Kpit cummins company report

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Kpit cummins company report

  1. 1. C O M P A N Y R E P O R T India 31 Oct 2012 KPIT Cummins Rs 123.9 Sector: IT/TECH A shining star in mid-cap IT sector BSE Code 532400 NSE Code KPIT KPIT Cummins (KPIT) has the most well defined CMP(31 Oct) 124 52W H/L 142/68 business model amongst mid-cap IT companies. Deep Nifty 5,597 Sensex 18,430 domain expertise in 3 key verticals, and strengths in Shares (m) 179.02 Face Value(Rs) 2 Market Cap (Rs m) 22,181 Free Float 73.8% two key horizontals - Oracle and SAP, has helped KPIT Rs mn to outgrow peers on a sustained basis. With a strong financial performance in H1 FY13, the company is set to Share holding as per 30 Sep 2012 maintain its growth leadership. At an expected 8xFY14 earnings, KPIT is attractively valued. We expect the stock to hit a price of Rs 150 by 26.22% Promoter Sep’13 based on a 12x forward PE. We expect KPIT to 33.46% continue to command a premium over midcap peers. FII DII Set to outgrow peers in FY13 Others KPIT has grown faster than peers in IT mid-cap space in 26.74% recent years, reporting growth of 41% in 2011 and 43% in 13.58% 2012 and CAGR 50% from 2003-2009. It is expected to outgrow peers in FY13 as well; KPIT should convincingly cross its current year guidance of 32-35% growth. 150 Vertical strengths explain growth outperformance 120 With increasing electronics in vehicles, automotive engg services outsourcing to India is set to grow. Automotive engg 90 services off-shoring is expected to reach $6.4bn with CAGR of 60 18% in FY11-20. KPIT is largest 3rd Party Vendor for Automotive Electronics in India. Similarly, Energy and Utilities 30 verticals are also expected to see strong tech spends. Inorganic strategy has worked well - Sep-11 Sep-12 Feb-12 Aug-12 Oct-12 Nov-11 Dec-11 May-12 Mar-12 Jun-12 KPIT’s inorganic moves have worked well, allowing it to develop domain expertise in new areas. Company has achieved strong growth through ramping up services offering KPIT Cummins Sensex in Oracle and SAP through inorganic expansion like CPG and SYSTIME. Q2 FY13 results show strong performance from Consolidated Financials Systime, where EBITDA margins have expanded from 5.5% during acquisition to 14%. FY11 FY12 FY13E FY14E 15,000 21,861 25,578 Outperformed all IT mid cap stocks for 1 yr, 6 monthSales 9,870 and 3 month stock performance & top line growthEBITDA 1,484 2,166 3,226 3,906 The Company gave return of almost 50% in last 6 month andPAT 946 1,454 2,011 2,618 1 year period, outperforming all the peers. It has consistentlyEBITDA (%) 18.4 14.4 14.8 15.3 outperformed Nifty and NSE-IT index through-out the year.EPS (Rs) 10.8 8.1 11.2 14.6 KPIT Cummins grew highest among almost all mid-cap IT stock in FY11 and FY12.ROE(%) 32.4 22.1 24.7 25.1 26.6 23.5 30.7 31.2 Revolo, profitability improvementROCE(%)P/E Ratio(x) 15.6 15.3 11.0 8.5 Couple of key performance drivers for the stock will be what happens to Revolo and profit margins. If Revolo’s commercialEV/EBITDA(x) 9.3 10.2 6.8 5.6 launch turns out a success, it will add significant value toEPS 10.8 8.1 11.2 14.6 company. Also the margins levers such as fixed price projects, Rs mn improved employee mix and increased off-shoring can further boost KPIT’s profitability. Four-s reports are available on BLOOMBERG, Reuters, Thomson Publishers and Market Publishers
  2. 2. Company Report: KPIT Cummins 31 Oct 2012 Investment Rationale Fastest growing mid-cap IT player KPIT Cummins is the fastest growing mid-cap IT player in India. KPIT grew at an outstanding CAGR of 50% in the period 2003-2009. It has maintained superior performance with USD revenue growth of 41% in FY11 and 43% in FY12.Consistently It has witnessed similar growth in its bottom line too. In FY12 itgrowing at registered PAT growth of 54% to Rs 1,449mn, along with 43%CAGR of above growth in EBITDA and EPS growth of 47% y-o-y. These numbers are40% better than almost all other mid-cap IT peers. Company FY12 Rev Growth Rev Growth Name Rev EBITDA PAT in Fy12 in Fy11 Hexaware Technologies 15,347 3,354 2,670 37% 3% Infotech Enterprises 15,707 2,866 1,514 29% 22% Mindtree Ltd 19,537 3,315 2,185 27% 12% NIIT Technologies 16,068 3,005 1,964 29% 35% Persistent Systems 10,339 2,580 1,418 28% 32% Polaris FT 16,568 2,730 2,023 21% -2% KPIT Cummins 15,138 2,304 1,450 52% 35% (Rs mn) This extraordinary growth is the result of successful execution of its chosen strategy of vertical focussed growth and successful inorganic expansion. This growth is driven by three major verticals, Auto & transportation, Manufacturing and Utilities. While working in these verticals the company has developed strong horizontal service offerings in Auto & Electronics, IES and SAP. Differentiated vertical-focus strategy driving growth While the rest of the IT industry started talking about vertical-focus in the last 2 years, KPIT very early on decided to focus on a few select verticals to be able to compete better. This company can beVertical-focus considered as the pioneer of this differentiating strategy among thestrategy sets it IT mid-caps.apart The company has focused from early days on automotive and manufacturing verticals. This has resulted in deep domain expertise in its focus verticals. KPIT Cummins is the largest 3rd party vendor for automobile electronics in India. KPIT has developed a strong domain expertise in the manufacturing segment and specifically in automobile sector. In its last more than 20 years of operations it hasFour-S Research 2
  3. 3. Company Report: KPIT Cummins 31 Oct 2012 been working mainly in its niche segment i.e. Automotive- manufacturing. This resulted in high domain expertise and strong clientele in the segment. This gives KPIT advantage among not only their Indian competitors but also with most of their global competitors. Till now, KPIT has developed technology solutions for more than 120 global automotive companies which include 8 out of top 10 global original equipment manufacturers (OEMs). Successful inorganic growth strategy KPIT Cummins has successfully kept firing the growth engine by supporting strong organic growth with carefully chosen inorganic acquisitions. These acquisitions have helped the company to grow atHighly effective a rapid space of 40-50% CAGR in the last decade, resulting in one ofinorganic the fastest growing company in the mid-cap IT space. It has alsogrowth track been successful in smooth integration of these acquisitions. Throughrecord these acquisitions it has developed expertise in various services offering in the likes of ERP implementation, Oracle and SAP services. These acquisitions were done with focus on gaining ground in terms of geography entry, or service offering expertise or gaining important client clusters. For example, KPIT has developed expertise in SAP practice with the successful acquisitions of Panex Consulting and Sparta Consulting whereas Oracle practise has been strengthened with recent CPG and Systime acquisition. It did 10 such strategic acquisition in the last decade with focus on driving the growth through strong practice offerings in SAP, ERP and Auto electronics and developed strong client base across the globe. Systime has given scale in Oracle If one takes the example of latest acquisition, SYSTIME ($50mn rev), the largest acquisition till date by KPIT, it gives KPIT strong Oracle practice, with JDE specialisation. This has helped KPIT improve its offering to its key manufacturing clients as clients in this industry prefer JDE solutions. Systime is the largest JD Edwards solution provider globally. It also gave the company foothold and strong client base in Brazil where Systime has good chunk of revenue coming. Innovation focused and R&D driven company Unlike most IT companies in India, KPIT invests significantly in R&D. The investment in these efforts has now increased to ~3% of its revenue. From these initiatives, the Company has applied for 40 patents in last 18 months.Four-S Research 3
  4. 4. Company Report: KPIT Cummins 31 Oct 2012Innovation to KPIT has many innovation based R&D projects, designed to developlead non linear new technologies and solution for their customers. This has resultedgrowth in growing revenue contribution from its non-linear projects. It has a department named ‘Center for Research in Engineering Services and Technology’ (CREST), which is totally dedicated to these initiatives. It focuses on research in areas such as System engineering, parallel computing, program analysis tool, security and surveillance and Energy. These R&D initiatives are again industry focussed which helps the company to maintain its edge in the industry and provide best service with IP led solution to its customers. Revolo a unique R&D initiative Revolo is one of the key results of this initiative. Revolo is plug-in, parallel hybrid solution for the automobiles which converts a regular vehicle into hybrid vehicle. It has filed 16 patents till date for Revolo only. Robust performance in H1 FY13 Top line expands strongly The company has given strong results in H1FY13 with revenue growing by 72% yoy from Rs 6,411mn in H2FY12 to Rs 11,054mn driven by revenue growth from latest acquisition, Systime, and strong momentum in all verticals. This was supported by outstanding growth in the US market where it grew by almost 100% from Rs. 4,243mn in H1FY12 to Rs 8,434mn in H1FY13, whereas it witnessedStrong H1 a flat European market with 11% growth and in ROW it grew byperformance 35%. Manufacturing and energy & utilities verticals grew at strongsets the tone 265% and 127%, respectively, in H1FY13 whereas Automotives vertical grew at 30%. All the SBUs showed good growth in this period with 94% growth in IES and 77% growth in SAP SBU and 53% growth in Auto & engg. Its PAT grew by good 60.8% from Rs. 605mn in H1FY12 to 974mn in H1FY13. The company also witnessed strong growth on client level with top client account (Cummins) growing by 60% whereas top 5 clients grew at 60% and top 10 clients account grew by 55%. The company added 7 new customers in this period and has 69 >$1mn clients compared to 59 at the start of the year. Increases margins as well, helped by Systime The company has also managed to push up the EBITDA margin from 13% to 14% despite lower EBITDA margins of Systime. Systime hasFour-S Research 4
  5. 5. Company Report: KPIT Cummins 31 Oct 2012Systime also shown strong performance, with 11.6% and 15.7% revenuemargins are growth q-o-q in Q1 and Q2FY13, respectively, along with EBITDAmoving up margin improvement from 5.5% at the time acquisition to 14% in Q2FY13. Q2 Q2 % Q1FY1 % H1 H1 % FY13 FY12 Change 3 Change FY13 FY12 ChangeNet Sales 5,672 3,250 74.5 5,383 5.4 11,055 6,412 72.4Total Expenditure 4,943 2,808 76.0 4,576 8.0 9,500 5,575 70.4EBITDA 729 442 65.0 806 -9.6 1,554 837 85.8Other Income 22 109 -79.5 30 -25.8 34 132 -74.2Operating Profit 752 552 36.3 837 -10.2 1,589 969 63.9Interest 32 11 199.9 30 8.2 62 19 224.3Exceptional Items 55 27 104.7 81 0 100.0PBDT 774 541 43.2 834 -7.1 1,608 950 69.3Depreciation 114 116 -1.0 113 0.8 228 210 8.5PBT 660 425 55.2 720 -8.4 1,380 740 86.5Tax 191 88 118.3 185 3.6 376 159 137.1Profit After Tax 468 338 38.8 536 -12.5 1,004 581 72.7Minority Interest -12 -1 -936.4 -12 0.4 -25 -4 -482.2Shares of Associates 5 28 -82.4 -10 147.9 -5 28 -119.1Net Profit 461 365 26.4 513 -10.1 974 606 60.8 (Rs mn)Four-S Research 5
  6. 6. Company Report: KPIT Cummins 31 Oct 2012 Peer Benchmarking Strong top-line performance Company Market EV Sales Sales 3 EBITDA PAT Cap yr CAGR Infotech 21,252 21,746 15,531 20% 2,691 1,614 Hexaware 32,005 32,005 14,505 8% 2,513 2,670 Persistent 18,792 18,869 10,003 19% 2,244 1,418 NIIT 16,468 16,593 15,765 17% 2,701 1,972 Mindtree 27,505 27,576 19,152 16% 2,930 2,185 Average 23,204 23,358 14,991 16% 2,616 1,972 KPIT 21,765 22,954 15,000 24% 2,166 1,454 (Rs mn) KPIT has shown significant growth in last few years over its peers. It has 3 yr CAGR for sales of 24% despite having not so good performance in FY10 due to recessionary environment. KPIT grewBetter growth faster than most of the mid-cap IT company in the period withthan peers decent performance on margins level. Such strong growth was showcased earlier too by KPIT when it grew 50% CAGR in 2003- 2009 period and above 40% growth in FY11 and FY12. Scope to improve profitability FY12 Margins Company EBIDTA PAT Infotech 17% 10% Hexaware 17% 18% Persistent 22% 14% NIIT 17% 13% Mindtree 15% 11% Average 18% 13% KPIT 14% 10% KPIT’s profit margins are on the lower side amongst its peers. Its profitability was also recently impacted by acquisition of Systime. Systime was a strategic acquisition, but it had the lower margins (5.5%) compared to company’s margins. The key will be to push upFour-S Research 6
  7. 7. Company Report: KPIT Cummins 31 Oct 2012 the margins of the business coming from such low margin acquisitions while striving for the growth through these acquisitions. Higher margins can also be achieved by various operational levers such as off-Strong balance shoring, pyramid restructuring etc.sheet helps in In H1 FY13, Systime’s margins have started moving up. Systimeinorganic margins have expanded substantially with 10% and 14% EBITDAstrategy margin in Q1 and Q2 FY13, respectively. Liquidity ratios on Par Current Ratio (x) Cash Ratio (x) Company FY10 FY11 FY12 FY11 FY12 Infotech 2.57 6.19 4.81 3.16 2.36 Hexaware 2.08 2.84 2.15 1.56 1.01 Persistent 2.10 1.88 1.82 0.40 0.45 NIIT 1.81 1.93 1.74 0.32 0.41 Mindtree 1.79 2.47 1.75 0.21 0.16 Industry Average 2.07 3.06 2.45 1.13 0.88 KPIT 2.39 1.82 1.39 0.77 0.30 The company has strong balance sheet with strong cash ratio and current ratio. Due to strong performance in the past, the company has managed to continue the inorganic expansion without much strain on its balance sheet. Debt Equity (x) Interest Coverage (x) Company FY11 FY12 FY11 FY12 Infotech 0.04 0.04 137.15 299.28 Hexaware 0.01 0.00 10.57 74.02 Persistent 0.02 0.01 NA NA NIIT 0.01 0.01 92.86 60.85 Mindtree 0.03 0.01 266.50 447.00 Average 0.02 0.01 126.77 220.29 KPIT 0.05 0.17 28.40 23.50Four-S Research 7
  8. 8. Company Report: KPIT Cummins 31 Oct 2012 Valuation Valuation: Growth momentum to drive valuation up The company is continuing its growth momentum from last two years into this year. Revenues grew 72% in yoy in H1 FY13 and 74% yoy in Q2FY13. The Company is expected to maintain this growth momentum in the rest of the year and should easily cross its higher range of guidance of 35% this year. Given the strong growth environment in its focus verticals, the Company is expected to carry forward this momentum to the next year. We expect KPIT to overshoot its guidance of 35% growth in FY13 and to achieve about 17% growth in FY14. TTM Price Market Price EV/ MCap/ Company Name Sales (Rs) Cap PE /BV EBITDA Sales Hexaware Technologies 17,363 112 33,160 10.0 3.1 6.8 1.9 Infotech Enterprises 17,672 188 20,961 10.3 1.7 4.1 1.2 Mindtree Ltd 22,047 660 27,145 9.3 2.9 8.1 1.4 Persistent Systems 11,659 478 19,120 11.4 2.0 5.9 1.6 Polaris FT 22,480 120 11,917 5.0 1.0 3.1 0.5 KPIT Cummins 19,643 124 22,181 11.8 2.8 7.9 1.1 (Rs mn) Premium valuations imply one year price target of Rs 150We expect KPIT Although company is traded at premium compared its peers, it willto command a continue to demand this premium based on its growth prospects andpremium over vertical growth strategy. Currently stock is trading at Rs 124, implyingpeers a PE of 10.9x and 8.4x for FY13 and FY14, respectively. We expect KPIT to reach 150 by Sep’13 based on a forward PE of 12x Sep’13. We believe KPIT deserves a continuing premium over the midcap space. 1 yr forward PE band chart 160 16x 140 120 13x 100 10x 80 60 40 20 0Four-S Research 8
  9. 9. Company Report: KPIT Cummins 31 Oct 2012 KPIT’s Business Differentiated Strategy : Strong Vertical Focus KPIT has organised its efforts around 3 key verticals: auto and transportation, manufacturing and energy and utilities. KPIT tries to provide industry specific holistic solutions to its clients with best in class service offerings. With high domain expertise, the company is in a position to provideDifferentiated full range of services to its customers. The company is also investingstrategy sets in R&D to develop and maintain domain excellence in automotivecompany apart segment. Revenue Spread – Verticals 71.38% 11.22% 1.68% 15.72% Automotive & Transportation Manufacturing Energy & Utilities Others Automotive and transport vertical contributed more than Rs 10.7bn, i.e. 71% of FY12 revenue, up from Rs 6.39bn or 64.77% of revenue in FY11. The contribution from Manufacturing increased from 10.48% in FY11 to 11.22% in FY12. This largely helped drive 41% and 43% growth in FY12 and FY11, respectively. Increased outsourcing in Auto industry With increasing competition in the Auto industry, OEMs are facing intense pressure to bring in the new models at a quicker pace, with increased electronics in them. This has worked as a booster to theAuto industry outsourcing industry as outsourcing helps in bringing down the totalmore inclining time required to develop the product and bring it in the market.towards out-sourcing Outsourcing helps OEMs and other auto vendors to bring down the lead time in product development and imparts flexibility to them to easily adjust to market dynamics. Also growing electrification of the vehicles and its increasing criticality in product success has furtherFour-S Research 9
  10. 10. Company Report: KPIT Cummins 31 Oct 2012 pushed the outsourcing market in auto engineering and Auto industry. Technology development in Automotive space to drive top line With focus on fuel efficiency, safety, cost cutting and hybrid technology increasing, auto companies are more and more incorporating electronics into their vehicles. As OEMs are not looking to get into technology development, especially IT, which is not theirTechnology core domain, this development mainly gets outsourced to company’sdevelopment in working in this domain. KPIT has benefitted in this trend withAuto to push for increasing projects from Auto OEMs.more As per Nasscom, the engineering services space is currentlyelectrification of exploding, thanks to robust growth across Europe, Asia and the US.vehicles According to the report, the total engineering services market was worth $746 billion in 2004 and will touch $1,100 billion by 2020. Of this the outsourced component could be worth around $200 billion. Currently, the engineering services outsourcing (ESO) market is worth around $15 billion with India garnering a healthy 12%share. Automotive is second largest contributor in this with 19% share US market on the recovery path US constituted around 70% of revenue in FY12; its share increased to 76% in Q1FY12. With US economy showing signs of recovery, prospects US car sales are expected to improve going forward. US Auto Sales (in mn) 16 15 14 13 12 11 10 9 8 Source:Ycharts.com, Bureau of Economic Analysis and Four-SFour-S Research 10
  11. 11. Company Report: KPIT Cummins 31 Oct 2012 With improving US car sales numbers, KPIT is expected to get good demand from its US based clients along with Japan and emerging markets with improving overall sector condition. Increasing electronics in Automotives As the technology is developing, more and more electronics is used in automotives to improve vehicle’s safety, fuel efficiency. Power- train, infotainment, interiors, tele/diagnostics. As per databeans,Increasing roughly 25% of vehicle cost accounts for electronic products whichelectronic goes up-to 30% in luxury cars. This will soon reach to 50%. Microcomponents in controllers based ECUs are increasing in vehicles with increasingvehicle, booster features in the vehicle. ECUs per vehicles range from 25 to 35 in anfor KPIT average vehicle to as many as 70 in luxury cars up from single digit micro controllers few years back. The automotive microcontroller market is expected to expand to Rs. 328bn ($7 billion) by 2015. Niche specialisation in other focused verticals driving the growth KPIT is now expanding into emerging verticals like Energy & Utilities and Industrial equipments. Energy & Utilities vertical is expected to attract large technology investments in the coming years which the company looking to leverage with domain specialised offerings. In cognizance with this core sector strategy, KPIT has recently movedEmerging focus out of BFSI sector which contributed around 2% to its revenue.vertical: Utilities This niche specialisation helps the Company to win larger deals with the existing and new customers and improves customer mining. Company moving ahead should also improve the profitability with plans to improve business mix and increase in offshore services. IT investment in Utilities on rise With increasing concerns all over the world over climate changes and environment issues, and depleting natural conventional energyHuge resources, there is rising demand in improving overall efficiency inopportunity in this sector with the help of information technology. The opportunitiesutilities sector vary from smart grid applications to billing solutions to customer management. For utilities vertical, north America is a vital vertical, where the company will gain advantage with its strong presence through Sparta Consulting. Sparta Consulting is one of the fastest growing SAP services partners in North America, having received the 2012 SAP Partner Impact Award as the SAP Services Partner of the Year for Momentum in North America. Sparta has delivered over 250Four-S Research 11
  12. 12. Company Report: KPIT Cummins 31 Oct 2012 successful projects based on SAP solutions, which have included over 25 leading energy and utilities companies. Strong positioning in horizontal SBUs pushing up the growth IES, Automotive & Engg and SAP constitute company’s key SBUs. IES (INTEGRATED ENTERPRISE SOLUTIONS) IES is the largest SBU in the company contributing 40% revenue to company’s top-line and is largely driven by Oracle practice. It grew 57% last year along with new customers deal worth $60mn. IESIES: Enterprise includes ERP implementation, support and e-biz. In IES, Oracle is theconsulting key practice which includes Business Intelligence (BI), Manufacturing Execution Systems (MES), JD Edwards (JDE), Oracle Transportation Management (OTM) and Supply Chain Management (SCM). Through organic skill developments and acquisitions KPIT has strengthen its offering. It is third largest partner in Oracle in North America in Industrial manufacturing and eight largest across the industries. With latest Systime acquisition, the Company’s standing is further strengthened in Oracle-JDE offering. Auto & Engineering KPIT is the largest third party vendor for automotive embedded electronics in India. With 50% growth from last year A&E contributes 26% of revenue. Auto & Engg is the highest margin SBU in theAuto & engg: company with margins ranging in 19-20%.Strong domain With increasing electronics in Automotives the company is gettingexpertise good traction from Powertrain, Infotainment, AUTOSAR, MEDS, Diagnostics and Telematics. This is niche market service line offering from KPIT with high domain expertise, offering embedded software and automotive electronics related practices to OEMs and tier I & II vendors. To further improve its competence in the vertical lot of R&D work is done in this SBU which results in IP based solutions to its clients. SAP KPIT has strong presence in SAP ERP implementation services for energy and utilization sector along with manufacturing sector withSAP: strong North America as major geography. The SAP SBU grew 57% lastpipeline with year with the company getting traction across the industries. Themany multi- SAP SBU is seeing good traction in Core ERP implementation,million deals Business Intelligence (BI) & Analytics, Customer RelationshipFour-S Research 12
  13. 13. Company Report: KPIT Cummins 31 Oct 2012 Management (CRM), Human Capital Management, Mobility and Application Maintenance & Support (AMS) projects. It closed three deals in SAP with more than $20mn size last year. With technology reset happening with in SAP company sees good opportunity HANA, mobility and Success factors in the coming days. The company is also looking to increase non linear business in SAP by developing industry specific templates targeted for mid size business in its focused industries. These templates can be deployed at much lower cost and time than traditional methods. SAP is lowest margin SBU in the company with Q2FY13 margins at 7%. Increased bench due to shift in technology and more onsite implementation projects are one of the key reasons for lower margins. Revenue Distribution: SBU wise 3% IES 31% 40% Auto & Engg SAP Semiconductor 26% Solutions Group Revolo: A hybrid solution Revolo is a major output of the Company’s R&D efforts. This could be a major lever to push up non linear revenue for the company in the near future. Revolo is a plug-in, parallel hybrid solution for the automobiles which converts a regular vehicle into hybrid vehicle using company’s innovative development in power-train technology. It has filed 16 patents till date for Revolo only. The solution will be developed and manufactured by 50:50 JVRevolo: between KPIT and Bharat Forge. Here KPIT will license its technologyOpportunity to whereas Bharat forge will bring in support for manufacturing andcreate hybrid kit distribution.market As per Automotive Research Association of India (ARAI) tests, this technology improves fuel efficiency by 40-50% and reduces green house gas emission by 30%. The kit can be fitted to a vehicle in 4-6 hrs at the cost of 65k-150K depending on type of vehicle. The Company is currently doing testing on 200 vehicle fitted with the kitFour-S Research 13
  14. 14. Company Report: KPIT Cummins 31 Oct 2012 and should come up with results near the year closing. After testing and concluding govt regulatory requirements the company should be able to launch the product in FY14 commercially. Revolo was earlier expected to launch in FY13 but due to battery problems it got delayed. The company expects Rs 3-5bn revenue from this product. Revenue Distribution: Geographically Though KPIT has strong presence across globe, it has strong dependency on US market like many other IT cos. Another reason for this could be attributed to its large client Cummins, based out ofUS is the key USA, which attributes 20-22% of revenue. In FY12, the US marketmarket contributed almost 70% of company’s revenue, up from 67% in FY11 and 60% in FY10. This is working in favour of the company, as the US economy and auto & manufacturing sector is showing the signs of recovery. Geographical Revenue Spread 18.20% USA 69.56% 12.24% Europe Rest of World Due to lower European market exposure, the Company is comparatively sheltered from current European crisis. It is looking to further diversify its geographical reach by gaining market share inEmerging emerging market like APAC, China and Brazil. The emerging marketmarket showing grew 56% in FY12 with growth coming from countries like India,strong growth China, Japan and Korea. To support good growth in China in automotive business, KPIT has set up a subsidiary in China. Similarly it has set up subsidiaries in Brazil and Netherlands too to strengthen its operations in Latin American nations, Scandinavian and other European regions. With the acquisition of Systime it has good positioning in the Brazil market of JDE offerings. Successful inorganic strategy to plug gaps in business model The company has successfully implemented its inorganic growth strategy to plug in gaps in its customer offerings. With 10Four-S Research 14
  15. 15. Company Report: KPIT Cummins 31 Oct 2012 acquisitions in as many years the company has managed to increase its top line by 28x in the last 10 years. With these acquisitions company has increased its foothold geographically and improved its client base. Revenue growth strongly supported by acquisitions 16000 14000Strategic 12000acquisitions 10000playing big role 8000in exponential 6000growth 4000 2000 0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Consol Revenue Standalone revenue (Rs mn) KPIT’s acquisitions are driven by any of the 3 considerations: domain expertise, geographical presence, or service expansion. Be it Cummins at the initial stage which gave them auto-mfg domain expertise or be it the latest $50mn SYSTIME acquisition which has strong hold in Oracle and JDE practice. Acquisitions Company Year Size Rationale Anchor Customer – Cummins, Cummins Infotech 2002 $1mn Vertical Focus - Manufacturing Panex 2003 $ 7.2 Mn SAP Practice, Anchor Customer SolvCentral 2005 $ 3.5 Mn BI Practice, Anchor Customer Direct Presence in France, Pivolis 2005 $ 1.5 Mn Geography Auto Electronics Domain, Auto10 years: 10 CG Smith 2006 $ 6.2 Mn OEM & Tier I Customersacquisition Harita TVS 2008 $ 1.0 Mn MEDS Practice SAP Practice, US Geography Sparta Consulting 2009 $ 3.5 Mn presence in SAP Vehicle Diagnostic & Telematics, In2Soft 2010 $ 4.0 Mn German Frontline CPG 2010 $ 11 Mn Oracle Consulting SysTime 2010 $ 50 Mn Oracle Consulting, JDE Specialist With these acquisitions KPIT has developed a strong offering in SAP, Auto engg and Oracle. This helps KPIT in cross-selling their Enterprise application services to their existing customer.Four-S Research 15
  16. 16. Company Report: KPIT Cummins 31 Oct 2012 Though these acquisitions have boosted company’s growth, organically also the company has shown good growth. Organically company has grown at 40% rate for last few years. SYSTIME acquisition SYSTIME is the largest acquisition till date of KPIT Cummins in its decade long acquisition history. At the time of acquisition in 2010,Systime: SYSTIME had revenue of $50mn. Systime is the worlds largest JDBiggest bet till Edwards solution provider, with manufacturing industry focusednow offerings. This has further strengthened manufacturing and energy & utilisation vertical of company as JDE is highly preferred in these verticals. With Systimes strong client base in manufacturing sector, including large manufacturers such as Frances Lafarge SA and U.S.-based industrial gases maker Praxair Inc, it provides strong cross-selling opportunity to the company. This acquisition adds-up to the company’s Oracle-based consulting and services business, making it a $125mn business for FY12. Also company gets head-start in emerging geography, Brazil, where Systime is an established player. Although Systime has lower EBITDA margins compared to company’s margins, KPIT could improve those with operational levers like off- shoring, pyramid restructuring and other cost cutting majors. Also it represents good cross-selling opportunity to KPIT and Systime customers. Strong and diversified customer portfolio KPIT has strong client portfolio with more 176 active clients and 69 clients with run rate more than $1mn. It has been adding 3-4 active clients every quarter from different verticals and service portfolio. Include values in the chart below 180 80 69 65 175 70 59 170 54 60 51 48 165 40 40 50 160 40 176 172 155 169 30 163 165 150 159 20 155 152 145 10 140 0 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2Fy13 No. of Active Customers Customers with run rate of >$1MnFour-S Research 16
  17. 17. Company Report: KPIT Cummins 31 Oct 2012 Dependency on its top client, Cummins, is also drastically come down in last 1-2 years. From almost 25% business coming from Cummins in Q3FY11 it has come down to 19.7% in Q2FY13. Strong growth potential with $1bn target for FY17 32-35% growth expected in FY13… The company has the guidance of 32-35% growth in FY13 which is better than most of major-mid cap IT companies expected growth in current environment. KPIT plans to achieve this with maintainingCompany edge in auto, mfg and utility sector and driving the growth withexpected to service offering with domain expertise as a differentiator.outperform its The company has recently (in last 9 months) closed 3 $20mn+ dealsguidance and expects similar deal flow from their focused verticals in the future. The company more than doubled the growth the top-line in last two years from $154mn in FY10 to $309mn in FY12 with major boost coming from SAP and auto segments. FY17 vision to reach $1bn KPIT has set a vision to become $1bn revenue company by FY17, with target to achieve EBITDA margin of 18% up from 14.5%. With strong vertical focused growth and best in class practices in Auto embedded, SAP and Oracle, company should achieve the target with the help of inorganic means and organic growth.Four-S Research 17
  18. 18. Company Report: KPIT Cummins 31 Oct 2012 Operational performance Focus on productivity improvement, Systime margins improve The company is showing positive developments in productivity factors. Systime had EBITDA margins of 5.5% at time of acquisitions compared to the company’s 15% which had impacted on company’sSystime margins. But as Systime integration is happening one can seeintegration positive trend in its margins.pushing its In Q4FY12 without SYSTIME EBITDA margin was ~17%, butmargins up SYSTIME itself had margin of 10%, bringing down overall EBITDA margin to 16%. With continued successful integration and increased offshore revenue from SYSTIME the productivity should move up. Also the company also has other levers available with them to increase the margins. By flattening the organisation pyramid further i.e. increasing fresher/experience ratio and improved utilisation on organisational level could further increase in profitability of the company. Improvement in the utilization visible Utilisation 100% 94.5% 94.7% 95% 90.7% 91.3% 90.2% 90.6% 89.1% 90% 85% 80% 74.3% 74.1% 75% 72.8% 71.9% 71.2% 69.9% 70% 67.6% 65% 60% Q3FY11 Q4FY11 Q1 FY12 Q2FY12 Q3FY12 Q4 FY12 Q1 FY13 Onsite Utilisation Offshore Utilisation KPIT is on the mid to lower side of utilisation level if one compares it to its peers (NIIT 78-79%, Polaris 80%, Persistent 73%, Mindtree 72%). But the company is trying to improve this shortcoming withUtilisation rate increasing utilisation on both onsite and offshore side.seen uptrend Company’s efforts are getting some positive results as offshore utilisation has gone up from 67.6% in Q3FY11 to 74.1% in Q1 GY13 and 89.1% onsite utilisation in Q3FY11 to 94.7% in Q1 FY13. Although company is showing this positive trend, it still has plenty ofFour-S Research 18
  19. 19. Company Report: KPIT Cummins 31 Oct 2012 ground to catch to come close to its top peers. Increased Off-shoring required KPIT has high amount revenue coming revenue coming from onsite which is in the ratio of 52-53% in recent quarters. This ratio hasOff-shoring toimprove been on growing trend lately increasing from 43% in Q4 FY11 to more than 53% in Q2 FY13. This growth is has major contributionmargins from SAP SBU which had most of the project in the implementation phase. Also acquired company has more onsite revenue compared to any KPIT. In the coming days company is expected to improve onsite:offshore revenue ratio with increasing offshoring. And existing onsite implementation project going into maintainance phase will also help. Onsite Revenue 55% 54% 53% 53% 52% 51% 49% 48% 47% 47% 44% 45% 43% 43% 41% 39% 37% 35% Q4FY11 Q1 FY12 Q2FY12 Q3FY12 Q4 FY12 Q1 FY13 Q2 FY13 Improvement in organisational pyramid The Company can also use some other majors to improve the productivity such as flattening the organisational pyramid. As of now it has more laterals working in the projects and fewer freshers as compared to its peers. Company is looking to improve this ratio with increasing fresher recruitment.Four-S Research 19
  20. 20. Company Report: KPIT Cummins 31 Oct 2012 Financial AnnexureProfit & Loss StatementIncome Statement FY08 FY09 FY10 FY11 FY12E FY13E FY14EGross Sales 5,835 7,932 7,316 9,870 15,000 21,861 25,578Employee Cost 2145 2634 2654 5300 7718 11361 13160Other Operating Expenses 2051 2362 1982 1772 3116 4360 5101Sales, Admin & GeneralExpenses 818 970 945 1198 1789 2608 3051Miscellaneous Expenses 87 706 390 117 211 307 360Total Expenses 5,102 6,672 5,971 8,386 12,834 18,636 21,672EBITDA 733 1,260 1,345 1,484 2,166 3,226 3,906Depreciation 255 436 308 411 445 445 445EBIT 478 823 1,037 1,073 1,721 2,781 3,461Other Income 218 30 56 67 138 -120 80Financial Expenses 94 76 33 38 73 73 73Profit before tax andExceptional Items 602 778 1,061 1,103 1,786 2,587 3,467Exceptional Items (13.72) - - - 100.45 - -Profit before tax 588 778 1,061 1,103 1,886 2,587 3,467Tax 76 120 169 155 437 623 849Profit after tax beforeminority interest 512 658 892 948 1,450 1,965 2,618Minority Interest 1 0 0 -2 -31 -46 0Reported net profit 513 659 892 946 1,454 2,011 2,618 (Rs mn), consolidated financialsFour-S Research 20
  21. 21. Company Report: KPIT Cummins 31 Oct 2012Balance SheetBalance Sheet FY08 FY09 FY10 FY11 FY12 FY13E FY14EShareholders EquityShare Capital 184 156 174 183 359 359 359Reserves and Surplus 2,454 1,475 3,697 5,849 6,766 8,777 11,395ESOPs - - - - - - -Total equity capital 2,638 1,631 3,871 6,032 7,125 9,136 11,754LiabilitiesSecured Loans 858 1,185 1,108 115 4 4 4Unsecured Loans 7 - - 158 1,186 650 650Minority Interest 5 3 - 9 326 460 460Total Liabilities andOwners Equity 3,508 2,819 4,979 6,314 8,641 10,250 12,868AssetsGoodwill on consolidation - - - - - - -Gross Block 5,626 2,489 3,464 4,241 7,445 8,189 9,172 Less: Depreciation 629 1,042 1,278 1,678 2,155 2,370 2,418Net Fixed Assets 4,997 1,447 2,186 2,563 5,290 5,819 6,755Work-in-progress 207 348 286 316 185 320 400Investments - 0 747 1,258 1,234 1,200 1,531Inventory - - - - - - -Debtors 1,432 1,776 1,388 2,288 4,380 4,498 5,263Cash and Bank Balance 740 1,671 1,052 2,080 1,473 2,283 3,201Other Current Assets 52 67 58 363 320 333 399Loans and Advances 478 383 619 216 579 972 1,262Total Current Assets 2,702 3,896 3,117 4,947 6,752 8,086 10,124Deferred Tax Asset (42) (60) (51) (55) 27 50 50Current Liabilities 546 2,716 1,076 2,517 4,220 4,613 5,398Provision 287 97 230 200 628 474 595Total Current Liabilities 833 2813 1306 2716 4847 5087 5992Net Current Assets 1868 1083 1811 2231 1905 2999 4132Total Assets 7032 2819 4979 6314 8641 10388 12867 (Rs mn)Four-S Research 21
  22. 22. Company Report: KPIT Cummins 31 Oct 2012 Cash Flow StatementCash Flow Statement FY08 FY09 FY10 FY11 FY12 FY13E FY14ENet Profit/(Loss) before Tax 602 778 1,061 1,103 1,886 2,587 3,467 Adjustments 273 441 432 365 415 324 409Operating Cash flow beforeWcap 875 1,219 1,493 1,467 2,301 2,912 3,876 Change in WC -390 113 -169 -574 -870 -1,074 -1,439Cash Generated fromOperations before taxes 485 1,332 1,324 894 1,432 1,838 2,437 Direct Taxes Paid -44 -141 -213 -249 -268 -331 -400Operating Cash flow- A 441 1,191 1,110 645 1,163 1,507 2,038Cash Flow from InvestingActivities -301 -669 -1,366 -675 -2,828 -750 -800Cash from Financing activities-C -22 182 -132 1,043 1,084 -320 -320Change in Cash= A+B+C 117 704 -388 1,013 -581 437 918Opening Balance 625 740 1,444 1,056 2,069 1,846 2,283Closing Balance 742 1444 1056 2069 1846 2283 3201 (Rs mn) Four-S Research 22
  23. 23. Company Report: KPIT Cummins 31 Oct 2012 RatiosRatios FY08 FY09 FY10 FY11 FY12 FY13E FY14EEPS 6.6 8.4 11.4 10.8 8.1 11.2 14.6CEPS 5.7 15.3 14.1 7.4 6.5 8.4 11.4DPS 0.7 0.6 0.7 0.7 0.7 0.8 1.0Valuation RatiosP/E Ratio 11.8 3.0 10.1 15.6 15.3 11.0 8.5EV/EBITDA 8.4 1.2 6.8 9.3 10.2 6.8 5.6EV/Sales 1.1 0.2 1.2 1.4 1.5 1.0 0.9Profitability (%)EBITDA margin 12.6 15.9 18.4 15.0 14.4 14.8 15.3Pretax margin 10.1 9.8 14.5 11.2 12.6 11.8 13.6Net margin 8.8 8.3 12.2 9.6 9.7 9.2 10.2Return on avg. Equity 30.1 30.9 32.4 19.1 22.1 24.7 25.1Return on avg. Capital employed 14.7 26.1 26.6 19.0 23.5 30.7 31.2Growth Ratios (%)Revenue growth 35.9 -7.8 34.9 52.0 45.7 17.0EBITDA growth 71.8 6.8 10.3 45.9 48.9 21.1Net profit growth 32.3 36.4 3.9 53.7 38.3 30.2Activity/Turnover RatiosAsset turnover 1.9 5.9 4.0 2.7 4.1 4.9 4.2Working Cap turnover 6.0 5.4 5.1 4.9 7.3 8.9 7.2Debtors turnover 8.1 4.9 4.6 5.4 4.5 4.9 5.2Debtor Days 44.8 73.8 78.9 68.0 81.1 74.1 69.6Payables turnover 21.4 4.9 3.9 5.5 4.5 4.9 5.1Payables Days 17.1 75.1 94.6 66.4 82.0 73.7 71.4Liquidity RatiosCurrent Ratio 3.2 1.4 2.4 1.8 1.4 1.6 1.7Cash Ratio 0.9 0.6 0.8 0.8 0.3 0.4 0.5SolvencyDebt Equity 0.3 0.7 0.3 0.0 0.2 0.1 0.1Leverage Ratio 2.7 1.7 1.3 1.0 1.2 1.1 1.1Net Debt / EBITDA 0.2 -0.4 0.0 -1.2 -0.1 -0.5 -0.7Interest Coverage 5.1 10.9 31.8 28.4 23.5 38.0 47.3 Four-S Research 23
  24. 24. Company Report: KPIT Cummins 31 Oct 2012About Four-S ServicesFounded in 2002, Four-S Services is a financial boutique providing Research, FinancialConsulting and Investment Banking services. We have executed more than 100+ mandatesacross diverse range of industries for Indian as well as global companies, investment firmsand private equity and venture capital firms.Our clients value our focused, actionable advice which is based on deep domain expertise inEducation, Financial Services, Media & Entertainment, Healthcare, Consumer Goods,Automotive, Energy, Logistics and Manufacturing. For further information on the companyplease visit www.four-s.comDisclaimerThe information contained herein has been obtained from sources believed to be reliable but is notnecessarily complete and its accuracy cannot be guaranteed. No representation, warranty, guaranteeor undertaking, express or implied, is made as to the fairness, accuracy or completeness of anyinformation, projections or opinions contained in this document. Four-S Services Pvt. Ltd. will notaccept any liability whatsoever, with respect to the use of this document or its contents. This companycommissioned document has been distributed for information purposes only and does n ot constitute orform part of any offer or solicitation of any offer to buy or sell any securities. This document shall notform the basis of and should not be relied upon in connection with any contract or commitmentwhatsoever. This document is not to be reported or copied or made available to others.Four-S may from time to time solicit from, or perform consulting or other services for any companymentioned in this document.For further details/clarifications please contact:Alok Somwanshi Ajay JindalAlok.somwanshi@four-s.com Ajay.jindal@four-s.comTel: +91-22-42153659 Tel: +91-22-42153659Four-S Research 24

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