KPIT Cummins Infosystems (KPISYS)

Result Update Rating matrix Rating : Hold Target : 110 Target Period : 12 months Potential Upside : 6% Key Financials ( Crore) FY12 FY13E FY14E FY15E Net Sales 1500 2239 2517 2876 EBITDA 218 365 423 472 EBITDAmargin % 14.5 16.3 16.8 16.4 Net profit 145 200 236 265 EPS ( ) 8.1 10.6 11.6 13.0 Valuation summary FY12 FY13E FY14E FY15E PE (x) 12.9 9.8 9.0 8.0 Target PE (x) 13.6 10.4 9.5 8.4 EV to EBITDA(x) 8.6 5.1 4.4 4.0 Price to book (x) 2.0 1.4 1.3 1.1 RONW (%) 22.1 22.6 20.3 19.1 ROCE (%) 21.3 28.0 26.1 26.0 Stock data Market cap ( crore) 1905 crore Debt (Mar-13) 362 crore Cash (Mar-13) 399 crore EV 1868 crore 52 week H/L ( ) 142/84 Equity capital 37 crore Face value 2 DII Holding (%) 11.8 FII Holding (%) 30.8 Price movement 200 150 100 50 0 Feb-11 May-11 Analyst s name Aug-11 Nov-11 Nifty Feb-12 May-12 Abhishek Shindadkar abhishek.shindadkar@icicisecurities.com Aishwariya KPL aishwariya.kpl@icicisecurities.com Aug-12 Nov-12 KPIT Cummins Feb-13 WHAT S CHANGED May 1, 2013 KPIT Cummins Infosystems (KPISYS) 104 PRICE TARGET... Changed from 120 to 110 EPS (FY14E)... Changed from 12.0 to 11.6 EPS (FY15E)... Changed from 13.9 to 13.0 RATING...Unchanged Growth deceleration continues KPIT reported Q4FY13 earnings, which were below our estimates. US$ revenues grew 2% QoQ to $105.5 million and were below our $108.9 million estimate. Growth was predominantly led by auto SBU (up 8.3% QoQ) and IES (up 1.7% QoQ, helped by SYSTIME) while SAP (down 5.8% QoQ) was the laggard. Excluding Systime ($19.9 million), organic revenues grew 0.4% QoQ to $85.6 million vs. $85.3 million in Q3. For FY14E, KPIT guided 14-16% US$ revenue growth ($465-475 million) and PAT of 230.9-238.8 crore. KPIT expects growth to accelerate in the back half of FY14E while Q1 could be soft led by Cummins. Weakness in top 10 clients (down 0.8% QoQ), tepid organic growth ex-systime (up 9.3% QoQ) Q4 was flat QoQ and low visibility in Cummins continue to influence our HOLD rating. EBITDA margins ahead but PAT below EBITDA margins improved 208 bps QoQ to 17.7% (15.7% in Q3 and 16.3% estimate) led by rising contribution of auto engineering and IES share in total revenues. Reported PAT of 51.2 crore was below our 59.4 crore estimate led by rising taxes (27.1% vs. 22.8% in Q3) and other income loss of 8.6 crore ( 0.5 crore estimate). Operating metric highlights Sequentially, Cummins revenues declined 11.5% QoQ and could be under pressure in Q1FY14E. Top 5 and top 10 customers declined 2.5% and 0.8%, respectively. North America and RoW grew 4.2% QoQ and 10.7% QoQ, respectively, whereas Europe declined ~17% QoQ. Across verticals, manufacturing and others grew 6.1% and 12.7% QoQ while E&U and auto declined 3.3% QoQ and 2.7% QoQ, respectively. Onsite and offshore utilisation improved 147 bps and 121 bps to 94.3% and 74.1%, respectively. The active client base increased by 5 to 183 vs. 178 in Q3. Muted organic growth dictates HOLD We are adjusting our estimates to account for 1) improved margin commentary and 2) higher tax rates. We expect revenues, diluted EPS to grow 12%, 9%, respectively, in FY14E with 52 bps EBITDA margin expansion. Further, we expect revenue, diluted EPS to grow 14%, 12% in FY15E, which translates to a CAGR of 24%, 17%, respectively, during FY12-15E. We are modestly lowering our PE multiple to 8.8x vs. 9x to account for the growth deceleration and now value KPIT at 110, i.e. at 8.8x CY14E EPS estimate of 12.7 vs. 9x of 13.9x CY14E earlier. Exhibit 1: Financial Performance ( crore) Q4FY13 Q4FY13E Q3FY13 Q4FY12 QoQ(Ch %) YoY(Ch%) Net Sales 569.9 589.8 563.3 480.0 1.2 18.7 EBITDA Margin (%) 17.7 16.3 15.7 15.8 208 bps up 190 bps up Depreciation 12.1 14.7 11.8 10.2 2.5 18.6 Interest 4.2 2.8 4.2 3.9 Other Income (8.6) 0.5 7.7 (11.3) (211.8) (24.0) Reported PAT 51.2 59.4 50.4 43.7 1.5 17.0 EPS ( ) 2.6 2.9 2.7 2.4 (3.0) 6.6 ICICI Securities Ltd Retail Equity Research

Exhibit 2: North America, RoW lead quarterly growth (4.2% QoQ & 10.7% YoY) while Europe declines 2.6% $ million Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 US 69.9 74.7 79.0 77.3 80.5 Contribution change (%) 2.8 2.9 0.2-1.6 1.6 QoQ growth (%) 35.1 6.9 5.7-2.1 4.2 Europe 13.7 14.3 12.5 14.4 12.0 Contribution change (%) -4.6 0.2-2.5 1.8-2.6 QoQ growth (%) -1.8 4.2-12.6 15.2-16.9 ROW 11.7 9.0 11.9 11.7 13.0 Contribution change (%) 1.8-3.1 2.4-0.2 1.0 QoQ growth (%) 52.6-23.0 32.4-1.7 10.7 Exhibit 3: Manufacturing grows 6.1% while E&U, auto decline 3.3%, 2.7% QoQ, respectively $ million Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Manfacturing 33.4 32.2 33.6 35.2 37.3 Contribution (%) 35.0 32.9 32.4 34.0 35.4 QoQ growth (%) 51.8-3.4 4.2 4.8 6.1 Auto & Transport 35.4 38.9 40.1 41.7 40.6 Contribution (%) 37.1 39.6 38.8 40.3 38.5 QoQ growth (%) 13.7 9.9 3.3 3.9-2.7 E&U 11.0 13.5 15.8 14.7 14.2 Contribution (%) 11.6 13.7 15.3 14.2 13.5 QoQ growth (%) 37.5 22.3 17.5-7.2-3.3 Others 15.6 13.5 13.9 11.9 13.4 Contribution (%) 16.4 13.8 13.5 11.5 12.7 QoQ growth (%) 26.9-13.7 3.0-14.5 12.7 Exhibit 4: Onsite, offshore utilisation improve 147 bps, 121 bps QoQ, respectively Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Development staff 7071 7218 7447 7616 7648 Support staff 526 530 536 538 538 Marketing staff 122 125 128 132 135 Closing employees 7719 7873 8111 8286 8321 Utilisation (%) Onsite 94.5 94.7 94.5 92.8 94.3 Offshore 74.3 74.1 74.7 72.9 74.1 ICICI Securities Ltd Retail Equity Research Page 2

[ Exhibit 5: Cummins revenues decline 11.5% QoQ & could be under pressure in Q1FY14E $ million Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Active clients 169 172 176 178 183 Client added 4 3 4 2 5 Top customer 18.6 20.2 20.4 19.8 17.5 Contribution (%) 19.5 20.6 19.7 19.1 16.6 QoQ growth (%) 5.8 8.5 1.0-3.0-11.5 Top 5 customers 31.5 35.5 36.4 38.1 37.1 Contribution (%) 33.0 36.3 35.2 36.8 35.2 QoQ growth (%) 14.7 12.9 2.5 4.6-2.5 Top 10 customer 40.3 43.2 45.2 46.8 46.4 Contribution (%) 42.2 44.0 43.7 45.2 44.0 QoQ growth (%) 16.5 7.2 4.7 3.5-0.8 Risks and concern The macro continues to remain challenging while cross currency and rupee could create operating margin headwinds in FY14E. Exhibit 6: One year forward (PE) chart 200 150 100 50 0 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 13 10 8 5 3 Exhibit 7: Assumptions FY12 FY13 FY14E FY15E Total Employee base 7719 8321 8996 9646 Additions 1205 602 1,000 800 Utilisation (offshore) 72.5% 73.9% 75.1% 76.0% Average $/ 48.3 54.5 53.5 53.0 ICICI Securities Ltd Retail Equity Research Page 3

Financial Summary Profit & Loss Account ( crore) FY12 FY13E FY14E FY15E Total Revenues 1,500 2,239 2,517 2,876 Growth (%) 46.6 49.2 12.4 14.3 Total Operating Expenditure 1,282 1,874 2,094 2,404 EBITDA 218 365 423 472 Growth (%) 43.3 67.4 16.0 11.4 Depreciation 44 47 53 58 Other Income 13 (17) 4 5 Interest 8 14 17 14 PBT before Exceptional Items 179 287 357 405 Growth (%) 62.0 61.0 24.3 13.3 Tax 44 77 102 115 PAT before Exceptional Items 132 202 236 265 Exeptional items (10) 1 - - PAT before MI 142 201 236 265 Minority Int & Pft. from associates 3.5 (0.5) - - PAT 145 200 236 265 Growth (%) 53.7 37.9 17.5 12.3 EPS* 8.1 10.6 11.6 13.0 EPS (Growth %) 42.1 31.5 9.3 12.3 Cash flow statement FY12 FY13E FY14E FY15E Net profit before Tax 189 287 357 405 Depreciation 44 47 53 58 (inc)/dec in Current Assets (141) (134) (30) (164) (inc)/dec in current Liabilities 54 77 40 89 CF from operations 100 203 307 258 Other Investments 21 (17) 4 5 (Purchase)/Sale of Fixed Assets (60) (65) (75) - CF from investing Activities (283) (216) (202) (126) Inc / (Dec) in Equity Capital 7 162 - - Inc / (Dec) in sec.loan Funds 120 60 - (50) Dividend & Divendend tax (7) (19) (27) (32) Interest Paid on Loans (7) (14) (17) (14) CF from Financial Activities 108 189 (94) (96) Exchange rate differences (2) - - - Opening cash balance 208 147 322 333 Closing cash 147 322 333 370 Balance sheet FY12 FY13E FY14E FY15E Equity 36 36 36 36 Reserves & Surplus 677 1,022 1,230 1,463 Networth 713 1,058 1,266 1,499 Minority Interest 33 41 61 86 Loans 222 282 232 182 Source of funds 1,680 2,439 2,826 3,267 Gross Block 382 447 522 522 Acc.dep 215 262 315 372 Net Block 167 185 207 150 CWIP 19 19 19 19 Investments & godwill 725 496 627 758 Debtors 438 556 562 715 Cash & Cash equivalents** 147 322 333 370 Loans and advances 60 90 126 144 Others 53 Current liabilities 282 134 159 181 Provisions 49 51 58 66 Application of funds 1,680 2,439 2,826 3,267 Ratio Analysis (Year-end March) FY12 FY13E FY14E FY15E Per share data ( ) EPS 8.1 10.6 11.6 13.0 BV 51.0 73.2 81.8 91.8 DPS 0.7 0.9 1.2 1.4 Cash Per Share 8.0 17.6 18.2 20.2 Operating Ratios (%) EBITDA Margin 14.5 16.3 16.8 16.4 PAT Margin 9.7 9.0 9.4 9.2 Debtor days 81 81 81 81 Creditor days 55 34 21 22 Return Ratios (%) RoE 22.1 22.6 20.3 19.1 RoCE 21.3 28.0 26.1 26.0 RoIC 27.2 35.3 34.0 33.4 Valuation Ratios (x) P/E 12.9 9.8 9.0 8.0 EV / Net Sales 1.2 0.8 0.7 0.6 Market Cap / Sales 1.3 0.9 0.8 0.7 Price to Book Value 2.0 1.4 1.3 1.1 Solvency Ratios Debt / Equity 0.3 0.3 0.2 0.1 Current Ratio 1.5 1.7 1.8 2.1 Quick Ratio 1.5 1.7 1.8 2.1 ICICI Securities Ltd Retail Equity Research Page 4

Company Description KPIT Cummins (KPIT) was incorporated in 1990 (IPO in 1999) as KPIT Infosystems and was later merged with Cummins Infotech to form KPIT Cummins Infosystems Ltd. KPIT provides product engineering solutions and IT & consulting solutions and services to customers across manufacturing, automotive, industrial equipment, utilities and semiconductor sectors. The company focuses on select strategic business units (SBUs, integrated enterprise solutions, auto & engineering & SAP). Headquartered in Pune, KPIT has 8200+ employees, eight development centres (mainly in Pune and Bangalore) and offices in 13 countries including the UK, China, Brazil, France, South Africa, Germany, the US, Japan, Singapore and South Korea. Exhibit 8: Recommendation History 150 100 50 0 Nov-12 Nov-12 Dec-12 Jan-13 Jan-13 Feb-13 Mar-13 Apr-13 Apr-13 Price Target Price [ Exhibit 9: Recent releases Date Event CMP Target Price Rating 7-Jan-13 Initiating coverage 109 120 HOLD 8-Jan-13 Q3FY13 Preview 110 120 HOLD 29-Jan-13 Q3FY13 Result Update 116 120 HOLD 11-Mar-13 Management meet update 107 120 HOLD 8-Apr-13 Q4FY13 Preview 98 120 HOLD 30-Apr-13 Q4FY13 Result Update 104 110 HOLD [ ICICI Securities Ltd Retail Equity Research Page 5

ICICIdirect.com Coverage Universe (IT) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E Eclerx (ECLSER) 610 810 Buy 1822 58.3 72.2 82.1 10.5 8.5 7.4 6.5 5.8 5.1 60.9 49.6 44.5 39.0 36.8 33.3 HCL Tech* (HCLTEC) 721 810 Hold 50218 54.0 59.4 65.4 13.4 12.1 11.0 8.4 7.6 6.9 36.2 32.0 29.5 29.7 26.2 23.7 Infotech (INFTC) 175 175 Hold 1958 20.8 21.0 22.9 8.4 8.4 7.7 4.1 3.8 3.5 26.1 24.4 24.0 18.4 16.0 15.4 Infosys (INFTEC) 2235 2,450 Hold 128368 164.9 170.5 181.1 13.6 13.1 12.3 9.0 8.7 7.9 28.5 24.9 23.7 25.7 22.6 20.6 KPIT Cummins (KPISYS) 104 115 Hold 2004 10.6 11.6 13.0 9.8 9.0 8.0 5.4 4.6 4.2 28.0 26.1 26.0 22.6 20.3 19.1 Mah. Satyam (SATCOM) 110 147 Hold 12986 8.8 11.3 12.2 12.6 9.8 9.0 5.9 6.0 5.4 38.1 27.2 23.8 25.7 24.9 21.2 Mastek (MASTEK) 130 180 Buy 321 14.3 18.7 NA 9.1 7.0 NA 2.8 2.3 NA 7.4 8.6 NA 6.7 8.0 NA Mindtree (MINCON) 802 775 Hold 3331 77.5 83.1 90.1 10.3 9.6 8.9 6.1 5.7 5.2 32.9 29.0 26.2 26.4 22.9 20.5 NIIT Ltd. (NIIT) 24 27 Hold 394 1.8 3.2 4.2 13.3 7.5 5.7 7.8 5.1 4.3-3.7 0.1 1.5 4.5 7.8 9.2 NIIT Technologies (NIITEC) 260 310 Buy 1567 36.6 41.0 46.0 7.1 6.3 5.6 3.9 3.5 3.0 27.0 26.3 25.9 22.2 21.1 20.3 Sasken Com (SASCOM) 130 120 Hold 273 13.1 11.8 NA 9.9 11.0 NA 7.4 7.5 NA 4.3 4.6 NA 7.7 7.3 NA Persistent (PSYS) 520 610 Buy 2080 47.7 52.0 60.6 10.9 10.0 8.6 5.0 4.6 4.0 19.8 20.0 20.0 20.8 19.4 19.6 TCS (TCS) 1378 1,560 Hold 269783 71.2 78.9 86.5 19.4 17.5 15.9 14.3 12.6 11.5 44.9 40.0 35.6 35.2 30.5 26.9 Tech Mahindra (TECMAH) 953 1,150 Buy 12213 89.7 93.5 106.7 10.6 10.2 8.9 9.8 10.1 9.6 19.7 15.5 14.0 25.7 21.4 20.1 Wipro (WIPRO) 348 380 Hold 85796 27.0 26.7 30.5 12.9 13.0 11.4 8.8 8.9 8.3 22.7 20.2 19.1 21.5 18.5 23.6,*June year end, Mahindra Satyam target price assumes announced merger swap ratio RoE (%) ICICI Securities Ltd Retail Equity Research Page 6

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Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: > 10%/ 15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com ANALYST CERTIFICATION We /I, Abhishek Shindadkar MBA Aishwariya KPL MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc. 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