KPIT CUMMINS: No further uptick in quarterly run-rate from Cummins for FY11; Revolo progress on track; Margins to recover in 2HFY11; Not Rated
We met with the management of KPIT Cummins (KPIT IN, CMP Rs163, MCap US$0.3b, Not Rated). Following are the key highlights:
- Quarterly run-rate from Cummins is expected to be in the range US$11-12m and an uptick from these levels is only anticipated from the onset of FY12. Revenues from Cummins saw a constant decline from US$17.7m in 2QFY09 to US$10.7m in 4QFY10, and stand at US$11m in 1QFY11.
- Expects incremental business from existing reputed clientele in the manufacturing segment to drive growth; surge in demand for auto electronics in China and acceleration in SAP practice post the acquisition of Sparta in 3QFY10 to be additional growth drivers.
- Increased hiring and wage inflation to keep margins subdued in 1HFY11; growth in revenues and resulting cost absorption to help recover margins in 2H. Increase of SAP in the overall mix and productivity gains from higher proportion of Fixed Price contracts may improve realizations going forward.
- Commercial production of hybrid kits from Revolo JV by 1QCY11; targeting Rs3-5b in revenues from JV by 2013 and 16% EBITDA margins.
- Continued focus on strategic acquisitions; looking to fill gaps in Engineering & Design and Government & Defense spaces; Germany is amongst preferred geographies for inorganic growth.
Quarterly revenues from Cummins to be in US$11-12m range in FY11; may increase from FY12
- KPIT witnessed a constant decline in revenues from its largest client – Cummins Group – down from US$17.7m in 2QFY09 to US$10.7m in 4QFY10. A rebound in Cummins business after the recession is expected to lead to improvement in KPIT’s revenues from Cummins, which grew 3.1% QoQ in 1QFY11 to US$11m.
- KPIT expects a pick-up in this run-rate going forward; for FY11, however, quarterly run-rate from Cummins is expected to be in US$11-12m range.
Range-bound quarterly US$ revenues over the past 2 years
Incremental business from existing large clientele to be the key growth driver; Focus on SAP, China as potential fuels for growth
- KPIT has managed to foster relationships with specific clients in manufacturing space comprising 16 Original Equipment Manufacturers (OEM) including 6 of the top 10 globally, 50 tier-I auto vendors and 8 of the top-10 semi-conductor companies. The company expects 80% of its growth in the automotive space to come from incremental work from existing high-profile client base.
- It has outlined a target to grow SAP into a US$100m business by 2013. KPIT’s SAP practice was ~US$18m, which increased to US$43m on the acquisition of SPARTA in 3QFY10.
- Given the increased environmental consciousness in China and measures towards improving fuel efficiency to reduce emissions, KPIT expects momentum in demand for auto electronics in the country. Of the 45 OEMs in China, KPIT targets to become a partner of choice for Automotive Electronics technology with 15 of them.
Five quarters of consistent growth in manufacturing
Realization to improve on mix-based pricing increase; Proportion of revenues from Fixed Price contracts to continue to increase
- KPIT does not see any renegotiation in unit based pricing in FY11. It expects margins to improve on the back of favorable business mix, with increased proportion of SAP in its overall revenues. KPIT realizes higher per unit onsite revenue in its SAP practice than other segments, as it requires greater onsite presence (realization in SAP ranges from US$125-150 per man-hour, v/s US$85-100 per man-hour for Oracle implementation).
- The proportion of revenues from Fixed Price contracts increased from 13.4% in 1QFY09 to 31.1% in 1QFY11. The company will continue to increase this proportion and see it reach ~45% going forward. Utilization and topline growth remain other margin levers for KPIT.
Revolo progress on track – commercial production by 1QCY11; to continue targeting strategic acquisitions with a 3-year cash payback
- KPIT’s JV with Bharat Forge for Revolo is on track for launch in 1QCY11. The company plans to launch Revolo in Mumbai and Pune markets, and then move into other cities 4-6 months later. The launch will be for following models: Logan; 1 Tata Ace and Tata 207.
- KPIT’s investments into the JV will be Rs150m prior to the launch, increasing to Rs500m with the onset of commercial production. The company expects to garner Rs3-5b in revenues by 2013 from the JV, implying a target sale of 30,000-60,000 kits during the period. KPIT has guided for EBITDA margins of 15-16% after considering royalty income from Revolo (7.5% of revenues).
- KPIT will continue assessing its options in the inorganic space looking for companies that would help provide: Geographic footing, and 1 Anchor customers. On these lines, the company is looking at filling gaps in its offerings in Government & Defense, Engineering & Design spaces, and geography-wise, Germany. To meet the financial fit, payback period of acquisition will have to be less than 3 years.
- On consensus estimates, KPIT trades at a FY12 PE of 11.3x and P/BV of 2.3x. Not Rated.
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