KPIT Cummins (Q2 FY14)

India Infoline News Service | Mumbai |

KPIT’s margin performance during the quarter was disappointing with OPM correcting 40bps qoq despite material rupee depreciation tailwind.

CMP Rs145, Target Rs160, Upside 10.3%
  • The Q2 FY14 revenue performance was below our estimate. Against our expectation of 4% qoq growth, the company registered revenues of US$112.2 –a sequential growth of 3.1%. This was largely due to softness in the key market of USA and delay in a large ERP project. The growth during the quarter was driven by both volumes (+2% qoq) and realisation improvement (+1.1% qoq).


  • Among the key SBUs, both Auto Engineering (+5.7% qoq growth) and IES (+3.3% qoq) were the key drivers. The SAP business continued its weak run, posting 0.2% qoq growth in dollar terms. On a positive note, though, management commented that SAP business has largely bottomed out and is expected to show growth in FY15. The Cummins account was stable at US$19mn growing 1.6% qoq. Growth across the Top clients (Top2-10) was weak at 0.6% qoq.


  • Amongst the key verticals, Automotive returned to growth posting a 4.7% growth on a sequential basis. Manufacturing continued to drive the company growth posting 3.3% growth on a qoq basis. Within geographies, the biggest market of US was weak driven by certain project delays and hence registering a 1.1% qoq de-growth. On the other hand, Europe and APAC led the growth during the quarter posting 8.2% and 24.4% qoq growth in dollar terms


  • KPIT’s margin performance during the quarter was disappointing with OPM correcting 40bps qoq despite material rupee depreciation tailwind. The OPM was impacted during the quarter due to several one-off expenses viz. – management program at Stanford for top leadership (Rs50mn, 70bps impact), participation in an industry event (Rs30mn, 40bps impact) and provision for delayed project (Rs120mn, 1.7% impact). These factors along with strong hiring more than offset the strong rupee depreciation tailwind (+250bps impact). Management guided that ramping of large deals won in the quarter (US$10mn each) and also expected 2 other large deals should lead to better margin over H2 FY14. Employee additions were strong with the total employee base expanding 4.3% on a sequential basis.


  • The lower than expected dollar revenue performance implies that the ask rate has gone up for rest of FY14 (considering the full year growth guidance of 13.5%-16%). While large deal wins (2 deals of US$25mn each) are expected to fructify in Q3 FY14, we choose to be conservative and reduce our full year expectation on the back of weaker than expected Q2. On the back of un-anticipated expenses during the quarter, sustained weakness in SAP SBU and continued investments, we now expect margin to correct 80bps over FY13-15E. Subsequently, we reduce our FY14/15E earnings by 1.5%/7% respectively. We maintain our positive stance on KPIT considering improved demand environment, KPIT’s niche market positioning and cheap valuation (P/E at ~9x FY15E earnings).

Result table
(Rs mn)
Q2FY14
Q1 FY14
% qoq
Q2 FY13
% yoy
Net sales
7,028
6,132
14.6
5,672
23.9
Operating profit
1,081
966
11.9
943
14.7
OPM (%)
15.4
15.7
(37) bps
16.6
(124) bps
Depreciation
(148)
(122)
22.0
(114)
29.7
Interest
(66)
(56)
17.8
(32)
105.7
Other income
23
59
-
(191)
-
Exceptional item
-
-

55

PBT
889
847
5.1
660
34.8
Tax
(222)
(246)
(9.6)
(191)
15.8
Effective tax rate (%)
(24.9)
(29.0)
-
(29.0)
-
Adjusted PAT
668
601
11.1
468
42.5
Adj. PAT margin (%)
9.5
9.8
(30) bps
8.3
220 bps
Minority Interest
-
-
-
(12.2)
(100.0)
Share of profits frm assoc.
-
-
-
5.0
-
Reported PAT
BSE 169.70 2.45 (1.46%)
NSE 169.20 1.65 (0.98%)

***Note: This is a NSE Chart

 

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