kpit cummins, 30th january 2013

7/29/2019 KPIT Cummins, 30th January 2013

1/13

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

[email protected]

Performance Highlights

3QFY2013 Result Update | IT

January 29, 2013


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KPIT Cummins Infosystems | 3QFY2013 Result Update

January 29, 2013 2

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


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


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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January 29, 2013 3

Exhibit 3:Trend in revenue growth (qoq)


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 (%)


4/13


January 29, 2013 4

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


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


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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January 29, 2013 6

Exhibit 9:Margin profile


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


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


7/13


January 29, 2013 7

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


Exhibit 12:One-year forward PE


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


8/13


January 29, 2013 8

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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January 29, 2013 9

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


10/13


January 29, 2013 10

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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January 29, 2013 11

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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January 29, 2013 12

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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J 29 2013 13

Research Team Tel: 022 - 3935 7800 E-mail: [email protected] 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%)

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

kpit cummins, 30th january 2013

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