KPIT Cummins (Q4 FY12)

CMP Rs103, Target price Rs117, Upside 13.6%

• Q4 FY12 has been an all-round stellar quarter for KPIT Cummins. One of the major highlights of this quarter has been the better than expected organic dollar revenue growth of 12% qoq. Integration of Systime (57.5% stake) boosted the topline by an incremental US$13mn, resulting in total dollar revenues of US$95.4mn – 30% qoq growth. Consolidated volumes grew 16.7% qoq and realization improved 11.3% qoq. Better than expected ramp-up of deals won in recent past (US$100mn+ deals of Q2 FY12 as well as deals won in Q4 FY12) have resulted in strong organic growth in the quarter.
  
• Among the SBU’s, SAP registered the strongest growth of 26% qoq (in dollar terms) on the back of ramp ups of recently won deals (as discussed above) followed by Auto and Engineering, which posted strong growth of 8% qoq in dollar terms. IES (Oracle practice) grew substantially by 50% on the back of consolidation of Systime revenues. On an organic basis, IES growth was relatively weak at 2.8% qoq. Growth across verticals and geographies was substantial buoyed by the consolidation of Systime and robust deal ramp-ups. Within verticals, E&U and Manufacturing grew the fastest, 37% and 32% respectively (in dollar terms). Amongst geographies, Americas and RoW drove the revenues, posting qoq growth of 35% and 53% respectively in dollar terms.
  
• Top-client Cummins continued its robust streak, notching qoq dollar revenue growth of 5.8% (7.7% cqgr over past four quarters). Management commentary on Cummins account remains positive amid prospects for continued IT and Engineering spending. Growth in top 5/top10 clients too was impressive at 14.7% and 16.5% qoq in dollar terms.
  
• OPM performance exceeded expectations, expanding 54bps qoq against our estimate of 60bps correction. This was despite the integration of lower margin (~10%) Systime business into the company financials. On an organic basis, the margin improved by more than 150bps – a strong expansion despite currency appreciation headwinds. The impressive margin performance was on the back of improved utilization (up ~300bps qoq on blended basis), increasing SAP SBU margin (improved 200bps qoq from 8% to 10% in Q4 FY12) as well as better realization. Other income had a strong negative swing, registering a loss of Rs113mn (versus a gain of Rs108mn in Q3 FY12). Strategic sale of hardware solution business as well as staggered payment of earlier divested DFS business resulted in an exceptional gain of Rs101mn. Resultantly, the consolidated PAT grew 6.5% on a qoq basis in rupee terms.
  
• The net addition of employees during the quarter was 1012 (15% of Q3 FY12 base). The material increase was largely due to the addition of Systime employees (980 nos.) and addition of 200 other employees as a part of a BFSI deal. Utilization improved sequentially by ~300bps on the back of strong volume growth of 16.7% qoq on a blended basis. Attrition, on a yearly basis, improved appreciably to 20.7% in FY12 as compared to 30%+ in FY11. Company plans to add 1200 employees in FY13 – split evenly between freshers and laterals.
  
• We were equally enthused by the strong dollar revenue growth guidance of 32% yoy for FY13 given by the company. Considering a US$95mn quarterly run-rate, this implies only a 2.7% CQGR (over FY13). But, the guidance still reflects sanguine demand scenario for the company. Even without Systime revenues, the revenue guidance is strong at 21% yoy, especially when compared to the expected industry growth (11-14% yoy). Management also guided for 100bps yoy improvement in operating margin despite salary hikes as well as sustained investments in S&M and people expertise. 
  
• Deal wins, ramp ups and order pipeline continue to remain impressive at KPIT Cummins, as validated by the all round outperformance in Q4 FY12 as well as bullish FY13 guidance and management commentary. KPIT’s niche engineering/embedded electronics focus as well smart acquisitions (and their commendable integration into the company) should continue to serve it well. We increase estimates on the back of better than estimated Q4 performance and upbeat FY13 guidance. Increase 9-month TP to Rs117 and recommend BUY.