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 532400 NSE Code Bloomberg Code KPIT KPITIN Market Cap (Rs cr) 2239 Free Float (%) 73.73 52- 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% 140 120 100 80 60 Shareholding Pattern 30-Jun-12 Promoters Holding 26.27% Institutional (Incl. FII) 39.55% Corporate Bodies 9.43% Public & others 24.75% Kavita Vempalli (+91 22 3926 8173) Research Analyst kavita.vempalli@nirmalbang.com Amrita Burde (+91 22 3926 8223) Research Associate amrita.burde@nirmalbang.com Robust revenue growth Adjusted USD Revenues grew 5% QoQ at $ 98.05 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.538.3 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 987.0 34.9% 148.4 15.0% 94.6 9.6% 5.3 19.6 14.6 19.1% FY 12A 1500.0 52.0% 216.6 14.4% 145.4 9.7% 8.0 15.8 10.5 22.1% FY 13E 2081.2 38.7% 305.0 14.7% 175.2 8.4% 9.8 12.8 7.2 21.6% FY 14E 2497.5 20.0% 377.1 15.1% 222.6 8.9% 12.5 10.1 5.4 22.0% 1 P a g e
Q1 FY13 Result Analysis (in Rs Crs.) Q1FY13 Q4FY12 Q-o-Q Q1FY12 Y-o-Y Adjusted sales 538.3 469.7 15% 294.8 83% Sales 538.3 480.0 12% 480.0 12% Software Dev expenses 350.6 318.6 10.1% 212.4 65.1% Selling and Marketing Expenses 350.6 318.6 10.1% 357.1 (1.8%) General and Admin Expenses 68.3 55.0 24.2% 59.5 14.7% EBITDA 81.2 76.0 7% 39.7 104% Margin 15.1% 15.8% (75)bps 12.6% 253 bps Depreciation & Amortization 11.3 10.2 11.6% 9.4 20.2% Finance charges 3.5 3.9 (9.1%) 1.0 242.4% Other income 3.0 (11.3) (126.8%) 2.2 35.0% Income before taxes 69.4 50.7 37% 31.5 120% Margin 13.4% 12.6% 73 bps 10.0% 342 bps Income taxes 18.5 15.0 23.4% 7.1 160.5% 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 51.3 43.7 17% 24.1 113% Margin 9.5% 9.1% 42 bps 7.6% 191 bps EPS Rs. 2.9 2.5 17% 1.4 112% 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 $) 120 100 80 60 40 45.04 50.74 60.37 67.92 65.36 70.38 73.43 93.34 98.05 20 0 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
140.0 EBIDTA & PAT (Rs in crore) 120.0 100.0 43.7 51.3 80.0 60.0 40.0 20.0 0.0 36.5 26.3 19.4 23.7 25.1 24.1 33.9 36.4 38.5 43.3 39.7 44.4 41.1 58.0 76.0 81.2 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
Financials Profitability (Rs. In Cr) FY11 FY12 FY13E FY14E Financial Health (Rs. In Cr) FY11 FY12 FY13E FY14E Revenues 987.0 1500.0 2081.2 2497.5 EQUITY AND LIABILITIES % change 34.9% 52.0% 38.7% 20.0% Share Capital 17.6 35.6 35.6 35.6 EBITDA 148.4 216.6 305.0 377.1 Reserves & Surplus 585.4 676.8 876.1 1126.1 % change in EBIDTA (8.1%) 45.9% 40.8% 23.6% Share application money 0.3 0.1 0.1 0.1 Depn & Amort 41.12 44.49 52.00 55.00 Minority Interest 0.9 32.6 38.0 44.9 Operating income 107.3 172.1 253.0 322.1 Non-Current Liabilities Interest 3.8 7.3 12.0 15.0 Long term borrowings 11.5 82.2 60.0 30.0 Other Income 6.74 13.8 3.0 3.0 Deferred tax Liabilities 5.7 0.8 0.8 0.8 Exceptional item 0.0 10.0 0.0 0.0 Other long term liabilities 10.7 26.4 31.7 38.0 PBT 110.3 188.6 244.0 310.1 Long term provisions 5.1 10.3 12.4 14.9 Tax 15.5 43.7 63.4 80.6 Current Liabilities Minority interest (0.19) (3.15) (5.42) (6.88) Short term Borrowings 81.6 140.0 110.0 50.0 Associates 0.0 3.5 0.0 0.0 Trade payables 94.2 175.7 231.2 277.5 PAT 94.6 145.4 175.2 222.6 Other current liabilities 34.4 42.2 40.0 40.0 EPS 5.3 8.0 9.8 12.5 Short term provisions 75.9 106.3 127.6 153.1 CPS 7.6 10.7 12.7 15.6 TOTAL 908.7 1336.3 1582.8 1842.1 No of shares (crs) 17.8 17.8 17.8 17.8 ASSETS Fixed assets Tangible assets 89.1 133.9 158.9 183.9 Quarterly (Rs. In Cr) Sep.11 Dec.11 Mar.12 Jun.12 Intangible assets 37.3 32.9 32.9 32.9 Revenue 325.0 378.9 480.0 538.3 Capital work-in-progress 28.1 9.2 10.0 20.0 EBITDA 44.4 58.0 76.0 81.2 Intangible assets 3.6 9.3 15.0 18.0 Dep 11.6 13.3 10.2 11.3 Goodwill (on consolidation) 130.0 362.3 362.3 362.3 Op Income 32.8 44.7 65.9 69.9 Non-current investments 0.0 21.7 25.0 40.0 Interest 1.3 1.6 3.9 3.5 Deferred tax assets 0.2 3.5 3.5 3.5 Other Inc. 11.00 10.84 (11.29) 3.03 Long-term loans and advances 75.5 61.7 64.8 68.0 Exceptional 10 11 Other non-current assets 2.7 3.4 3.8 4.2 PBT 42.5 53.9 60.7 80.4 Current assets Tax 8.8 12.8 15.0 18.5 Current investments 47.7 36.5 30.0 40.0 PAT 36.5 41.1 43.7 51.3 Trade receivables 228.8 438.0 578.1 693.7 EPS (Rs.) 4.1 2.3 2.5 2.9 Cash and Cash Equivalents 208.0 147.3 211.3 283.2 Short-term loans and advances 33.0 60.2 72.2 79.5 Other current assets 24.9 16.4 15.0 13.0 TOTAL 908.7 1336.3 1582.8 1842.1 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 148.4 216.6 305.0 377.1 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 61.6 100.2 174.4 256.0 Investment Capex 57.8 (253.9) (25.8) (35.0) Valuation Ratio FY11 FY12 FY13E FY14E Other Investment 27.0 11.2 6.5 (10.0) Price Earnings (x) 19.6 15.8 12.8 10.1 Other Income 6.7 13.8 3.0 3.0 Price / Book Value (x) 3.8 3.2 2.5 2.0 Total Investment 91.6 (228.9) (16.3) (42.0) EV / Sales 2.2 1.5 1.1 0.8 Financing EV / EBITDA 14.6 10.5 7.2 5.4 Change in Equity Capital 2 18 0 0 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 5.3 8.0 9.8 12.5 Total Financing (50.4) 68.0 (94.1) (142.2) BV per share 33.9 40.0 51.1 65.2 Net Chg. in Cash 102.77 (60.7) 64.0 71.9 Dividend per share 0.7 0.7 0.9 1.4 Cash at beginning 105.2 208.0 147.3 211.3 Cash at end 208.0 147.3 211.3 283.2 Source: Company & Nirmal Bang Research 4 P a g e
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-400013 Board No. : 91 22 3926 8000/8001 Fax. : 022 3926 8010 5 P a g e