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KPIT CUMMINS
OUTPERFORMER (RS142, MCAP: RS11BN / US$246MN)
• KPIT Cummins is a mid-tier IT services provider focused on the manufacturing vertical with a presence in the
automotive, industrial and defense sectors. It is now investing to expand into energy and utilities verticals. Within the
above verticals, the company is focused on a few key customers. In terms of service lines, KPIT offers VLSI and
embedded software services, package implementation, business intelligence, and BPO services besides regular
application development and maintenance services. The company has ~5,600 employees working for 150+ clients.
• Robust revenue growth momentum: Driven by the improving macroeconomic environment and an increase in
automobile-related discretionary spending, KPIT is witnessing strong revenue growth momentum. The company’s
organic business is expected to grow by 30-38% and inorganic business by 7-8% in FY12 on the back of overall ~38-
40% growth in FY11.
• Margins to improve gradually: Operating margins have been declining recently because of acquisition-related costs,
high attrition, low utilization, and lower margins at the acquired entities. The management is focused on improving
these and is employing various levers like higher fresher hiring, improving utilization, and increasing revenues from
offshore and fixed-price projects. These levers would play out in the long term and margins are expected to rise
gradually to ~18% in the next 2-3 years.
• REVOLO update: In June 2010, KPIT entered into a 50:50 JV with Bharat Forge to manufacture and market an
indigenously developed hybrid technology solution for automobiles – REVOLO. This would enable both existing and
new vehicles to dramatically increase fuel efficiency (by 50-80% depending upon the driving conditions) and engine
performance, while significantly decreasing green house gas emissions (~30%). The solution is currently being
successfully tested on a few retrofit fleet operators. REVOLO has received positive feedback from the retrofit market
and, post necessary approvals from the government, is expected to be operational by Q1FY12.
• Attrition continues to be a challenge: The management conceded that high attrition is a challenge, especially in the 3-
5 year experience band. It is trying to address this issue by hiring more freshers and providing existing employees
more growth opportunities. The company also did not rule out the possibility of double-digit wage hikes in FY12.
• M&A: KPIT acquired three companies (Sparta, In2soft and CPG) in the past six quarters and is seeking more
acquisition opportunities in the Oracle and SAP space. It got board approval in January 2011 to raise Rs1.125bn by
preferential share allotment, mainly for funding acquisitions.
• We expect KPIT to continue witnessing strong demand-led revenue growth from both the organic and inorganic
businesses. We currently do not build in any upside from REVOLO. Trading at ~12x FY11E and ~10x FY12E EPS, KPIT
Cummins is a key pick in the small-mid cap IT services space. We have an Outperformer rating with 12-month target
price of Rs220 (based on 15x FY12E EPS).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
KPIT CUMMINS
OUTPERFORMER (RS142, MCAP: RS11BN / US$246MN)
• KPIT Cummins is a mid-tier IT services provider focused on the manufacturing vertical with a presence in the
automotive, industrial and defense sectors. It is now investing to expand into energy and utilities verticals. Within the
above verticals, the company is focused on a few key customers. In terms of service lines, KPIT offers VLSI and
embedded software services, package implementation, business intelligence, and BPO services besides regular
application development and maintenance services. The company has ~5,600 employees working for 150+ clients.
• Robust revenue growth momentum: Driven by the improving macroeconomic environment and an increase in
automobile-related discretionary spending, KPIT is witnessing strong revenue growth momentum. The company’s
organic business is expected to grow by 30-38% and inorganic business by 7-8% in FY12 on the back of overall ~38-
40% growth in FY11.
• Margins to improve gradually: Operating margins have been declining recently because of acquisition-related costs,
high attrition, low utilization, and lower margins at the acquired entities. The management is focused on improving
these and is employing various levers like higher fresher hiring, improving utilization, and increasing revenues from
offshore and fixed-price projects. These levers would play out in the long term and margins are expected to rise
gradually to ~18% in the next 2-3 years.
• REVOLO update: In June 2010, KPIT entered into a 50:50 JV with Bharat Forge to manufacture and market an
indigenously developed hybrid technology solution for automobiles – REVOLO. This would enable both existing and
new vehicles to dramatically increase fuel efficiency (by 50-80% depending upon the driving conditions) and engine
performance, while significantly decreasing green house gas emissions (~30%). The solution is currently being
successfully tested on a few retrofit fleet operators. REVOLO has received positive feedback from the retrofit market
and, post necessary approvals from the government, is expected to be operational by Q1FY12.
• Attrition continues to be a challenge: The management conceded that high attrition is a challenge, especially in the 3-
5 year experience band. It is trying to address this issue by hiring more freshers and providing existing employees
more growth opportunities. The company also did not rule out the possibility of double-digit wage hikes in FY12.
• M&A: KPIT acquired three companies (Sparta, In2soft and CPG) in the past six quarters and is seeking more
acquisition opportunities in the Oracle and SAP space. It got board approval in January 2011 to raise Rs1.125bn by
preferential share allotment, mainly for funding acquisitions.
• We expect KPIT to continue witnessing strong demand-led revenue growth from both the organic and inorganic
businesses. We currently do not build in any upside from REVOLO. Trading at ~12x FY11E and ~10x FY12E EPS, KPIT
Cummins is a key pick in the small-mid cap IT services space. We have an Outperformer rating with 12-month target
price of Rs220 (based on 15x FY12E EPS).
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