KPIT Cummins BUY. Performance Highlights CMP. `105 Target Price `135. 4QFY2013 Result Update IT. Investment Period 12 Months

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1 4QFY2013 Result Update IT May 2, 2013 KPIT Cummins Performance Highlights (` cr) 4QFY13 3QFY13 % chg (qoq) 4QFY12 % chg (yoy) Net revenue EBITDA EBITDA margin (%) bp bp PAT (14.6) For 4QFY2013, KPIT Cummins Infosystems (KPIT) reported broadly in-line numbers on the revenue front but ahead on the operating front. The EBITDA margin came in at 17.7%, up 208bp qoq, and above our estimate of 15.8%. For FY2014, the company guided for a revenue band of US$465m-475m, implying a growth of 13.3%-15.7% yoy, which is encouraging. We continue to remain positive on the stock and maintain Buy rating on it. Quarterly highlights: For 4QFY2013, KPIT reported a revenue of US$105.5mn, up 2.0% qoq. In INR terms, the revenue came in at `570cr, up 1.2% qoq. The EBITDA and EBIT margins increased by 208bp and 205bp qoq to 17.7% and 15.6%, respectively. The EBITDA margin expansion was a function of the company s business mix, ie a higher growth in auto & engineering (+9.1% qoq), where EBITDA margin is upwards of 20%, while SAP declined (-5.0% qoq), where full year (FY2013) margin was 5%. The PAT came in at `51cr, down 14.6% qoq, below our estimate of `54cr, despite significant margin beat, on account of forex loss of ~`12cr. Outlook and valuation: KPIT s USD revenue for FY2013 grew by 33%, exceeding the Management s guidance of 32% and much ahead of industry s FY2013 growth rate. For FY2014, the company guided for a revenue band of US$465mn- 475mn, implying a growth of 13.3%-15.7% yoy, which is encouraging and higher than Nasscoms industry growth estimate of 12-14%. The company expects EBITDA margin in FY2014 to expand ~50bp yoy to 16.8%. PAT guidance range for FY2014 stands at ` cr, implying a growth of 16%-20%. The company is growing ahead of other peer companies in terms of revenue; on the operational front, the company s performance has been improving since the last four quarters. Over FY E, we expect the company to post USD and INR revenue CAGR of 12.8% and 12.2%, respectively. PAT is expected to post a CAGR of 13.3% over FY E. We value the company at 10x FY2015E EPS, which gives us a target price of `135. We maintain Buy rating on the stock. BUY CMP `105 Target Price `135 Investment Period 12 Months Stock Info Sector IT Market Cap (` cr) Net debt (` cr) 1,885 (75) Beta 52 Week High / Low Avg. Daily Volume /92 149,410 Face Value (`) 2 BSE Sensex Nifty Reuters Code 19,736 5,999 KPIT.BO Bloomberg Code KPIT@IN Shareholding Pattern (%) Promoters 24.3 MF / Banks / Indian Fls 11.8 FII / NRIs / OCBs 30.8 Indian Public / Others 33.1 Abs. (%) 3m 1yr 3yr Sensex (0.2) KPIT Cummins (5.0) Key financials (Consolidated) Y/E March (` cr) FY2011 FY2012 FY2013E FY2014E FY2015E Net sales 1,007 1,500 2,239 2,513 2,819 % chg Net profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) Ankita Somani Ext: 6819 ankita.somani@angelbroking.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 4QFY2013 performance (Consolidated) Y/E March (` cr) 4QFY13 3QFY13 % chg (qoq) 4QFY12 % chg (yoy) FY2013 FY2012 % chg (yoy) Net revenue ,239 1, Cost of revenue , Gross profit SGA expenses (7.8) EBITDA Depreciation EBIT Interest expense Other income (9) 8 (11) (17) 13 Exceptional item - (9) 10 (1) 10 PBT Income tax PAT Minority interest Share in profit of ass (1) 3 Adj. PAT (14.6) EPS (3.0) EBITDA margin (%) bp bp bp EBIT margin (%) bp bp bp PAT margin (%) (137)bp bp bp Exhibit 2: Actual vs Angel estimates (` cr) Estimate Actual Var. (% ) Net revenue EBITDA margin (%) bp PAT (5.2) Robust operational performance For 4QFY2013, KPIT reported revenues of US$105.5mn, up 2.0% qoq. Onsite revenues grew slightly by 0.3% qoq to US$457mn while offshore revenues grew by 4.0% qoq to US$49mn during the quarter. The growth was impacted by an ~12% qoq decline in the revenues from its largest client - Cummins. In INR terms, the revenue came in at `570cr, up 1.2% qoq. May 2,

3 Exhibit 3: Trend in revenue growth (qoq) (US$ mn) QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Revenue (US$ mn) qoq growth (%) (%) KPIT s revenue performance came on the back of a decent growth in its major strategic business units (SBUs). IES SBU posts modest growth: The integrated enterprise solutions (IES) SBU (contributed 49.0% to revenue) reported a modest growth of 2.5% qoq in USD revenue, aided by a 9.3% qoq growth in revenue from Systime. Revenues of IES SBU were impacted due to softness in revenues from the Cummins account. The Management indicated that due to the current macro environment, Cummins as an entity has been experiencing volatile business conditions and expects softness in business from Cummins in the first half of CY2013 and pick-up in the business momentum from the second half of the year. For the year FY2013, IES SBU led the growth with a 75.3% yoy growth in INR revenues. The company is witnessing increasing traction for Oracle s 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 in 3QFY2013 has seen good demand traction, with clients going for either new implementations or technology upgrades. Auto and engineering SBU emerges as the company s primary growth driver: The auto and engineering SBU (contributed 25.0% to revenue) emerged as the primary growth driver of the company and posted a 9.1% qoq growth in USD revenue, with revenue coming in at US$26.4mn. In this SBU, demand for practices such as power train, infotainment, mechanical engineering & design services, in-vehicle networks and hybrid technologies was spread across geographies. SAP SBU muted: The SAP SBU (contributed 26.0% to revenues) registered a 5.0% qoq decline in its revenue. 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. KPIT s 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 a revenue decline for the third consecutive quarter and it may still be in the next quarter. May 2,

4 Exhibit 4: Revenue growth (SBU wise) SBU % of revenue % growth (qoq) % growth (yoy) Integrated enterprise solutions Auto and engineering SAP 26.0 (5.0) (11.1) The company s anchor vertical, automotive and transportation (contributed 38.5% to revenue) registered a revenue decline of 2.7% qoq, mainly due to weakness in business from the Cummins account. 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 from auto majors, as to remain competitive, the companies are trying to maintain/reduce costs and still bring in high-end technology features in their vehicles. Smaller vehicles, especially in India and China, are among 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 6.1% qoq. In this industry vertical, the company is witnessing demand traction from thrust in operational efficiency through productivity improvement, quality management and cost reduction by automation of human tasks. Another important focus area for manufacturers around the globe is reduction in time to market. Exhibit 5: Revenue growth (Vertical wise) Service verticals % of revenue % growth (qoq) % growth (yoy) Automotive and transportation 38.5 (2.7) 14.7 Manufacturing Energy and utilities 13.5 (3.3) 29.1 Others (14.3) Geography wise, revenue from US grew by 4.2% qoq, with growth opportunities in the space of JDE and SAP offerings mainly across manufacturing and utilities vertical. Revenue from Europe declined by 16.9% qoq, primarily impacted by the Euro-zone conditions, with Germany, an important automotive market, not showing any major turnaround unless the macro improves. The Management indicated that APAC presents the highest growth opportunity in the coming years in engineering and business IT related services. Exhibit 6: Revenue growth (Geography wise) Geography % of revenue % growth (qoq) % growth (yoy) U.S Europe 11.3 (16.9) (12.8) Rest of the World May 2,

5 Hiring and utilization During the quarter, KPIT s total employee base witnessed a net addition of 35 employees, taking its total employee base to 8,321. Onsite as well as offshore utilization increased by 147bp and 121bp qoq to 94.3% and 74.1%, respectively during the quarter. Exhibit 7: Employee addition Particulars 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Net addition Development Sales and support Total 1, Total employees Development 7,071 7,218 7,447 7,616 7,648 Sales and support Total 7,719 7,873 8,111 8,286 8,321 Exhibit 8: Trend in utilization (%) QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Onsite utilisation Offshore utilisation Margins enhance On the operational front, KPIT s EBITDA and EBIT margins increased by 208bp and 205bp qoq to 17.7% and 15.6%, respectively. EBITDA margin expansion was a function of business mix, ie a higher growth in auto & engineering (+9.1% qoq), where EBITDA margin is upwards of 20%, while SAP declined (-5.0% qoq), where full year (FY2013) margin was 5%. May 2,

6 Exhibit 9: Margin profile (%) QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Gross margin EBITDA margin EBIT margin Client pyramid KPIT added five new clients during 4QFY2013. The total active client base of the company stands at 183 as against 178 in 3QFY2013. The USD revenue from Cummins declined by 11.6% qoq to US$17.5mn. 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. KPIT s revenue from the top-10 clients excluding Cummins grew by 7.1% qoq. Exhibit 10: Client metrics (% of revenue) 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Top client-cummins Top-10 client billing No. of customers added No. of active customers Customers with run rate >US$1mn Outlook and valuation KPIT s USD revenue for FY2013 grew by 33%, exceeding the Management s guidance of 32% and much ahead of the industry s FY2013 growth rate. For FY2014, the company guided for a revenue band of US$465mn-475mn, implying a growth of % yoy, which is encouraging and higher than Nasscoms industry growth estimate of 12-14%. The company expects EBITDA margin in FY2014 to expand ~50bp yoy to 16.8%. PAT guidance range for FY2014 stands at ` cr, implying a growth of 16-20%. The lower PAT guidance is on account of higher tax rate of 28.5% in FY2014 vs 26.8% in FY2013. The company guided at adding ~1,000 people (net) to the team in FY2014. The company is growing ahead of other peer companies in terms of revenue; and on the operational front, the company s performance has been improving since the last four quarters. May 2,

7 KPIT has reiterated its positive tone and does not witness any delay in decision making. The company continues to expect strong traction in the auto & engineering space, which grew at a CQGR of 4.8% in FY2013. Similarly, in IES SBU, it continues to see strong traction for JDE upgrades, master data management and BI. However, growth in SAP SBU is expected to remain muted and may grow only in 2HFY2014. We expect USD revenue growth of 13.4% in FY2014. Over FY E, we expect the company to post USD and INR revenue CAGR of 12.8% and 12.2%, respectively. On the EBITDA margin front, we expect margin to be at 16.1% and 15.5% for FY2014 and FY2015, respectively. PAT is expected to post a CAGR of 13.3% over FY E. The stock is currently trading at 8.4x FY2014E and 7.5x FY2015E EPS. We value the company at 10x FY2015E EPS, which gives us a target price of `135. We maintain Buy rating on the stock. Exhibit 11: Key assumptions FY2014 FY2015 Revenue growth-usd terms (%) USD-INR rate Revenue growth-inr terms (%) EBITDA margin (%) Tax rate (%) EPS growth (%) Exhibit 12: One-year forward PE 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 Apr-13 Price 14x 11x 8x 5x 2x May 2,

8 Exhibit 13: Recommendation summary Company Reco. CMP Tgt. price Upside FY2015E FY2015E FY E FY2015E FY2015E (`) (`) (%) EBITDA (%) P/E (x) EPS CAGR (%) EV/Sales (x) RoE (%) HCL Tech Buy Hexaware Buy Infosys Accumulate 2,287 2, Infotech Entp. Neutral KPIT Cummins Buy Mahindra Satyam Buy MindTree Accumulate Mphasis Accumulate NIIT^ Buy (7.1) Persistent Accumulate TCS Accumulate 1,429 1, Tech Mahindra Buy 963 1, Wipro Accumulate ; 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 in nine years, which scaled up KPIT's revenue many fold. May 2,

9 Profit and Loss statement (Consolidated) Y/E March (` cr) FY2011 FY2012 FY2013E FY2014E FY2015E Net sales 1,007 1,500 2,239 2,513 2,819 Cost of revenue ,464 1,656 1,874 % of net sales Gross profit % of net sales S&M expenses % of net sales G&A expenses % of net sales EBITDA % of net sales Depreciation EBIT Interest expense, net Other income, net 3 13 (17) 9 22 Exceptional item - 10 (1) - - Profit before tax Provision for tax % of PBT PAT Minority interest Share in profit of ass. - 3 (1) - - Adj. PAT EPS (`) May 2,

10 Balance sheet (Consolidated) Y/E March (` cr) FY2011 FY2012 FY2013E FY2014E FY2015E Liabilities Share capital Application money ESOP outstanding Preferential shares Reserves and surplus ,021 1,257 1,519 Share premium Total shareholders funds ,056 1,292 1,554 Secured loans Unsecured loans Total debt Minority interest Deferred tax liability, net 5 (3) Other liabilities Long term provisions Total liabilities 718 1,001 1,579 1,795 2,057 Assets Gross block - fixed assets Accumulated depreciation Net block Capital work-in-progress Goodwill 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 ,021 Total assets 718 1,001 1,579 1,795 2,057 May 2,

11 Cash flow statement (Consolidated) Y/E March (` cr) FY2011 FY2012 FY2013E FY2014E FY2015E Pretax profit from operations Depreciation Pre tax cash from operations Other income/prior period ad 3 13 (17) 9 22 Net cash from operations Tax (15) (44) (77) (97) (107) Cash profits (Inc)/dec in Current assets (128) (217) (262) 21 (56) Current liabilities Net trade working capital (68) (75) (227) 68 2 Cash flow from operating activities (Inc)/dec in fixed assets (76) (72) (75) (100) (100) (Inc)/dec in investments 75 (22) (7) (15) 2 Inc/(dec) in deferred tax liability 0 (8) (Inc)/dec in intangibles (35) (232) (80) - - Inc/(dec) in minority interest 1 32 (6) - - Inc/(dec) in other non-current assets (34) 34 (52) - - Cash flow from investing activities (68) (268) (217) (115) (98) Inc/(dec) in debt (18) (20) - Inc/(dec) in equity/premium 128 (22) 142 (0) - Dividends (7) (7) (7) (7) (7) Cash flow from financing activities (27) (7) Cash generated/(utilized) 103 (61) Cash at start of the year Cash at end of the year May 2,

12 Key ratios Y/E March FY2011 FY2012 FY2013E FY2014E FY2015E 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 May 2,

13 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. 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 Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to -15%) Sell (< -15%) May 2,