Recommendation BUY Results above expectations CMP (25/01/2010) Rs. 159 Target Rs. 186 Sector IT Consulting & Software Stock Details BSE Code NSE Code Bloomberg Code Market Cap (Rs. cr) Free Float (%) 52- wk HI/Lo Avg. volume BSE (Quarterly) Face Value Dividend Shares o/s (Crs) 532400 KPIT - EQ KPIT IN 1265.24 70.22 192.90/88.00 168895 Rs.2.00 35% 7.94 Relative Performance 1Mth 3Mth 1Yr Polaris 18.24% -3.37% 17.41% Sensex -5.50% -5.93% 8.48% 150 100 50 KPIT Sensex 0 Jan-10 Jun-10 Oct-10 Shareholding Pattern as of 31/12/2010 Promoters Holding 29.78% Institutional (Incl. FII) 26.74% Corporate Bodies 13.55% Public & others 29.93% Ashish Khetan Research Analyst (+91 22 3926 8174) ashish.khetan@nirmalbang.com Amrita Burde Research Associate (+91 22 3926 8223) amrita.burde@nirmalbang.com KPIT s Q3 FY11 revenues grew 19.0% QoQ to US$60.4 mn as CPG Solutions & In2Soft Gmbh got consolidated for the full quarter in Q3 FY11. In INR terms, revenues grew 16.5% QoQ to Rs.273.7 Crs beating our estimates as revenues from acquired companies were higher than our forecast. PAT margin declined 86 bps 9.2% QoQ due to consolidation of lower margin subsidiaries. Key highlights of the quarter Total headcount was 6,229 as of Q3FY11 end as against 5,953 as at Q2FY11 end. Revenue Growth of 52.91% Y-o-Y in USD terms. During this quarter, CPG Solutions & In2Soft Gmbh got consolidated for the full quarter and they together contributed around USD 4.62Mn to the total revenues. Geography-wise, US & Europe have grown by 21% respectively, while APAC has shown a de-growth of 10%. 5 New customers were added during the quarter with 3 from US and 2 from Europe. Total number of active customers are 152. Management has revised its guidance of USD revenue growth to 38%-40% for FY 2011 compared to its previous guidance of 25% It has also revised INR PAT growth of 8% to 10% for FY 2011 as compared to a guidance of 5% announced in Q2 FY11. Attrition continued to be on the higher side (+30%) during the quarter and remains a concern. Management expects the attrition rate to ease in Q4 FY11. Valuation & Recommendations At the current price of Rs.159,KPIT is trading at a PE of 13.6x FY11 estimated EPS & 9.42x FY12 estimated EPS. The valuations look attractive at current levels given that some of the company s peers are trading at significantly higher multiple. Based on our estimated EPS of Rs 16.89 for FY 2012 and a target PE multiple of 11x we arrive at a target price of Rs.186 per share for KPIT indicating a potential upside of 17% from current levels. Consequently, we give a HOLD rating on the stock and recommend to buy on dips. Year Net Sales Growth % EBITDA Margin % PAT Margin% EPS PE P/BV ROE FY 09A 784.6 30.7% 167.8 21.4% 72.0 9% 9.23 17.37 7.67 33.7% FY 10A 731.6-6.8% 161.4 22.1% 85.7 12% 10.97 14.61 3.23 31.2% FY 11E 995.9 36.1% 151.6 15.2% 95.7 10% 11.79 13.60 2.73 22.2% FY 12E 1,214.0 21.9% 203.0 16.7% 123.2 10% 16.89 9.42 2.27 26.2%
Performance Analysis KPIT s revenues grew 16.5% Q-o-Q in Q3 FY11 to Rs.273.7 Crs and 48.2% Y-o-Y driven by the consolidation of acquired subsidiary companies and higher revenues from its key client Cummins. Cummins revenue share for the quarter increased to 24.07% in Q3 FY11 from 21.93% in Q2 FY11. This growth is on account of Cummins investment in future technologies and this trend is expected to continue in the coming year. The company reported EBITDA of Rs. 38.5 Crs in Q3 FY11 as compared to Rs. 36.5 Crs in Q2 FY11. The growth in EBITDA was modest despite the growth in top-line as the acquired companies have EBITDA margin of around 14% as compared to KPIT s margin of 18-20%. Moreover, exchange rate fluctuations and lower utilization rate due to increasing attrition rate also impacted EBITDA margins in Q3 FY11. KPIT reported net profit of Rs 25.3 Crs in Q3 FY11 as compared to Rs. 23.7 Crs in Q2 FY11 representing a modest growth of 6.5% on Q-o-Q basis Company s diluted EPS increased to Rs 3.02 in Q3 FY11 from Rs.2.91 in Q2 FY11. Q3 FY11 Result Analysis (in Rs Crs.) Q3 FY11 Q2 FY11 Q-o-Q Q3 FY10 Y-o-Y Revenues 273.7 234.9 16.5% 184.8 48.2% Software development exp 179.5 151.0 18.9% 102.7 74.7% Gross profit 94.3 84.0 12.3% 82.0 14.9% General & Administration exp 36.7 28.2 29.8% 24.6 49.3% Selling & Marketing exp 19.1 19.3-1.3% 18.1 5.2% EBITDA 38.5 36.4 5.8% 39.4-2.1% margin 14.1% 15.5% -142 bps 21.3% -722 bps Depreciation & Amortization 8.5 8.4 1.7% 8.1 4.4% Finance charges 0.6 0.3 105.0% 1.3-50.0% Other income 0.8-0.6-239.1% -4.6-117.8% Income before taxes 30.2 27.2 11.3% 25.3 19.3% margin 11.0% 11.6% -52 bps 13.7% -267 bps Income taxes 4.9 3.4 4.0 Net Income for the period 25.3 23.7 6.5% 21.4 18.4% margin 9.2% 10.1% -86 bps 11.6% -232 bps Diluted EPS 3.05 2.91 4.8% 2.69 13.4% Source: Company data, Nirmal Bang Research
SAP SME Partnership to aid top-line growth KPIT has been awarded the highest status as an SME partner within the SAP ecosystem in the US. Sparta is now a SAP gold channel partner authorized to resell SAP Business All-in-One and SAP BusinessObjects solutions to midsize and high-growth businesses in North America. KPIT will do significant investment in the coming quarters for the SME partnership and hence we expect lower operating margins from this business initially. In calendar year 2011, Management expects this business to be in the range of $ 6-8 mn, which can scale to about $ 25-35 mn by 2013 with comparable EBITDA. Robust growth to continue Inorganic route has played a vital role in the growth of company by enabling it to enter new geographies and develop domain expertise. KPIT Cummins has achieved many fold increase in the revenues of the companies it has acquired. It has recently acquired 2 companies in FY 2011 which has enabled the company to deliver strong results. Going forward, we expect the company to grow further both organically and inorganically. Margins to expand gradually During the quarter though there was a good growth in revenue but the EBIDTA margins of KPIT Cummins did not improve accordingly due to consolidations of acquired companies - CPG Solutions and In2Soft in Q2 FY11. This was mainly due to some one time deal and integration expenses like professional fees, legal fees, travel and other related costs both which effectively reduced the operating margins. The company will continue to incur integration expenses in the next quarter as well. The utilization rate has remained low at 67.6% primarily due to higher attrition. Moreover the wage hike and addition of employees further impacted the margins in Q3 FY11. Going forward, we expect the margins to improve gradually driven by higher utilization rate, improvement in employee pyramid and better operational efficiency and synergy. REVOLO on track for commercial launch in Q1 FY12 KPIT has finalized the assembly & manufacturing location for the JV, which is rented and would be ready by Q1 FY12 and has also kicked off road tests on vehicles. Trials of pilot vehicles as well as consumer trials are being conducted on an ongoing basis. Moreover, KPIT is in discussion with multiple OEMs for factory fitted REVOLO solutions. Company is ready for the commercial launch of REVOLO in Q1 FY11. We believe that it is a huge opportunity for the company. Valuation & Recommendation We expect strong top-line growth in FY 2011 driven by increase in demand and acquisition of CPG which has an annual run rate of US$11 mn. However, margins have declined. We expect FY 2012 to be better in terms of profitability as the income from the JV is expected to kick in from Q1 FY12 once the company successfully launches REVOLO. Consequently, we expect the company to achieve a CAGR of 28.8% in Sales and 19.9% in PAT over next two years. At the current price of Rs.159,KPIT is trading at a PE of 13.6x FY11 estimated EPS & 9.42x FY12 estimated EPS. The valuations look attractive at current levels given that some of the company s peers are trading at significantly higher multiple. Based on our estimated EPS of Rs 16.89 for FY 2012 and a target PE multiple of 11x we arrive at a target price of Rs.186 per share for KPIT indicating a potential upside of 17% from current levels. Consequently, we give a HOLD rating on the stock and recommend to buy on dips.
Profitability (Rs. In Cr) FY09A FY10A FY11E FY12E Financial Health (Rs. In Cr) FY09A FY10A FY11E FY12E Revenues 784.6 731.6 995.9 1214.0 Share Capital 15.6 15.7 15.7 15.7 % change 30.7% -6.8% 36.1% 21.9% Reserves & Surplus 147.5 371.4 460.4 600.6 EBITDA 167.8 161.4 151.6 203.0 Net Worth 163.1 387.1 476.1 616.3 % change in EBIDTA 81.8% -3.8% -6.1% 33.9% Secured Loans 118.0 110.8 110.8 110.8 Depn & Amort 43.65 30.81 33.79 42.60 Deferred Tax Liabilities 6.3 5.1 5.1 5.1 Operating income 124.1 130.6 117.8 160.5 Total Liabilities 287.4 503.0 592.0 732.2 Forex Gain/(Loss) 0.0 0.0 0.0 0.0 Net Fixed Ass (Incl WIP) 151.0 152.2 148.4 150.8 Interest 4.5 2.7 2.2 2.5 Goodwill 28.5 95.0 95.0 95.0 Other Income -41.8-25.3-2.8 0.0 Investments 0.0 74.7 74.7 74.7 PBT 77.8 102.6 112.9 157.9 Sundry Debtors 177.6 138.8 188.1 229.3 Tax 5.8 16.9 17.2 34.7 Cash & Bank 167.1 105.2 169.2 267.0 Minority interest 0.0 0.0 0.0 0.0 Loans & Advances 44.9 67.7 92.5 124.1 PAT 72.0 85.7 95.7 123.2 C A L&A 389.6 311.7 449.9 620.4 Shares o/s ( No. in Cr.) 7.80 7.80 8.11 8.72 CL & P 281.3 130.6 175.9 208.7 EPS 9.23 10.99 11.79 14.12 Total Assets 287.8 503.0 592.0 732.2 Cash EPS 12.53 10.61 10.98 11.74 Cash Flow (Rs. In Cr) FY09A FY10A FY11E FY12E Quarterly (Rs. In Cr) Mar.10 Jun.10 Sep.10 Dec.10 Operating ` Revenue 197.1 206.1 234.9 273.7 Net Income 77.8 102.6 112.9 182.1 EBITDA 38.6 33.9 36.4 38.5 Change in WC 12.6-16.9-28.8-40.0 Dep 8.0 8.1 8.4 8.5 Other Adjustment 30.2 21.9 16.6 7.9 Op Income 30.7 25.9 28.1 30.0 CF from Operation 120.6 107.6 100.6 149.9 Interest 0.4 0.6 0.3 0.6 Investment Other Inc. -5.7-3.0-0.6 0.8 Capex -49.6-90.5-30.0-45.0 Forex Gain/(Loss) 0.0 0.0 0.0 1.0 Other Investment 2.5-53.0 0.0 0.0 PBT 24.5 22.3 27.2 31.2 Total Investment -47.1-143.5-30.0-45.0 Tax 3.7 2.9 3.4 4.9 Financing PAT 22.3 23.1 22.6 21.1 Dividend Paid -6.4-5.5-6.6-7.1 EPS (Rs.) 2.57 2.38 2.91 3.05 Share Capital 0.0 2.7 0.0 0.0 Performance Ratio FY09A FY10A FY11E FY12E Proceeds/Repay on Loan 24.6-10.4 0.0 0.0 PAT growth (%) 36.8% 19.0% 11.6% 54.0% Total Financing 18.2-13.2-6.6-7.1 Gross margin (%) 43.1% 44.1% 35.4% 35.9% Net Chg. in Cash 91.7-49.1 64.0 97.8 EBITDA margin (%) 21.4% 22.1% 15.2% 16.7% Eff of exch diff on trans 1.5-3.7 0.0 0.0 PAT margin (%) 9.2% 11.7% 9.6% 12.1% Cash at beginning 74.0 167.1 105.2 169.2 ROE (%) 33.7% 31.2% 22.2% 27.0% Cash at end 167.1 114.3 169.2 267.0 Valuation Ratio FY09A FY10A FY11E FY12E Per Share Data FY09A FY10A FY11E FY12E Price Earnings (x) 17.24 14.51 13.50 9.42 Reported EPS 9.23 10.97 11.79 16.89 Price / Book Value (x) 7.62 3.21 2.71 2.25 BV per share 20.89 49.60 58.68 70.65 EV / Sales 1.52 1.71 1.24 1.01 Cash per share 21.42 23.05 30.06 39.17 EV / EBITDA 7.11 7.73 8.13 6.07 Dividend per share 0.70 0.70 0.70 0.70
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