KPIT Cummins (Q2 FY13)

India Infoline News Service | Mumbai |

Maintain BUY rating but with a marginally reduced 9-month TP of Rs135

                CMP Rs120, Target Rs135, Upside 12.5% 
  • KPIT Cummins reported strong better-than-expected revenue growth performance in Q2 FY13. The dollar revenues grew 5.5% qoq to US$103.4mn versus our expectation of US$102mn. Consolidated volumes grew 4.1% qoq with continued expansion of onsite volumes (+8.9% qoq versus 7.2% in Q1 FY13) due to strong traction for its enterprise business. Commentary on pricing remained sanguine with Q2 FY13 realisation improving 1.3% sequentially due to higher onsite and business mix changes.
  • The strong sequential dollar revenue growth was driven by both IES as well as Auto Engineering SBUs which grew 9.1% and 8.6% respectively over last quarter. Strong up-tick in IES (+9.1% qoq) and Systime (+15.7% qoq) was on the back robust environment for enterprise software upgrades as well as higher cross selling among clients. Due to the absence of sticky maintenance revenues in the SAP SBU (80% implementation and 20% maintenance revenues) as well as demand shift towards HANA, Success Factors resulted in weak performance in the SAP SBU (-1.9% qoq).
  • The traditionally strong verticals of Manufacturing and Auto continued to show decent growth of 4.2%/3.3% sequentially. Energy and Utilities too registered strong growth of 15.8% qoq (albeit on a relatively smaller base). From the top client (Cummins) perspective, due to completion of large transformational project the growth was marginal at 1% qoq. As commented by the management, the spending from Cummins was as expected and is anticipated to show 10-12% yoy growth in FY13.  Among other clients, Top 2-10  clients drove the revenues, posting 8% qoq growth in dollar terms.
  • OPM performance too was better than expected expanding 164bps qoq as against expectation of 78bps expansion. This expansion was on the back of improved operational efficiencies as well as strong SG&A leverage supported by the strong volumes. While on one hand, SAP SBU operating margin corrected ~300bps due to lower utilization, Systime margin expanded impressively from 10% in Q1 FY13 to 14% now. Going forward, management expects margin from both SAP as well Systime to improve on the back of higher offshoring, improved employee pyramid and better volumes. Due to higher than expected forex losses and higher tax outflow, the PAT came marginally below expectation at Rs461mn.
  • The net employee additions during the quarter were decent, growing 3% qoq over Q1 FY13 base. Offshore  utilization improved marginally to 74.7% (highest in last four years). On hiring front, management has guided towards additions of ~500 additional employees in H2 FY13.
  • KPIT’s niche positioning, deep domain expertise and meaningful acquisitions has resulted in sustained traction for the company. Continued momentum as seen in Q2 FY13 as well as industry leading revenue growth guidance of 32-35% (in dollar terms) validates the same. From a medium term perspective, OPM too is expected to improve supported by SAP as well as IES business margin expansion. We continue remain positive KPIT but valuations at 9.3x FY14E earnings do not provide sizeable upside. Maintain BUY rating but with a marginally reduced 9-month TP of Rs135.
Result table
(Rs mn) Q2 FY13 Q1 FY13 % qoq Q2 FY12 % yoy
Net sales 5,672 5,383 5.4 3,250 74.5
Operating profit 943 806 16.9 443 112.6
OPM (%) 16.6 15.0 164 bps 13.6 298 bps
Depreciation (114) (113) 0.8 (116) (1.0)
Interest (32) (30) 8.2 (13) 150.7
Other income (191) 30 - 110 -
Exceptional item 55 27
-
PBT 660 694 (4.8) 425 55.3
Tax (191) (185) 3.6 (88) 118.3
Effective tax rate (%) (29.0) (26.6) - (20.6) -
Adjusted PAT 468 509 (7.9) 337 38.9
Adj. PAT margin (%) 8.3 9.5 (119) bps 10.4 (212) bps
Minority interest (12.2) (12.3) (0.4) (1.2) 936.4
Share of profits from asso. 5.0 (10.7) (146.6) 28.4 -
Reported PAT 461 486 (5.1) 365 26.5
EPS (Rs) 2.6 2.9 (10.0) 2.0 26.5
 Source: Company, India Infoline Research

Financial Summary
Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenues (Rs m) 10,065 15,000 22,439 25,386
yoy growth (%) 37.6 49.0 49.6 13.1
Operating profit 1,522 2,171 3,585 3,801
OPM (%) 15.1 14.5 16.0 15.0
Pre-exceptional PAT (Rs mn) 948 1,317 1,888 2,306
Reported PAT (Rs m) 948 1,418 1,970 2,306
yoy growth (%) 10.6 49.6 38.9 17.1





EPS (Rs) 5.4 8.0 11.1 13.0
P/E (x) 22.3 15.1 10.8 9.3
Price/Book (x) 3.5 3.0 2.3 1.9
EV/EBITDA (x) 13.2 10.2 5.5 4.8
RoE (%) 19.2 20.0 23.0 22.2
RoCE(%) 18.6 22.1 28.4 30.8
Source: Company, India Infoline Research

BSE 167.30 1.60 (0.97%)
NSE 167.15 0.40 (0.24%)

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