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KPIT Cummins Infosystems (KPIT IN, INR 145, Not Rated)
We met the management of KPIT Cummins Infosystems (KPIT) recently. We summarise below the key takeaways from our discussion.
n Better outlook on revenue growth, driven by Cummins
KPIT is clearly seeing better growth from Cummins (its largest customer, contributing 25% to revenues), which until now, had been under pressure. Opportunities from managing enterprise applications on the Oracle platform and engineering services are seen within Cummins leading to improved visibility for next year. The company expects improved growth from Cummins for FY12E against decline of 6% in FY11E and 26% in FY10.
n Significant improvement in operating profit margin unlikely
Continued attrition and higher cost of lateral addition is expected to keep KPIT’s margins under pressure. Management’s guidance of 18-20% EBITDA margins by Q4FY11 will be difficult to meet. With H1 EBITDA margins at 15.9%, full year FY11 margins are unlikely to exceed 17%. KPIT expects EBITDA margins to improve by 200bps to 19% for FY12 (optimistic in our view) over FY11 target of 17%. For FY12, margin aiders such as employee pyramid and higher utilisation exists apart from volume growth itself while increase in wage costs in absence of pricing improvement remains a major margin detractor.
n December quarter to see 10%+ revenue growth
The December quarter once again will see 10%+ Q-o-Q revenue growth, driven by consolidation of CPG solutions and In2Soft (USD 3.5 mn i.e. 7% growth). Organic growth is likely to be 3-5%. EBITDA margins may improve only marginally due to integration expenses, lower-than-expected decline in attrition related cost and rupee appreciation balanced by benefits from utilisation.
n Outlook and valuations: Margin improvement the key; ‘NOT RATED’
Overall the revenue outlook for KPIT seems to improving as sub-sectors within the manufacturing vertical see uptick. EMs, Europe and Cummins account are clearly looking up giving KPIT visibility of 20%+ revenue growth for FY12, while the challenge remains on margin improvement. At a CMP of INR 145, the stock is trading at a P/E of 12.4 and 10.0 FY11E and FY12E consensus earnings, respectively.
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