KPIT Cummins ACCUMULATE. Performance Highlights CMP. `121 Target Price `132. 2QFY2013 Result Update IT. Investment Period 12 Months

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1 2QFY2013 Result Update IT October 29, 2012 KPIT Cummins Performance Highlights (` cr) 2QFY13 1QFY13 % chg (qoq) 2QFY12 % chg (yoy) Net revenue EBITDA EBITDA margin (%) bp bp PAT (16.4) For 2QFY2013, KPIT Cummins Infosystems (KPIT) reported a strong operational set of results. For FY2013, the management has maintained its guidance of 32-35% yoy growth in USD revenue, which is 2.5x more than Nasscom s guidance of 11-14% growth and includes ~US$45mn inorganic revenue from Systime. We maintain our Accumulate recommendation on the stock. Quarterly highlights: For 2QFY2013, KPIT reported a revenue of US$103mn, up 5.5% qoq. The overall volume growth stood at 4% qoq. In INR terms, the revenue came in at `567cr, up 5.4% qoq. The EBITDA and EBIT margins increased by 157bp and 166bp qoq to 16.7% and 14.6%, respectively, aided by improvement in Systime margins from 5% in 4QFY2012 to 14% in 2QFY2013 and a qoq decline in general and administrative (G&A) costs. The PAT came in at `41cr, down 16.4% qoq, negatively impacted by forex loss of `21cr. The management indicated that forex losses are expected to decline going forward at prevailing currency rates. Outlook and valuation: KPIT s management has maintained its FY2013 USD revenue growth of a whopping 32-35% yoy, which is the strongest amongst its peers, even on the back of a strong 40% yoy revenue growth recorded in FY2012 because of the company s strengthening deal pipeline as well as incremental revenues from Systime. On the PAT front also, the company has maintained its guidance of 19-24% yoy growth to `173cr-180cr. The company is growing ahead of other IT companies in terms of revenues; and on the operational front, the company s performance has been improving since the last couple of quarters. Hence, we expect the company s revenue to post a CAGR of 21.2% and 24.3% in USD and INR terms, respectively, over FY E. On the EBITDA and PAT fronts, the company is expected to post a 26.2% and 28.1% CAGR respectively over FY E. We value the company at 11x FY2014E EPS of `12.0, which gives us a target price of `132. We maintain our Accumulate rating on the stock. ACCUMULATE CMP `121 Target Price `132 Investment Period 12 Months Stock Info Sector IT Market Cap (` cr) Net debt (` cr) 2, Beta 52 Week High / Low Avg. Daily Volume /68 125,465 Face Value (`) 2 BSE Sensex Nifty Reuters Code 18,636 5,666 KPIT.BO Bloomberg Code KPIT@IN Shareholding Pattern (%) Promoters 26.2 MF / Banks / Indian Fls 13.6 FII / NRIs / OCBs 26.7 Indian Public / Others 33.5 Abs. (%) 3m 1yr 3yr Sensex KPIT Cummins (0.2) Key financials (Consolidated) Y/E March (` cr) FY2010 FY2011 FY2012 FY2013E FY2014E Net sales 732 1,007 1,500 2,195 2,317 % chg (7.8) Net profit % chg EBITDA margin (%) EPS (`)* P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) ; Note: *FY2010 numbers not adjusted for bonus Ankita Somani Ext: 6819 ankita.somani@angelbroking.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 2QFY2013 performance (Consolidated) Y/E March (` cr) 2QFY13 1QFY13 % chg (qoq) 2QFY12 % chg (yoy) 1HFY13 1HFY12 % chg (yoy) Net revenue , Cost of revenue Gross profit SGA expenses (3.8) EBITDA Depreciation (1.0) EBIT Interest expense 3 4 (2.8) Other income (19) 3 11 (16) 13 Exceptional item PBT (8.4) Income tax PAT (12.5) Minority interest Share in profit of ass. 1 (1) 3 (1) 3 Adj. PAT (16.4) EPS (11.0) EBITDA margin (%) bp bp bp EBIT margin (%) bp bp bp PAT margin (%) (156)bp 10.9 (344)bp (106)bp Exhibit 2: Actual vs Angel estimates (` cr) Estimate Actual Var. (% ) Net revenue EBITDA margin (%) (4)bp PAT (18.5) Robust performance For 2QFY2013, KPIT reported a revenue growth of 5.5% qoq with revenue coming in at US$103.4mn. Onsite revenues grew by 7.6% and the volume growth onsite was ~9%. Offshore revenues grew by 2.9% and the offshore volume growth was ~3%. The overall volume growth stood at 4% qoq and revenue growth in constant currency (CC) terms came in at ~6% qoq. In INR terms, the revenue came in at `567cr, up 5.4% qoq. October 29,

3 Exhibit 3: Trend in revenue growth (qoq) (US$ mn) (%) QFY12 3QFY12 4QFY12 1QFY13 2QFY13 Revenue (US$ mn) qoq growth (%) 0 KPIT s revenue performance came on the back of a modest growth across all its major strategic business units (SBUs). IES emerges as the company s primary growth driver: The integrated enterprise solutions (IES) SBU (contributed 45.9% to revenue) reported a robust 9.1% qoq growth in USD revenue, aided by revenue from Systime. 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 will drive demand for Systime services for at least a period of months, with clients going for either new implementations or technology upgrades. Also, there are some attractive accounts at Systime which present crossselling opportunity to KPIT post the acquisition. The company managed to increase revenue traction from Systime to US$17mn from US$13mn in 4QFY2012. Also, the EBITDA margin of Systime moved up from 5% in 4QFY2012 to 14% in 2QFY2013. Auto and engineering SBU continues its momentum: The auto and engineering SBU (contributed 24.4% to revenue) posted an 8.6% qoq growth in USD revenue, with revenue coming in at US$25mn. In this SBU, demand for practices such as power train, infotainment, mechanical engineering and design services, in-vehicle networks and hybrid technologies was spread across geographies. The EBITDA margin of this SBU was 23%+ during 2QFY2013. SAP SBU sluggish: The SAP SBU (contributed 29.7% to revenue) registered a 1.9% qoq decline in its revenue. The EBITDA margin at SAP came down to ~7% from 10% in 4QFY2012 on account of investments in HANA, mobility and success factors, and increase in the bench during the quarter. The management indicated that normal utilization levels will return in four to five months. 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. October 29,

4 Exhibit 4: Revenue growth (SBU wise) SBU % of revenue % growth (qoq) % growth (yoy) Integrated enterprise solutions Auto and engineering SAP 29.7 (1.9) 42.5 The company s anchor vertical, automotive and transportation (contributed 38.8% to revenue) registered a revenue growth of 3.3% qoq during the quarter. The company is witnessing modest traction in this vertical as automobile companies try to improve efficiency, safety and comfort as well as due to regulatory standards. Also, increased demand for smaller vehicles, especially in India and China, is one of the drivers of the building deal pipeline for this vertical. The energy and utilities industry vertical emerged as the primary growth driver for the company with revenues growing by 17.5% qoq, as SAP related work has yielded healthy traction in the recent quarters (quarterly revenue run-rate has doubled in the last four quarters in energy and utilities). Exhibit 5: Revenue growth (Vertical wise) Service verticals % of revenue % growth (qoq) % growth (yoy) Automotive and transportation Manufacturing Energy and utilities Others Geography wise, revenue from rest of world grew by 32.6% qoq. Revenue from Europe declined by 12.6% qoq, out of which ~6% of the decline was an impact of cross currency movement. Exhibit 6: Revenue growth (Geography wise) Geography % of revenue % growth (qoq) % growth (yoy) U.S Europe 12.1 (12.6) (11.8) Rest of the World Hiring and utilization During the quarter, KPIT s total employee base witnessed a net addition of 238 employees, taking its total employee base to 8,111. The management indicated that in FY2013, the company is on track of its guidance of hiring ~1,000 employees; it has already hired 500+ employees in 1HFY2013. October 29,

5 Exhibit 7: Employee addition Particulars 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 Net addition Development (45) Sales and support Total (40) 163 1, Total employees Development 6,018 6,178 7,071 7,218 7,447 Sales and support Total 6,544 6,707 7,719 7,873 8,111 Onsite utilization declined marginally by 25bp qoq to 94.5%, while offshore utilization moved up by 62bp qoq to 74.7% during the quarter. Exhibit 8: Trend in utilization 100 (%) QFY12 3QFY12 4QFY12 1QFY13 2QFY13 Onsite utilisation Offshore utilisation Margins decline On the operational front, KPIT s EBITDA and EBIT margin increased by 157bp and 166bp qoq to 16.7% and 14.6%, respectively, aided by improvement in Systime margins from 5% in 4QFY2012 to 14% in 2QFY2013. G&A costs declined during the quarter by 150bp qoq (G&A costs currently stands at 11.2% to revenue as against 12.7% in 1QFY2013). The management indicated that they expect to get 15.5%+ margins in FY2013. October 29,

6 Exhibit 9: Margin profile (%) QFY12 3QFY12 4QFY12 1QFY13 2QFY13 Gross margin EBITDA margin EBIT margin Client pyramid KPIT added four new clients during 2QFY2013. The total active client base of the company stands at 176 as of 2QFY2013 as against 172 in 1QFY2013. The USD revenue from Cummins grew merely by 1.0% qoq to US$20.4mn. The management foresees revenue from the Cummins account to remain soft in the near term. The revenue from top 10 clients excluding Cummins grew by 8.0% qoq. Non-top10 clients revenue grew 6.1% qoq. Exhibit 10: Client metrics (% of revenue) 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 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 management has maintained its FY2013 USD revenue growth 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 company s 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 maintained its guidance of 19-24% yoy growth to `173cr-180cr. On the operating margin front, the management indicated that FY2013 margins are expected to be 15.5% plus. The company has already reached 16.7% EBITDA margin in 2QFY2013 even after absorbing the negative impact of the wage hike. So even if the currency movement is unfavorable for the rest of the year, we believe the company will most likely reach its margin target. The company is growing ahead of other IT companies in terms of its revenue; and on the operational front, the company s performance has been improving since the last couple of quarters. Hence, we expect the company s October 29,

7 revenue to post a CAGR of 21.2% and 24.3% in USD and INR terms, respectively, over FY E. On the EBITDA and PAT fronts, the company is expected to post a 26.2% and 28.1% CAGR over FY E. We value the company at 11x FY2014E EPS of `12.0, which gives us a target price of `132. We maintain our Accumulate rating on the stock. Exhibit 11: Key assumptions FY2013 FY2014 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 Price 26x 20x 14x 8x 2x October 29,

8 Exhibit 13: Recommendation summary Company Reco. CMP Tgt. price Upside FY2014E FY2014E FY E FY2014E FY2014E (`) (`) (%) EBITDA (%) P/E (x) EPS CAGR (%) EV/Sales (x) RoE (%) HCL Tech Accumulate Hexaware Buy Infosys Accumulate 2,334 2, Infotech Entp. Accumulate KPIT Cummins Accumulate Mahindra Satyam Neutral (0.6) MindTree Accumulate Mphasis Neutral (0.5) NIIT^ Accumulate (1.5) Persistent Accumulate TCS Accumulate 1,308 1, Tech Mahindra Accumulate Wipro Buy ; 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 and engineering and SAP. KPIT has been growing strongly, both organically and inorganically. The company has successfully acquired eight companies in eight years, which scaled up KPIT's revenue many fold. October 29,

9 Profit and Loss statement (Consolidated) Y/E March (` cr) FY2010* FY2011 FY2012 FY2013E FY2014E Net sales 732 1,007 1,500 2,195 2,317 Cost of revenue ,443 1,544 % 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 (25) 3 13 (11) 23 Exceptional item Profit before tax Provision for tax % of PBT PAT Minority interest Share in profit of ass (1) - Adj. PAT EPS (`) Note: *FY2010 numbers not adjusted for bonus October 29,

10 Balance sheet (Consolidated) Y/E March (` cr) FY2010 FY2011 FY2012 FY2013E FY2014E Liabilities Share capital Application money ESOP outstanding Preferential shares Reserves and surplus ,081 Share premium Total shareholders funds ,117 Secured loans Unsecured loans Total debt Minority interest Deferred tax liability, net 5 6 (3) - - Other liabilities Long term provisions Total liabilities ,001 1,170 1,363 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 Total assets ,001 1,170 1,363 October 29,

11 Cash flow statement (Consolidated) Y/E March (` cr) FY2010 FY2011 FY2012E FY2013E FY2014E Pretax profit from operations Depreciation Pre tax cash from operations Other income/prior period ad (25) 3 13 (11) 23 Net cash from operations Tax (17) (15) (44) (71) (79) Cash profits (Inc)/dec in Current assets 16 (128) (217) (77) (44) Current liabilities (151) (5) Net trade working capital (135) (68) (75) (52) (49) Cash flow from operating activities (18) (Inc)/dec in fixed assets (38) (76) (72) (75) (70) (Inc)/dec in investments (75) 75 (22) (13) (15) Inc/(dec) in deferred tax liability (1) 0 (8) 3 - (Inc)/dec in intangibles (67) (35) (232) - - Inc/(dec) in minority interest (0) Inc/(dec) in other non-current assets 6 (34) 34 - (5) Cash flow from investing activities (174) (68) (268) (86) (90) Inc/(dec) in debt (8) (18) 129 (20) (20) Inc/(dec) in equity/premium (22) - - Dividends (6) (7) (7) (7) (7) Cash flow from financing activities (27) (27) Cash generated/(utilized) (62) 103 (61) Cash at start of the year Cash at end of the year October 29,

12 Key ratios Y/E March FY2010 FY2011 FY2012E FY2013E FY2014E Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BVPS Dividend yield (%) (0.7) (0.7) (0.7) (0.7) (0.7) 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 October 29,

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%) October 29,