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Event – approval of preferential share issue
KPIT Cummins (KPIT) has informed the stock exchange that the Board of Directors has approved
the proposal to issue preferential shares. The board has approved issue of 7.76m shares of Rs2 each
on a preferential basis to Warhol Ltd, Mauritius (an affiliate of ChrysCap V LLC, Mauritius) at a
price of Rs145 per share for an aggregate amount of Rs1.125bn, subject to shareholder and other
regulatory approvals.
Relevant details
♦ Preferential share issue will infuse Rs1.125bn (US$25m) in KPIT and will expand the equity base
by ~9.5% (lower than the indicated dilution of 15-25% post Q2FY11 results).
♦ As of 30 Sep 2010, KPIT had gross debt of Rs1.13bn and cash of Rs836m.
The rationale for fund raising
The primary aim for this capital raising exercise is to fund future acquisitions. In the last five
quarters, KPIT has acquired three companies (Sparta, In2soft and CPG) - one medium-sized
enterprise (Sparta: ~US$25m revenues) and two small companies (~US$ 8m revenues each). During
the latest earnings call, the management highlighted that it does not need additional cash for
operations and funds would be required primarily for future acquisitions. The board had then
passed two resolutions - to increase the authorized capital and an enabling resolution to issue fresh
equity in the next 12 months.
Our view – stock offers upside despite EPS dilution
Currently, the stock trades at ~11x FY12E EPS. Assuming post tax yield of 6.5% on the incremental
cash infused, this fund raising will lead to ~2.5% dilution to our FY12E EPS. Note that our financial
estimates do not build in the contribution of REVOLO. Reiterate Outperformer on KPIT with 12-
month price target of Rs186 (based on 15x average FY11-12E EPS).
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