buy 81 118 46.5 19.0 7.5 6.3 0.8 22.0
Infosys Neutral 2,798 - - 28.8 16.2 5.9 2.9 21.3
Infotech Entp. Neutral 178 - - 17.4 9.1 10.3 0.6 13.6
Mahindra Satyam Neutral 124 - - 19.3 11.5 2.1 1.3 23.5
MindTree Accumulate 799 868 8.6 19.3 9.2 17.4 0.9 21.7
Mphasis Accumulate 370 396 6.9 17.5 9.8 0.0 0.7 13.5
NIIT^ Buy 27 36 33.1 10.9 4.4 (2.7) 0.2 14.1
Persistent Neutral 539 - - 24.1 10.0 15.1 1.1 18.0
TCS Accumulate 1,343 1,465 9.1 28.9 17.0 13.3 3.5 29.7
Tech Mahindra Accumulate 1,001 1,087 8.6 19.0 9.4 6.5 1.8 21.6
Wipro Accumulate 408 429 5.2 19.4 14.7 6.8 1.7 17.9
Source: Company, Angel Research; Note: Valued on SOTP basis
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 & engineering and SAP. KPIT has been growing strongly, both organically
and inorganically. The company has successfully acquired eight companies ineight years, which scaled up KPIT's revenue many fold.
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Profit and Loss statement (Consolidated)
Cost of revenue 409 644 993 1,462 1,641% of net sales 55.9 64.0 66.2 65.4 66.3
Gross profit 323 363 507 772 836
% of net sales 44.1 36.0 33.8 34.6 33.7
S&M expenses 66 76 112 160 178
% of net sales 9.1 7.6 7.4 7.2 7.2
G&A expenses 95 134 177 258 280
% of net sales 13.0 13.3 11.8 11.6 11.3
% of net sales 22.1 15.1 14.5 15.8 15.2
Depreciation 31 41 44 46 54
EBIT 131 111 174 307 323
Interest expense, net 3 3 8 15 14
Other income, net (25) 3 13 (7) 15
Exceptional item - - 10 (1) -
Profit before tax 103 110 189 284 324
Provision for tax 17 15 44 75 84
% of PBT 16.5 14.0 23.1 26.6 26.0
PAT 86 95 145 208 240
Minority interest - - 3 6 4
Share in profit of ass. - - 3 (1) -
EPS (`) 10.8 5.7 8.0 10.9 12.8
Note: *FY2010 numbers not adjusted for bonus
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Balance sheet (Consolidated)
Share capital 16 16 36 36 36
Application money 0 0 0 0 0
ESOP outstanding 2 2 - - -
Preferential shares - - - - -
Reserves and surplus 370 458 677 879 1,111
Share premium - 128 - - -
Secured loans 111 111 82 82 82
Unsecured loans - - 140 120 100
Minority interest - - 33 33 33
Deferred tax liability, net 5 6 (3) - -
Other liabilities - - 26 26 26
Long term provisions - 5 10 10 10
Gross block - fixed assets 251 327 399 474 549
Accumulated depreciation 128 169 213 260 314
Net block 124 158 185 214 234
Capital work-in-progress 29 3 3 3 3
Goodwill 95 130 362 362 362
Investments 75 - 22 30 42Loans and advances - 76 62 62 62
Sundry debtors 139 229 438 496 550
Cash and bank balance 105 208 147 277 446
Loans and advances 68 33 60 89 99
Other current assets - 73 53 53 53
Sundry creditors 64 94 176 200 225
Other liabilities 43 76 106 126 146
Provisions 23 20 49 74 82
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Cash flow statement (Consolidated)
Pretax profit from operations 128 108 169 292 309
Depreciation 31 41 44 46 54Pre tax cash from operations 159 149 214 339 363
Other income/prior period ad (25) 3 13 (7) 15
Net cash from operations 133 151 226 331 378
Tax (17) (15) (44) (75) (84)
(Inc)/dec in
Current assets 16 (128) (217) (87) (64)
Current liabilities (151) 60 141 69 53
Net trade working capital (135) (68) (75) (18) (11)
(Inc)/dec in fixed assets (38) (76) (72) (75) (75)
(Inc)/dec in investments (75) 75 (22) (8) (12)
Inc/(dec) in deferred tax liability (1) 0 (8) 3 -
(Inc)/dec in intangibles (67) (35) (232) - -
Inc/(dec) in minority interest (0) 1 32 - -
Inc/(dec) in other non-current assets 6 (34) 34 - -
Inc/(dec) in debt (8) (18) 129 (20) (20)
Inc/(dec) in equity/premium 145 128 (22) - -
Dividends (6) (7) (7) (7) (7)
Cash flow from financing activities 131 104
Cash at start of the year 167 105 208 147 277
Cash at end of the year 105 208 147 277 446
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KPIT Cummins Infosystems | 3QFY2013 Result Update
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Key ratios
P/E (on FDEPS) 10.7 20.3 14.4 10.6 9.0P/CEPS 7.9 6.9 10.9 8.1 7.0
P/BVPS 2.4 1.6 2.9 2.3 1.8
Dividend yield (%) 0.7 0.7 0.7 0.7 0.7
EV/Sales 2.8 1.9 1.4 0.9 0.7
EV/EBITDA 12.8 12.8 9.8 5.6 4.8
EV/Total assets 4.1 2.7 2.1 1.7 1.3
EPS 10.8 5.7 8.0 10.9 12.8
Cash EPS 14.7 16.7 10.6 14.2 16.4
Dividend 0.9 0.9 0.9 0.9 0.9
Book value 48.8 73.9 39.8 51.1 64.1
Tax retention ratio (PAT/PBT) 0.8 0.9 0.7 0.7 0.7
Cost of debt (PBT/EBIT) 0.8 1.0 1.1 0.9 1.0
EBIT margin (EBIT/Sales) 0.2 0.1 0.1 0.1 0.1
Asset turnover ratio (Sales/Assets) 1.5 1.4 1.5 1.9 1.8
Leverage ratio (Assets/Equity) 1.3 1.2 1.4 1.3 1.2
Operating ROE 22.2 15.7 19.0 22.2 20.5
RoCE (pre-tax) 26.0 15.5 17.3 25.9 23.1
Angel RoIC 47.6 29.2 35.3 56.3 54.7
RoE 22.2 15.7 19.0 22.2 20.5
Asset turnover (fixed assets) 1.9 1.6 1.7 2.0 1.9
Receivables days 79 67 81 81 81
Payable days 67 45 50 50 50
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Research Team Tel: 022 - 3935 7800 E-mail: research@angelbroking.com Website: www.angelbroking.com
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Disclosure of Interest Statement KPIT Cummins
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)
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