KPIT Cummins’ impressive performance over last couple of years can be credited to the sustained demand from its key verticals supported by its deep expertise as well as synergistic acquisitions. Recent conversations with the management suggest that decent demand traction should continue. Headroom for margin expansion on the back of various levers should result in a better FY14 OPM performance (versus our earlier expectation of 100bps correction). Though slower decision making and softness in top client account could be near-term headwinds, we continue to remain positive.
Stable demand across SBUs to help sustain decent revenue traction
Our interactions with the company suggest decent demand visibility across major areas of focus viz. Auto engineering, SAP and IES (Oracle practice). Led by automotive and utilities verticals as well as sustained demand from US and APAC, we expect KPIT’s revenue growth to continue to be in the top quartile of its peer set. Also, on the back of the recent approval of capital infusion, further inorganic expansion can provide added upsides.
OPM to expand 200bps over FY12-14E on the back of variety of levers
Integration of lower margin acquisitions, greater onsite contribution and continued investments in business were the key reasons for subdued OPM over FY10-11. More recently though, the OPM performance has shown marked improvement supported by utilization, fixed cost leverage, weaker rupee and improving subsidiary profitability. Going forward, possible improvement in SAP SBU profitability, higher shift towards offshore and improving age pyramid should help margin to expand ~200bps over FY12-14E.
KPIT’s performance to remain in top quartile amongst peer set; BUY
Buoyed by sustained demand for its niche services and strong ramp up in acquired businesses, KPIT has been one of the best performing mid-cap IT companies. We expect the company to continue to be in the top quartile of its peer set with an expected dollar revenue CAGR of 24% over FY12-14E. We also mark up our OPM estimates and resultantly expect a PAT CAGR of 33% over FY12-14E. Though the near term sluggishness in decision making and soft top client account could be probable headwinds, we continue to be positive and maintain BUY.
|Y/e 31 Mar (Rs m)||FY11||FY12||FY13E||FY14E|
|yoy growth (%)||37.6||49.0||49.6||12.3|
|yoy growth (%)||10.6||53.3||37.9||28.9|
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