KPIT Cummins (Q3 FY14)

India Infoline News Service | Mumbai |

The Q2 FY14 revenue performance of KPIT was very disappointing with dollar revenues contracting by 2.3% qoq v/s our expectation of 3% growth.

CMP Rs159, Target Rs188, Upside 18.4%
  • The Q2 FY14 revenue performance of KPIT was very disappointing with dollar revenues contracting by 2.3% qoq v/s our expectation of 3% growth. The de-growth in revenue was led by the SAP SBU where business contracted by 9% qoq impacted by extended furlough at some clients (lost additional onsite billing days) and delay in closure of some large deals. While revenues in IES SBU were flat sequentially, Auto & Engineering SBU grew by 2%.


  • During the quarter, KPIT closed large deals worth US$70mn of which a large portion was in the SAP SBU. Three deals of cumulative size of US$60mn+ were closed late in Q3 FY14, so while some revenues from this could flow in Q4 FY14, ramp-up would only happen in FY15. Consequently, compared to earlier expectations, KPIT now expects a relatively modest growth of 3-5% qoq in the current quarter. To deliver on the large deals, company added 308 people (3.8% on Q2 FY14 base) during the quarter. 


  • At the company level, volume growth was muted at 1.2% qoq solely driven by 2% growth in offshore volumes as onsite volumes declined by 2% qoq. While contract pricing was stable during the quarter, onsite pricing fell by material 3.5% qoq which can be attributed o the sharp decline in the contribution of SAP revenues. Revenue mix shifted towards offshore by 180bps qoq. 


  • Energy & Utility was the only vertical that grew while the company witnessed de-growth in all the other verticals. Similarly, amongst geographies, growth was witnessed only in the Europe region while revenues from US and RoW declined sequentially. Cummins, the Top client, grew by 6% qoq and its revenue share increased to 18%. 


  • Despite the onsite pricing decline and utilization fall (had added 350+ people in Q2 FY14), KPIT managed to sustain OPM near the previous quarter level at 15.3%. Offshore revenue shift and absence of one-off costs (~Rs200mn in Q2 FY14) provided support to the margin. Steep decline in revenues significantly impacted SAP SBU margin which slipped deeper in the red. However, with a healthy order book and operational efficiency measures already in place, SAP SBU is expected to turnaround at the operational level in FY15. This along with utilization improvement should expand company’s operating margin substantially by the end of FY15. 


  • Lower than expected forex loss (Rs31mn v/s Rs110mn) helped the company in reporting an in-line PAT of Rs608mn. Against the earlier growth guidance of 13.5%-16%, KPIT now expects 10% growth in full-year dollar revenues. On factoring a lower revenue growth and moderating margin assumptions, we cut FY14/15 earnings estimates by 3%/6%. Given inexpensive valuation at 8.2x FY16 P/E, we maintain our positive stance on KPIT expecting better operational performance in coming quarters. Rate BUY with 9-12 month price target of Rs188. 

Result table
(Rs mn)
Q3 FY14
Q2 FY14
% qoq
Q3 FY13
% yoy
Net sales
6,779
7,028
(3.5)
5,633
20.3
Operating profit
1,035
1,081
(4.3)
879
17.7
OPM (%)
15.3
15.4
(12) bps
15.6
(34) bps
Depreciation
(135)
(148)
(9.3)
(118)
14.4
Interest
(72)
(66)
8.2
(39)
85.6
Other income
18
23
(24.4)
77
(77.2)
Exceptional item
-
-
-
(94)
-
PBT
846
889
(4.9)
705
20.0
Tax
(238)
(222)
7.4
(183)
30.6
Effective tax rate (%)
(28.2)
(24.9)
-
(25.9)
-
Adjusted PAT
608
668
(9.0)
522
16.3
Adj. PAT margin (%)
9.0
9.5
(54) bps
9.3
(31) bps
EPS (Rs)
3.1
3.5
(9.0)
2.8
10.9
Source: Company, India Infoline Research

Financial Summary
Y/e 31 Mar (Rs m)
FY13
FY14E
FY15E
BSE 170.00 [0.20] ([0.12]%)
NSE 170.10 0.35 (0.21%)

***Note: This is a NSE Chart

 

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