KPIT Cummins Infosystems – BUY (Target Price Rs138, Upside 20.6%)

Our recent interaction with KPIT management has made us more confident about company’s strong revenue growth prospects and margin defense capability in the next two years. We expect KPIT’s dollar revenues to witness 25% CAGR over FY10-12 driven by robust growth in Sparta and operating margin to decline by 300bps (lower than earlier assumption of 450bps) despite factoring steep ~10% rupee appreciation from hereon. Resultantly, we revise upwards FY11 and FY12 EPS estimates by 5% and 13% respectively. Earnings revision and the recent stock price correction have made current valuations attractive. Upgrade KPIT to BUY with a target price of Rs138.

Auto Electronics, Semiconductor Solutions and SAP services to lead revenue growth recovery in FY11 

KPIT has been witnessing multiple signs of business recovery over the past 3-4 months especially in the Automotive Electronics and Business IT segments. Rate of proposals going out of the company has increased while project discussions and customer visits have seen an uptick. As per the management, the customers, however, remain cautious and are not willing to commit any projects immediately. As a result, the order flow has not revived in any significant manner albeit remaining better than H1 FY10 though. With respect to enterprise services, KPIT believes that implementation of already-purchased unutilized licenses would drive growth in the next 6-12 months while new license sale may take time to pick-up. Many of the company’s clients are holding SAP licenses and their implementation is being actively discussed. Post the acquisition of Sparta, KPIT is likely to benefit significantly from this opportunity. Management expects Auto Electronics, Semiconductor Solutions and SAP services (part of Manufacturing Business IT segment) to drive revenue growth recovery in FY11.