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KPIT Cummins Infosystems (KPIT) reported modest set of numbers for 3QFY2011
with robust volume growth of 7.6% qoq. The company revised its USD revenue
growth guidance for FY2011 to 38-40% yoy from 25% yoy earlier and PAT
growth for FY2011 to 8-10% yoy from 5% yoy earlier. Management stated that its
demand pipeline was strengthening on account of recovery in its anchor vertical,
manufacturing, resulting in the company going in for aggressive hiring, which is
expected to be higher than FY2011 as well. Thus, we recommend an Accumulate
on the stock.
Stellar revenue growth: For 3QFY2011, KPIT posted revenues of US $60.4mn
(v/s our estimate of US $54.2mn), up a whopping 19.0% qoq. This growth was a
combination of volume growth of 7.6% qoq and pricing growth of 8.8% qoq.
Margins dip: EBITDA margin declined by 140bp qoq to 14.1% (v/s our
expectation of 17.0%) from 15.5% in 2QFY2011 due to integration costs,
increase in employee costs and SG&A expenses.
Outlook and Valuation: KPIT is well-poised to capture growth in spending related
to discretionary services such as engineering and enterprise solutions due to its
strong domain focus. We expect the company’s momentum to continue as most
of its manufacturing clients, including top client Cummins, have returned to their
growth trajectories. We expect the company’s revenues to post CAGR of 27.4% in
USD terms and 24.1% in INR terms over FY2010-13, with EBITDA and PAT CAGR
of 16.1% and 21.5% over the mentioned period. We recommend Accumulate on
the stock, with a Target Price of `181, valuing it at 10.5x FY2013E EPS of `17.2.
The company’s stellar revenue performance came on the back of strong growth
across all its major strategic business units (SBUs).
IES leads the growth: The integrated enterprise solutions (IES) SBU (contributed
39.6% to revenue) reported a whopping 34.8% qoq growth in revenues. The
company’s focus on supply chain management and logistics through value chain
planning and oracle transportation management helped gain traction with the new
customers. This SBU also gained traction on account of consolidation of CPG
Solutions. In this SBU, the company is seeing good traction in the US and UK and
is exploring growth opportunities in geographies like Scandinavia and in India for
the government sector.
Auto and engineering back in the race: The auto and engineering SBU
(contributed 26.6% to revenue) posted robust 17.7% qoq growth in revenues. In
this SBU, the demand is spread across geographies and practices like
infotainment, mechanical engineering & design services and powertrain.
Acquisition of In2Soft Gmbh aided revenues of this SBU.
SAP records modest growth: The SAP SBU (contributed 31.5% to revenue)
registered 8.2% qoq growth in revenues with the order pipeline being very strong
going ahead. The company is witnessing demand across geographies.
Management highlighted that robust license sales by SAP and Oracle in
2HCY2010 should culminate in strong demand for implementation and support &
maintenance services going forward.
SSG: The Semiconductor Solutions group (SSG) SBU registered 22.0% qoq degrowth
in revenues, but contributed a mere 2.3% to the company’s overall
revenues. Also, the company is now focusing on improving the volume of business
from SSG customers, by strengthening the front-end team and emphasising on
new delivery models.
The company’s anchor vertical, manufacturing (contributed 72.6% to revenues)
registered 7.8% qoq growth in revenues. The company is witnessing good traction
in this vertical with all the SBU’s deal pipeline, relating to this vertical, being strong.
The energy and utilities vertical (contributed 6.6% to revenue) posted 21.0% qoq
revenue growth aided by the In2Soft acquisition. However, BFSI (contributed 3.0%
to revenue) vertical reported 3.4% qoq de-growth in revenues as work from two of
its very old clients is settling down and is not a growth focus area for the company.
Margins decline
On the operational front, the company’s performance was muted. EBITDA margin
and EBIT margin declined by 140bp and 95bp qoq to 14.1% and 11.0%
respectively, in 3QFY2011. Margin underperformance was due to the following
factors: a) acquisition related costs like professional fees, legal fees, travel and
other related costs for CPG Solutions and In2Soft Gmbh both, which effectively
reduced the operating margins to around 5% (from normalised 14%), b) low
utilisation levels with higher number of freshers coming on board and cost run ups
due to high attrition levels (above 30%), c) lower forex realization, and d) increase
in employee costs and SG&A expenses.
Consolidation of the two acquisitions done in 2QFY2011 primarily hampered
OPM, which slipped to 5% from 14%+ on the back of one-time integration
expenses. Management has indicated that it will continue to incur these integration
expenses in the next quarter as well, which would keep the margins depressed.
Hiring spree continues, utilisations slip marginally
During the quarter, the company added 269 technical employees taking the
technical employee base to 5,743. Total net hiring was 276 taking the company’s
total employee base to 6,229. In 3QFY2011, 172 freshers were added.
Onsite utilisation remained almost similar to 2QFY2011 levels at 89.1%. Offshore
utilisation however, declined by 30bp to 67.6%, the lowest level since the last
seven quarters due to fresher intake.
Client pyramid
The company’s revenue from its top client, Cummins Inc., increased by 107bp to
24.1% with 21.9% qoq growth in its revenues. The growth in this account has been
higher than the company’s growth rate. Cummins is making investments in future
technologies and emerging markets, and this trend is expected to continue in the
coming year as well. In fact recently, the engine maker announced plans to add
~2,500 US jobs in 2011, many requiring engineering or other technical skills. In
2010, Cummins raised its US employment by only 185 personnel. The company
now has ~14,800 US employees. Also, Cummins plans to boost its capital
spending by 50% in 2011 to ~US $600mn from 2010
KPIT also added five new clients during the quarter taking its total active clients to
152 during the quarter. Out of the clients added, one customer added has a run
rate greater than US $1mn.
Outlook and valuation
Globally, the green shoots of recovery in the manufacturing business have
propelled growth for the company over the recent quarters, leading the company
to post 10.7% revenue CQGR over 2QFY2010–3QFY2011. In fact, the qoq
growth sported by the manufacturing vertical of tier-I IT companies, which grew by
4-9% qoq in 3QFY2011, corroborates this trend. We expect the growth
momentum to continue as most of KPIT’s manufacturing clients, including top
client Cummins, have returned to their growth trajectories. Also, management is
witnessing a strengthening demand pipeline, which is leading the company to go
in for aggressive hiring strategy, which is expected to be higher than FY2011.
Hence, over FY2010–13, we expect KPIT’s dollar revenues to post a CAGR of
27.4% and rupee revenues to post a CAGR of 24.1%; the CAGR in INR terms is
lower because of stronger rupee assumption. The expected growth is scorching on
account of robust organic growth due to return in demand for enterprise solutions
and engineering services in its anchor vertical manufacturing as well as the recent
strategic acquisitions done in 2QFY2011 - CPG Solutions and In2Soft Gmbh –
which would further aid growth.
On the profitability front too, KPIT has many margin levers: a) improving
utilisation, which currently stands at 67.6%, the lowest level since the last seven
quarters, b) ratiolisation of employee pyramid, which is currently skewed with
lateral: fresher ratio of 65:35 vis-à-vis IT peers with 60:40 ratio, c) reaping SG&A
efficiency. Also, the acquisition of CPG Solutions has helped the company’ to
realise higher onsite billing rates, up from ~81$/hr to 94$/hr. On the back of
these levers, we expect KPIT’s EBITDA margins to rebound to 17.3% and 18.0% in
FY2012 and FY2013 respectively, from 15.1% in FY2011. Over FY2010–13, we
expect EBITDA to post CAGR of 16.1% and PAT to register a CAGR of 21.5%,
which is expected to outpace EBITDA growth, on the back of hedges turning into
at-the-money going forward, ceasing excessive forex losses like prior period and
aiding profitability further. We recommend an Accumulate on the stock, with a
Target Price of `181, valuing it at 10.5x FY2013E EPS of `17.2.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
KPIT Cummins Infosystems – 3QFY2011 Result Update
Angel Broking recommends an Accumulate on KPIT Cummins Infosystems with a Target Price of Rs. 181
KPIT Cummins Infosystems (KPIT) reported modest set of numbers for 3QFY2011
with robust volume growth of 7.6% qoq. The company revised its USD revenue
growth guidance for FY2011 to 38-40% yoy from 25% yoy earlier and PAT
growth for FY2011 to 8-10% yoy from 5% yoy earlier. Management stated that its
demand pipeline was strengthening on account of recovery in its anchor vertical,
manufacturing, resulting in the company going in for aggressive hiring, which is
expected to be higher than FY2011 as well. Thus, we recommend an Accumulate
on the stock.
Stellar revenue growth: For 3QFY2011, KPIT posted revenues of US $60.4mn
(v/s our estimate of US $54.2mn), up a whopping 19.0% qoq. This growth was a
combination of volume growth of 7.6% qoq and pricing growth of 8.8% qoq.
Margins dip: EBITDA margin declined by 140bp qoq to 14.1% (v/s our
expectation of 17.0%) from 15.5% in 2QFY2011 due to integration costs,
increase in employee costs and SG&A expenses.
Outlook and Valuation: KPIT is well-poised to capture growth in spending related
to discretionary services such as engineering and enterprise solutions due to its
strong domain focus. We expect the company’s momentum to continue as most
of its manufacturing clients, including top client Cummins, have returned to their
growth trajectories. We expect the company’s revenues to post CAGR of 27.4% in
USD terms and 24.1% in INR terms over FY2010-13, with EBITDA and PAT CAGR
of 16.1% and 21.5% over the mentioned period. We recommend Accumulate on
the stock, with a Target Price of `181, valuing it at 10.5x FY2013E EPS of `17.2.
Blockbuster revenue growth
For 3QFY2011, KPIT reported strong revenues US $60.4mn v/s our expectation of
US $54.2mn, a growth of a whopping 19% qoq. This growth came on the back of
robust volume growth of 7.6% qoq and pricing growth of 8.8% qoq. Organic
revenue (excluding CPG Solutions and In2Soft Gmbh) grew by 9.9% qoq, which
was largely volume led. CPG Solutions and In2Soft Gmbh got consolidated for the
full quarter and together contributed ~US $4.62mn to total revenues. Higher
onsite billing rates were facilitated by the CPG acquisition.
In rupee terms, revenues came in at `273.7cr v/s our expectation of `243cr, up
16.5% qoq (lower growth as against dollar revenues as INR appreciated against
the USD by 3.5% qoq in 3QFY2011).
The company’s stellar revenue performance came on the back of strong growth
across all its major strategic business units (SBUs).
IES leads the growth: The integrated enterprise solutions (IES) SBU (contributed
39.6% to revenue) reported a whopping 34.8% qoq growth in revenues. The
company’s focus on supply chain management and logistics through value chain
planning and oracle transportation management helped gain traction with the new
customers. This SBU also gained traction on account of consolidation of CPG
Solutions. In this SBU, the company is seeing good traction in the US and UK and
is exploring growth opportunities in geographies like Scandinavia and in India for
the government sector.
Auto and engineering back in the race: The auto and engineering SBU
(contributed 26.6% to revenue) posted robust 17.7% qoq growth in revenues. In
this SBU, the demand is spread across geographies and practices like
infotainment, mechanical engineering & design services and powertrain.
Acquisition of In2Soft Gmbh aided revenues of this SBU.
SAP records modest growth: The SAP SBU (contributed 31.5% to revenue)
registered 8.2% qoq growth in revenues with the order pipeline being very strong
going ahead. The company is witnessing demand across geographies.
Management highlighted that robust license sales by SAP and Oracle in
2HCY2010 should culminate in strong demand for implementation and support &
maintenance services going forward.
SSG: The Semiconductor Solutions group (SSG) SBU registered 22.0% qoq degrowth
in revenues, but contributed a mere 2.3% to the company’s overall
revenues. Also, the company is now focusing on improving the volume of business
from SSG customers, by strengthening the front-end team and emphasising on
new delivery models.
The company’s anchor vertical, manufacturing (contributed 72.6% to revenues)
registered 7.8% qoq growth in revenues. The company is witnessing good traction
in this vertical with all the SBU’s deal pipeline, relating to this vertical, being strong.
The energy and utilities vertical (contributed 6.6% to revenue) posted 21.0% qoq
revenue growth aided by the In2Soft acquisition. However, BFSI (contributed 3.0%
to revenue) vertical reported 3.4% qoq de-growth in revenues as work from two of
its very old clients is settling down and is not a growth focus area for the company.
Margins decline
On the operational front, the company’s performance was muted. EBITDA margin
and EBIT margin declined by 140bp and 95bp qoq to 14.1% and 11.0%
respectively, in 3QFY2011. Margin underperformance was due to the following
factors: a) acquisition related costs like professional fees, legal fees, travel and
other related costs for CPG Solutions and In2Soft Gmbh both, which effectively
reduced the operating margins to around 5% (from normalised 14%), b) low
utilisation levels with higher number of freshers coming on board and cost run ups
due to high attrition levels (above 30%), c) lower forex realization, and d) increase
in employee costs and SG&A expenses.
Consolidation of the two acquisitions done in 2QFY2011 primarily hampered
OPM, which slipped to 5% from 14%+ on the back of one-time integration
expenses. Management has indicated that it will continue to incur these integration
expenses in the next quarter as well, which would keep the margins depressed.
Hiring spree continues, utilisations slip marginally
During the quarter, the company added 269 technical employees taking the
technical employee base to 5,743. Total net hiring was 276 taking the company’s
total employee base to 6,229. In 3QFY2011, 172 freshers were added.
Onsite utilisation remained almost similar to 2QFY2011 levels at 89.1%. Offshore
utilisation however, declined by 30bp to 67.6%, the lowest level since the last
seven quarters due to fresher intake.
Client pyramid
The company’s revenue from its top client, Cummins Inc., increased by 107bp to
24.1% with 21.9% qoq growth in its revenues. The growth in this account has been
higher than the company’s growth rate. Cummins is making investments in future
technologies and emerging markets, and this trend is expected to continue in the
coming year as well. In fact recently, the engine maker announced plans to add
~2,500 US jobs in 2011, many requiring engineering or other technical skills. In
2010, Cummins raised its US employment by only 185 personnel. The company
now has ~14,800 US employees. Also, Cummins plans to boost its capital
spending by 50% in 2011 to ~US $600mn from 2010
KPIT also added five new clients during the quarter taking its total active clients to
152 during the quarter. Out of the clients added, one customer added has a run
rate greater than US $1mn.
Outlook and valuation
Globally, the green shoots of recovery in the manufacturing business have
propelled growth for the company over the recent quarters, leading the company
to post 10.7% revenue CQGR over 2QFY2010–3QFY2011. In fact, the qoq
growth sported by the manufacturing vertical of tier-I IT companies, which grew by
4-9% qoq in 3QFY2011, corroborates this trend. We expect the growth
momentum to continue as most of KPIT’s manufacturing clients, including top
client Cummins, have returned to their growth trajectories. Also, management is
witnessing a strengthening demand pipeline, which is leading the company to go
in for aggressive hiring strategy, which is expected to be higher than FY2011.
Hence, over FY2010–13, we expect KPIT’s dollar revenues to post a CAGR of
27.4% and rupee revenues to post a CAGR of 24.1%; the CAGR in INR terms is
lower because of stronger rupee assumption. The expected growth is scorching on
account of robust organic growth due to return in demand for enterprise solutions
and engineering services in its anchor vertical manufacturing as well as the recent
strategic acquisitions done in 2QFY2011 - CPG Solutions and In2Soft Gmbh –
which would further aid growth.
On the profitability front too, KPIT has many margin levers: a) improving
utilisation, which currently stands at 67.6%, the lowest level since the last seven
quarters, b) ratiolisation of employee pyramid, which is currently skewed with
lateral: fresher ratio of 65:35 vis-à-vis IT peers with 60:40 ratio, c) reaping SG&A
efficiency. Also, the acquisition of CPG Solutions has helped the company’ to
realise higher onsite billing rates, up from ~81$/hr to 94$/hr. On the back of
these levers, we expect KPIT’s EBITDA margins to rebound to 17.3% and 18.0% in
FY2012 and FY2013 respectively, from 15.1% in FY2011. Over FY2010–13, we
expect EBITDA to post CAGR of 16.1% and PAT to register a CAGR of 21.5%,
which is expected to outpace EBITDA growth, on the back of hedges turning into
at-the-money going forward, ceasing excessive forex losses like prior period and
aiding profitability further. We recommend an Accumulate on the stock, with a
Target Price of `181, valuing it at 10.5x FY2013E EPS of `17.2.
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