Key highlights of Q2-FY11 results of KPIT Cummins Infosystems:: Keynote

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Key highlights of Q2-FY11 results of KPIT Cummins Infosystems Ltd.

KPIT Cummins Infosystems Ltd. (KPIT) reported more than expected topline growth of 14% q-o-q touching `235Cr during Q2FY11 (13% by volumes and 1% due to currency movements). KPIT witnessed significant contraction in EBITDA margin (-200bps q-o-q), on account of higher on-site SAP activity and, lower offshore utilisation (-58 bps q-o-q) due to addition of manpower at entry levels.

KPIT’s SAP SBU has increased at 26.8% q-o-q growth rate, while emerging economies grew 20% q-o-q. 

Notable events during Q2FY11 include the acquisition of US based CPG Solutions Inc. (CPG) for a maximum consideration of $12mn (structured as $6mn upfront payment and variable component of $6mn, to be disbursed on reaching specific operating benchmarks). CPG is a fundamentally robust company (15%+ EBITDA margins) in high growth phase, expected to achieve $100mn Oracle practice over 3 years. The acquisition will aid KPIT’s efforts to create America focused ‘Best in Class’ Oracle practice aimed at the manufacturing vertical.

Further, the management has expressed confidence in initiating Revolo – production by Q4FY11.    

Outlook

We see improved traction on the back of broad based growth in manufacturing and energy & utilities verticals. In our view, the energy vertical will be a major contributor to KPIT’s topline growth, going forward.

Additionally, during the quarter, the company bagged significant deals in the Industrials sub-vertical and, obtained premium membership in JASPAR. Currently, IP revenues account for ~2% of KPIT’s topline during Q2FY11 and, we expect an increase in the same.

As expected, we find a favorable business scenario based on hiring numbers; 609 net-additions (+11.4% Q1FY11 total-headcount), including 230 fresh joinees. Management expects improved cost structure with 200-300bps increment in employee utilisation by Q4FY11, post-training. However, attrition rates remain a major concern.

KPIT is looking at additional equity infusion for exploring inorganic opportunities; a mixed signal. We also note that KPIT has beaten our Q2FY11 topline estimates by 10.1%, inspiring significant revisions in FY11 and FY12 financial projections. However, our EBITDA forecasts hold good, to a reasonable extent (-2.7%). Hence, we maintain positive outlook on KPIT.