KPIT Cummins Infosystems Ltd

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1 4 Recommendation HOLD Q1FY13 results above expectations; onsite volume growth of 7%, pricing stable. CMP Target Price Sector Stock Details Rs.126 Rs.137 IT Software products BSE Code NSE Code Bloomberg Code KPIT KPITIN Market Cap (Rs cr) 2239 Free Float (%) wk HI/Lo (Rs) 133.5/68.3 Avg. volume BSE (Quarterly) 2,64,557 Face Value (Rs) 2.0 Dividend (FY 12) 35% Shares o/s (Crs) 17.8 Relative Performance 1Mth 3Mth 1Yr KPIT 6.4% 51.1% 27.9% Sensex -0.6% -2.9% -10.6% Shareholding Pattern 30-Jun-12 Promoters Holding 26.27% Institutional (Incl. FII) 39.55% Corporate Bodies 9.43% Public & others 24.75% Kavita Vempalli ( ) Research Analyst Amrita Burde ( ) Research Associate Robust revenue growth Adjusted USD Revenues grew 5% QoQ at $ mn (adjusted for SSG transfer) on the back of good traction in US and across all the segments. SYSTIME revenues which KPIT consolidated since last quarter grew 11.6 % QoQ to $ 14.7mn. In Rupee terms, adjusted revenues grew 14.6% QoQ to Rs crore. Onsite Volume growth came in at 7% and adjusted offshore volumes grew 5%. Pricing was stable during the quarter. Semiconductor solutions group (SSG) was KPIT s hardware business of semiconductors, which was hived off into a new company under business partnership with Sankalp Semiconductor Pvt Ltd. in Q4FY12. Benefit from rupee depreciation offset by wage hike and higher visa costs EBIDTA margins slipped 75 bps QoQ to 15.1%. Currency benefit of 2.3% and operational efficiency of 0.3% was offset by wage hikes of -3% and visa costs of -0.4% during the quarter. The company gave 10% and 4% salary hike to offshore and onsite employees respectively. Profits aided by exceptional income and forex gain Profits grew 17.3% QoQ to Rs.51.3 crore. There was an exceptional income of Rs. 2.7 crore on account of Semiconductor Hardware Solutions business transfer which stood at Rs 10 crs in Q4FY12. During the quarter, company made a forex gain of Rs.18.6 lakh against a loss of Rs.9.6 crore in the previous quarter. Other Highlights The top client - Cummins account grew by 18.5% QoQ and as their revenue contribution increased to 20.6% Vs 19.5% in Q4FY12. The company also witnessed growth in Top 5 and Top 10 accounts which grew 23.12% and 16.91% on QoQ basis and by 62% and 52% on a YoY basis respectively. Valuation & Recommendations KPIT revenues and profits have grown at a CQGR of 13% in INR terms in the past 8 quarters. The stock has moved up sharply post Q4FY12 results. We had given a target price of Rs.124 in our Q4FY12 update which has got achieved and we are now upgrading our target price to Rs. 137 based on the FY14E earnings. At CMP, the stock is trading 12.8x and 10.1x FY13E and FY14E expected earnings. While we remain positive on the growth prospects of the company, valuations seem stretched. We had recommended the stock at ex-bonus price of Rs.74 a year ago and have almost doubled now. We recommend investors to partially book profits and Hold the rest. Year Net Sales Growth % EBITDA Margin % PAT Margin% EPS PE EV/EBITDA ROE % FY 11A % % % % FY 12A % % % % FY 13E % % % % FY 14E % % % % 1 P a g e

2 Q1 FY13 Result Analysis (in Rs Crs.) Q1FY13 Q4FY12 Q-o-Q Q1FY12 Y-o-Y Adjusted sales % % Sales % % Software Dev expenses % % Selling and Marketing Expenses % (1.8%) General and Admin Expenses % % EBITDA % % Margin 15.1% 15.8% (75)bps 12.6% 253 bps Depreciation & Amortization % % Finance charges (9.1%) % Other income 3.0 (11.3) (126.8%) % Income before taxes % % Margin 13.4% 12.6% 73 bps 10.0% 342 bps Income taxes % % Minority Interest (1.2) (2.2) (44.1%) (0.3) 305.3% Share in profit of associate (1.0) 0.2 (692.6%) 0 NA Net income % % Margin 9.5% 9.1% 42 bps 7.6% 191 bps EPS Rs % % Source: Company data, Nirmal Bang Research Other highlights: The onsite: offshore revenue mix in Q1FY13 was 52.73%:47.27% Vs 51.54%:48.46% The onsite: offshore utilization in Q1FY13 was 94.72%:74.11% Vs 94.54%:74.28% During the quarter KPIT added 3 customers, taking the total number of active clients to 172. DSO stood at 75 days from 76 in the previous quarter. In Q1FY13, the company also accounted for Rs 1 crore of Share of loss from associate arising from the strategic stake in GAIA Systems Solutions Inc. - Japan based Software Specialist Company. Increase in revenues over the quarters Revenues (USD Mn $) Source: Company data, Nirmal Bang Securities Note: SYSTIME revenues for Q4FY12 and Q1FY12 have been adjusted for SSG and DFS business in order to make it comparable with Q1FY13. 2 P a g e

3 140.0 EBIDTA & PAT (Rs in crore) PAT EBIDTA Revolo Update The launch of 200 hybrid vehicles on a trial basis in on track and is expected to take place by the end of CY12. KPIT has completed its product engineering phase for REVOLO and has shifted the team to the new facility in Hinjewadi (Pune). Valuation & Recommendation KPIT revenues and profits have grown at a CQGR of 13% in INR terms in the past 8 quarters. The stock has moved up sharply post Q4FY12 results. We had given a target price of Rs.124 in our Q4FY12 update which has got achieved and we are now upgrading our target price to Rs. 137 based on the FY14E earnings. At CMP, the stock is trading 12.8x and 10.1x FY13E and FY14E expected earnings. While we remain positive on the growth prospects of the company, valuations seem stretched. We had recommended the stock at ex-bonus price of Rs.74 a year ago and have almost doubled now. We recommend investors to partially book profits and Hold the rest. 3 P a g e

4 Financials Profitability (Rs. In Cr) FY11 FY12 FY13E FY14E Financial Health (Rs. In Cr) FY11 FY12 FY13E FY14E Revenues EQUITY AND LIABILITIES % change 34.9% 52.0% 38.7% 20.0% Share Capital EBITDA Reserves & Surplus % change in EBIDTA (8.1%) 45.9% 40.8% 23.6% Share application money Depn & Amort Minority Interest Operating income Non-Current Liabilities Interest Long term borrowings Other Income Deferred tax Liabilities Exceptional item Other long term liabilities PBT Long term provisions Tax Current Liabilities Minority interest (0.19) (3.15) (5.42) (6.88) Short term Borrowings Associates Trade payables PAT Other current liabilities EPS Short term provisions CPS TOTAL No of shares (crs) ASSETS Fixed assets Tangible assets Quarterly (Rs. In Cr) Sep.11 Dec.11 Mar.12 Jun.12 Intangible assets Revenue Capital work-in-progress EBITDA Intangible assets Dep Goodwill (on consolidation) Op Income Non-current investments Interest Deferred tax assets Other Inc (11.29) 3.03 Long-term loans and advances Exceptional Other non-current assets PBT Current assets Tax Current investments PAT Trade receivables EPS (Rs.) Cash and Cash Equivalents Short-term loans and advances Other current assets TOTAL Performance Ratio FY11 FY12 FY13E FY14E PAT growth (%) 10.3% 53.7% 20.5% 27.1% Cash Flow (Rs. In Cr) FY11 FY12 FY13E FY14E EBITDA margin (%) 15.0% 14.4% 14.7% 15.1% Operating PAT margin (%) 9.6% 9.7% 8.4% 8.9% OP before WC changes ROE (%) 19.1% 22.1% 21.6% 21.5% Change in WC (71.4) (72.7) (67.1) (40.5) ROCE (%) 12.5% 14.7% 16.2% 17.6% (less) Tax (15.5) (43.7) (63.4) (80.6) CF from Operation Investment Capex 57.8 (253.9) (25.8) (35.0) Valuation Ratio FY11 FY12 FY13E FY14E Other Investment (10.0) Price Earnings (x) Other Income Price / Book Value (x) Total Investment 91.6 (228.9) (16.3) (42.0) EV / Sales Financing EV / EBITDA Change in Equity Capital Change in Borrowing (18) 129 (52) (90) Dividend & Interest Paid (9.9) (19.8) (28.6) (39.5) Per Share Data FY11 FY12 FY13E FY14E Loans & Others (24.6) (59.4) (13.3) (12.7) Reported EPS Total Financing (50.4) 68.0 (94.1) (142.2) BV per share Net Chg. in Cash (60.7) Dividend per share Cash at beginning Cash at end Source: Company & Nirmal Bang Research 4 P a g e

5 Disclaimer: This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities Pvt Ltd). The information, analysis and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in anyway be responsible for the contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document. Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.) B-2, 301/302, Marathon Innova, Opp. Peninsula Corporate Park, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai Board No. : /8001 Fax. : P a g e