2QFY2013 Result Update IT October 29, 2012 KPIT Cummins Performance Highlights (` cr) 2QFY13 1QFY13 % chg (qoq) 2QFY12 % chg (yoy) Net revenue 567 538 5.4 325 74.5 EBITDA 95 81 16.4 44 113.1 EBITDA margin (%) 16.7 15.1 157bp 13.6 301bp PAT 41 49 (16.4) 36 11.5 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 FY2012-14E. On the EBITDA and PAT fronts, the company is expected to post a 26.2% and 28.1% CAGR respectively over FY2012-14E. 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) 2,159 534 Beta 52 Week High / Low Avg. Daily Volume 0.6 142/68 125,465 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 10.7 4.7 14.4 KPIT Cummins (0.2) 48.3 209.1 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) 37.6 49.0 46.3 5.6 Net profit 86 95 135 189 222 % chg 30.3 10.6 42.5 39.7 17.4 EBITDA margin (%) 22.1 15.1 14.5 15.5 15.0 EPS (`)* 10.8 5.7 8.0 10.7 12.0 P/E (x) 11.1 21.2 15.0 11.3 10.0 P/BV (x) 2.5 1.6 3.0 2.4 1.9 RoE (%) 22.2 15.7 19.0 21.0 19.8 RoCE (%) 26.0 15.5 17.3 24.7 21.4 EV/Sales (x) 3.0 2.0 1.5 1.0 0.9 EV/EBITDA (x) 13.4 13.4 10.2 6.3 5.8 ; Note: *FY2010 numbers not adjusted for bonus Ankita Somani 022-3935 7800 Ext: 6819 ankita.somani@angelbroking.com Please refer to important disclosures at the end of this report 1
Exhibit 1: 2QFY2013 performance (Consolidated) Y/E March (` cr) 2QFY13 1QFY13 % chg (qoq) 2QFY12 % chg (yoy) 1HFY13 1HFY12 % chg (yoy) Net revenue 567 538 5.4 325 74.5 1,105 641 72.4 Cost of revenue 370 351 5.6 213 73.6 721 426 69.4 Gross profit 197 188 4.9 112 76.2 385 216 78.5 SGA expenses 102 106 (3.8) 67 51.9 209 131 58.9 EBITDA 95 81 16.4 44 113.1 176 84 109.0 Depreciation 11 11 0.8 12 (1.0) 23 21 8.5 EBIT 83 70 18.9 33 153.2 153 63 142.4 Interest expense 3 4 (2.8) 1 168.0 7 2 201.2 Other income (19) 3 11 (16) 13 Exceptional item 5 3-8 - PBT 66 72 (8.4) 43 55.2 138 74 86.5 Income tax 19 18 3.6 9 118.3 38 16 137.1 PAT 47 54 (12.5) 34 38.8 100 58 72.7 Minority interest 1 1 0 2 0 482.2 Share in profit of ass. 1 (1) 3 (1) 3 Adj. PAT 41 49 (16.4) 36 11.5 89 61 47.4 EPS 2.5 2.8 (11.0) 2.0 24.3 5.3 3.3 58.9 EBITDA margin (%) 16.7 15.1 157bp 13.6 301bp 15.9 13.1 278bp EBIT margin (%) 14.6 13.0 166bp 10.1 455bp 13.8 9.8 400bp PAT margin (%) 7.4 9.0 (156)bp 10.9 (344)bp 8.2 9.3 (106)bp Exhibit 2: Actual vs Angel estimates (` cr) Estimate Actual Var. (% ) Net revenue 554 567 2.5 EBITDA margin (%) 16.7 16.7 (4)bp PAT 50 41 (18.5) Robust performance For 2QFY2013, KPIT reported a revenue growth of 5.5% qoq with revenue coming in at US$103.4mn. Onsite revenues grew by 7.6% and the volume growth onsite was ~9%. Offshore revenues grew by 2.9% and the offshore volume growth was ~3%. The overall volume growth stood at 4% qoq and revenue growth in constant currency (CC) terms came in at ~6% qoq. In INR terms, the revenue came in at `567cr, up 5.4% qoq. October 29, 2012 2
Exhibit 3: Trend in revenue growth (qoq) 110 100 90 95.4 29.9 98.1 103.4 35 30 25 (US$ mn) 80 70 60 50 70.4 73.4 4.3 2.8 5.5 20 15 10 5 (%) 40 0.4 2QFY12 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 18-24 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, 2012 3
Exhibit 4: Revenue growth (SBU wise) SBU % of revenue % growth (qoq) % growth (yoy) Integrated enterprise solutions 45.9 9.1 75.3 Auto and engineering 24.4 8.6 30.1 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 38.8 3.3 38.4 Manufacturing 32.4 4.2 54.0 Energy and utilities 15.3 17.5 121.2 Others 13.5 3.0 11.7 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. 76.4 5.7 64.7 Europe 12.1 (12.6) (11.8) Rest of the World 11.6 32.6 44.5 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, 2012 4
Exhibit 7: Employee addition Particulars 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 Net addition Development (45) 160 893 147 229 Sales and support 5 3 119 7 9 Total (40) 163 1,012 154 238 Total employees Development 6,018 6,178 7,071 7,218 7,447 Sales and support 526 529 648 655 664 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 (%) 90 80 70 60 91.3 90.6 72.8 71.9 94.5 94.7 94.5 74.6 74.1 74.7 50 2QFY12 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, 2012 5
Exhibit 9: Margin profile 45 35 34.4 34.2 33.6 34.9 34.7 (%) 25 15 5 15.3 15.8 16.7 15.1 13.6 14.6 11.8 13.7 13.0 10.1 2QFY12 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 22.6 23.9 19.5 20.6 19.7 Top-10 client billing 48.1 47.1 42.2 44.0 43.7 No. of customers added 4 2 4 3 4 No. of active customers 163 165 169 172 176 Customers with run rate >US$1mn 51 54 59 65 69 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, 2012 6
revenue to post a CAGR of 21.2% and 24.3% in USD and INR terms, respectively, over FY2012-14E. On the EBITDA and PAT fronts, the company is expected to post a 26.2% and 28.1% CAGR over FY2012-14E. 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 (%) 32.9 10.6 USD-INR rate 53.4 51.0 Revenue growth-inr terms (%) 46.3 5.6 EBITDA margin (%) 15.5 15.0 Tax rate (%) 26.1 26.0 EPS growth (%) 33.7 12.3 Exhibit 12: One-year forward PE 300 250 200 150 100 50 0 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, 2012 7
Exhibit 13: Recommendation summary Company Reco. CMP Tgt. price Upside FY2014E FY2014E FY2011-14E FY2014E FY2014E (`) (`) (%) EBITDA (%) P/E (x) EPS CAGR (%) EV/Sales (x) RoE (%) HCL Tech Accumulate 610 648 6.2 18.1 12.7 10.1 1.5 22.0 Hexaware Buy 110 140 26.6 21.4 9.1 10.9 1.2 23.9 Infosys Accumulate 2,334 2,573 10.2 30.4 13.6 5.6 2.6 23.1 Infotech Entp. Accumulate 191 202 5.8 17.3 9.5 11.6 0.6 14.0 KPIT Cummins Accumulate 121 132 9.4 15.0 10.0 14.5 0.9 19.8 Mahindra Satyam Neutral 107 110 2.8 18.4 10.7 (0.6) 1.1 22.2 MindTree Accumulate 661 747 13.0 17.7 8.9 11.6 0.8 19.7 Mphasis Neutral 383 392 2.3 16.9 10.3 (0.5) 0.8 12.6 NIIT^ Accumulate 33 36 7.6 11.0 5.2 (1.5) 0.3 14.3 Persistent Accumulate 460 485 5.4 24.6 8.5 15.1 1.0 17.9 TCS Accumulate 1,308 1,410 7.8 29.1 17.1 12.0 3.6 29.1 Tech Mahindra Accumulate 928 1046 12.7 17.1 9.3 4.2 1.7 20.5 Wipro Buy 345 421 22.0 19.3 12.3 7.3 1.3 17.9 ; 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, 2012 8
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 409 644 993 1,443 1,544 % of net sales 55.9 64.0 66.2 65.8 66.6 Gross profit 323 363 507 751 773 % of net sales 44.1 36.0 33.8 34.2 33.4 S&M expenses 66 76 112 155 162 % of net sales 9.1 7.6 7.4 7.0 7.0 G&A expenses 95 134 177 257 264 % of net sales 13.0 13.3 11.8 11.7 11.4 EBITDA 161 152 218 340 347 % of net sales 22.1 15.1 14.5 15.5 15.0 Depreciation 31 41 44 51 56 EBIT 131 111 174 289 291 Interest expense, net 3 3 8 13 10 Other income, net (25) 3 13 (11) 23 Exceptional item - - 10 8 - Profit before tax 103 110 189 273 305 Provision for tax 17 15 44 71 79 % of PBT 16.5 14.0 23.1 26.1 26.0 PAT 86 95 145 202 226 Minority interest - - 3 4 4 Share in profit of ass. - - 3 (1) - Adj. PAT 86 95 135 189 222 EPS (`) 10.8 5.7 8.0 10.7 12.0 Note: *FY2010 numbers not adjusted for bonus October 29, 2012 9
Balance sheet (Consolidated) Y/E March (` cr) FY2010 FY2011 FY2012 FY2013E FY2014E Liabilities Share capital 16 16 36 36 36 Application money 0 0 0 0 0 ESOP outstanding 2 2 - - - Preferential shares - - - - - Reserves and surplus 370 458 677 863 1,081 Share premium - 128 - - - Total shareholders funds 387 603 713 899 1,117 Secured loans 111 111 82 82 82 Unsecured loans - - 140 120 100 Total debt 111 111 222 202 182 Minority interest - - 33 33 33 Deferred tax liability, net 5 6 (3) - - Other liabilities - - 26 26 26 Long term provisions - 5 10 10 5 Total liabilities 503 718 1,001 1,170 1,363 Assets Gross block - fixed assets 251 327 399 474 544 Accumulated depreciation 128 169 213 265 320 Net block 124 158 185 209 224 Capital work-in-progress 29 3 3 3 3 Goodwill 95 130 362 362 362 Investments 75-22 35 50 Loans and advances - 76 62 62 62 Current assets Sundry debtors 139 229 438 487 514 Cash and bank balance 105 208 147 227 342 Loans and advances 68 33 60 88 104 Other current assets - 73 53 53 53 Less:- Current liabilities Sundry creditors 64 94 176 198 212 Other liabilities 43 76 106 86 63 Provisions 23 20 49 72 76 Net current assets 181 352 367 499 662 Total assets 503 718 1,001 1,170 1,363 October 29, 2012 10
Cash flow statement (Consolidated) Y/E March (` cr) FY2010 FY2011 FY2012E FY2013E FY2014E Pretax profit from operations 128 108 169 276 281 Depreciation 31 41 44 51 56 Pre tax cash from operations 159 149 214 327 337 Other income/prior period ad (25) 3 13 (11) 23 Net cash from operations 133 151 226 316 361 Tax (17) (15) (44) (71) (79) Cash profits 117 136 183 245 281 (Inc)/dec in Current assets 16 (128) (217) (77) (44) Current liabilities (151) 60 141 25 (5) Net trade working capital (135) (68) (75) (52) (49) Cash flow from operating activities (18) 68 107 193 232 (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) 1 32 - - 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 145 128 (22) - - Dividends (6) (7) (7) (7) (7) Cash flow from financing activities 131 104 100 (27) (27) Cash generated/(utilized) (62) 103 (61) 80 115 Cash at start of the year 167 105 208 147 227 Cash at end of the year 105 208 147 227 342 October 29, 2012 11
Key ratios Y/E March FY2010 FY2011 FY2012E FY2013E FY2014E Valuation ratio (x) P/E (on FDEPS) 11.1 21.2 15.0 11.3 10.0 P/CEPS 8.2 7.2 11.4 8.5 7.7 P/BVPS 2.5 1.6 3.0 2.4 1.9 Dividend yield (%) (0.7) (0.7) (0.7) (0.7) (0.7) EV/Sales 3.0 2.0 1.5 1.0 0.9 EV/EBITDA 13.4 13.4 10.2 6.3 5.8 EV/Total assets 4.3 2.8 2.2 1.8 1.5 Per share data (`) EPS 10.8 5.7 8.0 10.7 12.0 Cash EPS 14.7 16.7 10.6 14.1 15.7 Dividend -0.9-0.9-0.9-0.9-0.9 Book value 48.8 73.9 39.8 50.2 62.4 Dupont analysis Tax retention ratio (PAT/PBT) 0.8 0.9 0.7 0.7 0.7 Cost of debt (PBT/EBIT) 0.8 1.0 1.1 0.9 1.0 EBIT margin (EBIT/Sales) 0.2 0.1 0.1 0.1 0.1 Asset turnover ratio (Sales/Assets) 1.5 1.4 1.5 1.9 1.7 Leverage ratio (Assets/Equity) 1.3 1.2 1.4 1.3 1.2 Operating ROE 22.2 15.7 19.0 21.0 19.8 Return ratios (%) RoCE (pre-tax) 26.0 15.5 17.3 24.7 21.4 Angel RoIC 47.6 29.2 35.3 49.7 44.2 RoE 22.2 15.7 19.0 21.0 19.8 Turnover ratios (x) Asset turnover (fixed assets) 1.9 1.6 1.7 2.0 1.8 Receivables days 79 67 81 81 81 Payable days 67 45 50 50 50 October 29, 2012 12
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