KPIT Cummins Infosystems – Initiating Coverage

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��



KPIT Cummins Infosystems – Initiating Coverage
KPIT Cummins Infosystems (KPIT) is a mid-tier domain-focused IT company, which is riding
high on the green shoots of recovery in its anchor vertical, i.e. manufacturing. The
company is back to reporting an 8.7% CQGR in its revenue over 2QFY2010–2QFY2011,
after recording decline at a 9% CQGR over 2QFY2009–1QFY2010. We Initiate Coverage
on the stock with a Buy recommendation.

Niche focus to be a revenue driver: Globally, the green shoots of recovery in the
manufacturing business have propelled growth for the company over the recent quarters.
Going forward, we believe the company will witness revenue growth once the automobile
sector returns to strong growth; the manufacturing vertical increasingly starts spending on
discretionary IT services to go-to-market and drive cost efficiencies; and the top-client,
Cummins, returns to secular robust growth.

Profitability to surge: KPIT has many margin levers in hand such as 1) expanding utilisation
2) rationalising employee pyramid and 3) taking up more of fixed price projects. We
expect these levers to bolster the company’s EBITDA growth and margins to rebound to
17%, 18.3% and 18.4% for FY2011, FY2012 and FY2013, respectively, from 16% in
1HFY2011. Also, with hedges turning into at-the-money, we expect bleeding profitability
due to forex losses to cease and aid the bottom line further, with a 20.2% CAGR over
FY2010–13E, outperforming earnings growth of even tier-I IT companies.

Key triggers: Management’s focus on 1) growth via inorganic strategy and proven track
record of scaling up the acquired assets (such as Harita and CGS have grown at a 41%+
CAGR and Panex and SC have grown at a 18%+ CAGR since the time of their respective
acquisition) and 2) monetisation of investments in Revolo by FY2013 by going-to-market
may act as potential valuation triggers, providing a strong upside risk to our estimates.
Valuations: KPIT is better positioned in the mid-tier Indian IT space to capture growth in
spending related to discretionary services such as engineering and enterprise solution due
to its domain focus. The company’s revenue growth and profitability growth are expected
to outpace that of its peers. Over the past five years, KPIT has traded at a one-year forward
median P/E(x) of 12x and in a range of 6–17x. Our target price is based on 9x FY2013E
EPS of `18.2 (~55% discount to Infosys’ target multiple). We Initiate Coverage on the stock
with a Buy recommendation and a Target Price of `164.