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KPIT Cummins Infosystems (KPIT) reported its 4QFY2011 results, which
outperformed street as well as our expectations on the revenue front but came in
line with expectations on the PAT front. For FY2012, the company has guided for
USD revenue of US$275mn–285mn, i.e., 23–27% yoy growth, and has given PAT
growth guidance of 22–27% yoy. Management stated that its demand pipeline is
strengthening on account of recovery in its anchor vertical, manufacturing. Over
FY2011–13E, we expect a strong CAGR of 23.0% in USD revenue with 25.3%
CAGR in PAT. Thus, we maintain our Accumulate view on the stock with a target
price of `200.
Quarterly highlights: For 4QFY2011, KPIT posted revenue of US$67.9mn
(vs. our estimate of US$60.0mn), up by whopping 12.5% qoq. This growth was a
combination of volume growth of 10.6% qoq and pricing growth of 2.2% qoq.
However, operational performance was subdued with EBITDA and EBIT margins
declining by 3bp and 218bp qoq to 14.1% and 8.8%, respectively, due to a
10.8% qoq increase in employee costs. PAT stood at `26.3cr (vs. our expectation
of `26.8cr), up 4.7% qoq.
Outlook and valuation: Management has guided for strong revenue growth even
on the back of strong 40% yoy organic growth recorded in FY2011, with
strengthening of the demand environment for discretionary spend. This has been
highlighted by growth in the manufacturing vertical for tier-I companies as well
as comeback in license sales witnessed by likes of Oracle and SAP. We expect
the company’s revenue to post a CAGR of 23% in USD terms and 20.7% in INR
terms over FY2011–13E, with EBITDA and PAT CAGR of 28.6% and 25.3%,
respectively. We maintain our Accumulate rating on the stock with a target price
of `200, valuing it at 12x FY2013E (five-year historical one-year forward median
P/E) EPS of `16.7
Blockbuster revenue growth
For 4QFY2011, KPIT reported revenue of US$67.9mn vs. our expectation of
US$60.0mn, whopping growth of 12.5% qoq, on the back of robust volume
growth of 10.6% qoq and pricing growth (including cross-currency benefit) of 2.2%
qoq. In INR terns, revenue came in at `308.2cr vs. our expectation of `272cr, up
12.6% qoq.
For FY2011, KPIT outperformed its USD revenue growth guidance of 38–40% yoy
and reported 45.7% yoy growth in USD revenue to US$224mn. Also, in INR terms,
FY2011 revenue came in at `1,023cr, up 39.8% yoy. On an organic basis, KPIT’s
revenue grew by 39.5% yoy in FY2011, primarily led by growth in non-Cummins
accounts. Cummins account grew by 5.6% yoy and contributed 22.8% to the
company’s revenue in FY2011.
KPIT’s stellar revenue performance came on the back of strong growth across all
its strategic business units (SBUs).
IES records strong growth: The integrated enterprise solutions (IES) SBU
(contributed 38.5% to revenue) reported robust 9.3% qoq growth in revenue.
EBITDA margin for this SBU came at 17–18%.
KPIT’s focus on supply-chain management and logistics through value-chain
planning, oracle transportation management (OTM), manufacturing execution
system, enterprise software support and consulting helped KPIT to retain its
continuous growth momentum. This SBU also gained traction on account of
consolidation of CPG Solutions. In the IES SBU, the company is witnessing good
traction from the US. KPIT has also bagged one of the largest OTM
implementation deals in the Middle East from IFFCO. Moreover, the company is
looking for various opportunities in the government and defense sectors in India
for offerings in the IES SBU.
Auto and engineering continues its growth momentum: The auto and engineering
SBU (contributed 26.9% to revenue) posted whopping 13.9% qoq growth in
revenue. EBITDA margin for this SBU came in at 19–20%.
In this SBU, demand for practices such as powertrain, infotainment, mechanical
engineering and design services, in-vehicle networks and hybrid technologies was
spread across geographies, with Europe leading the growth, followed by the US,
India and Asia Pacific. Acquisition of In2Soft GmbH further aided the SBU’s
revenue. KPIT is looking to increase the share of non-liner revenue in this SBU to
improve the quality of revenue as well as assist in improving margins.
SAP maintains revenue growth trajectory: The SAP SBU (contributed 31.8% to
revenue) registered considerable 13.7% qoq growth in revenue with strong order
pipeline going ahead. EBITDA margin for this SBU came in at 8–9%. In the next
few years, the company expects to pull up its margins to 17–18% by increasing
offshore revenue and capturing volumes in the SAP SME business.
KPIT is witnessing strong demand from the US and India for its practices such as
business intelligence, customer relationship management and application
maintenance and support. Demand from Middle East is also picking up.
Management highlighted that robust license sales by SAP and Oracle in FY2011
should culminate in strong demand for implementation and support and
maintenance services going forward.
SSG leads growth: The semiconductor solutions group (SSG) SBU (contributed
2.8% to revenue) registered 35.1% qoq growth in revenue. Further, KPIT is now
focusing on improving the volume of business from SSG customers by practices
such as analog mixed signal and system on chip.
The company’s anchor vertical, manufacturing (contributed 78.3% to revenue),
registered whopping 21.4% qoq growth in revenue. The company is witnessing
good traction in this vertical on the back of healthy deal pipelines across SBUs.
The BFSI vertical (contributed 3.2% to revenue) posted 19.3% qoq revenue growth.
In this vertical, the company is catering to only two of its old clients, as it is not a
growth-focus area for the company. However, the energy and utilities (contributed
5.0% to revenue) vertical reported a 15.9% qoq decline in revenue, impacted by
base effect of 21.0% qoq growth in 3QFY2011. The company has a healthy deal
pipeline in this vertical for its SAP offerings, especially from the US.
Geography wise, the US and Europe grew by 11.0% and 3.4% qoq, respectively.
Rest of the World (RoW) registered significant 42.1% qoq revenue growth. For the
full year, among emerging markets, while India led the growth, the company has
also started engagements with two major manufacturers of China. Management
indicated that going ahead US will continue to lead growth, followed by Europe,
India and Asia Pacific.
Margins decline
On the operational front, the company’s performance was muted. EBITDA margin
and EBIT margin declined by 3bp and 218bp qoq to 14.1% and 8.8%,
respectively, in 4QFY2011. EBIT margin for the quarter declined due to a) a 10.8%
qoq increase in employee costs, b) integration cost of US$0.5mn occurred because
of In2Soft GmbH’s acquisition and c) amortisation of R&D spends of `7.5cr.
For FY2011, EBITDA margin stood at 14.9% as against 22.1% in FY2010. The
company has announced a substantial wage hike of 12–14% for offshore
employees and 2–4% for onsite employees, effective from April 1, 2011, which will
impact its operating margin in 1QFY2012 by 200–250bp; however, for the full
year FY2012, the company expects to pull up its operating margin by 200bp yoy.
Hiring spree continues
During the quarter, KPIT added 255 technical employees, taking its technical
employee base to 5,998. Total net hiring was 285, taking the company’s total
employee base to 6,514. In FY2011, more than 800 freshers were added.
Offshore as well as onsite utilisation increased by 231bp and 116bp qoq to
69.88% and 90.23%, respectively. The company has still got headroom to increase
its utilisation from the existing level, which can act as an important lever to pull up
its margins.
Client pyramid
KPIT added three new clients during 4QFY2011, taking its total active client base
to 155 as against 152 in 3QFY2011. The company’s revenue from its top client,
Cummins, grew by 5.6% yoy in FY2011. Management foresees an increase in IT
and engineering spends coming in from the Cummins account in FY2012, as
Cummins is making investments in future technologies. Non-Cummins business of
KPIT grew by 54.6% yoy in FY2011.
Guidance
For FY2012, KPIT has guided for USD revenue of US$275mn–285mn, i.e.,
23–27% yoy growth. PAT growth guidance for FY2012 is at 22–27% yoy, i.e,
`115cr–120cr.
Also, for Revolo, the company expects construction at the assembly and
manufacturing location to complete by 2QFY2012. Management has indicated
that it expects volumes for Revolo to pick up in FY2013, with full year target of
`300cr–500cr in revenue. However, we have not factored in any impact of this
product in our estimates, as currently it is difficult to ascertain the product’s
outcome.
Outlook and valuation
Management has guided for strong revenue growth even on the back of strong
40% yoy organic growth recorded in FY2011, with strengthening of the demand
environment for discretionary spend. This has been highlighted by growth in the
manufacturing vertical for tier-I companies as well as comeback in license sales
witnessed by likes of Oracle and SAP. We expect the company’s growth
momentum to continue as most of KPIT’s manufacturing clients, including the top
client Cummins, have returned to their growth trajectories (growing 5% yoy in
FY2011 itself). This strengthening of the demand pipeline is leading the company
to go in for an aggressive hiring strategy, which is expected to lead to
1,200–1,500 net employee additions in FY2012, with 1,000 fresher additions.
Further, on the back of a strong demand environment, the company has managed
to get a 3–5% like-to-like increase in pricing in its 10–12 accounts, effective
January 1, 2011. Hence, we expect the company’s revenue to post a CAGR of
23% in USD terms and 20.7% in INR terms over FY2011–13E.
Management has announced aggressive wage hikes of 12–14% offshore and
3–4% onsite for FY2012, effective April 1, 2011. This is expected to impact the
company’s margin by 200–250bp. However, on the profitability front, KPIT has
many margin levers such as a) improving utilisation, which currently stands at
69.9% offshore and 89.8% onsite b) rationalisation of the employee pyramid,
which is currently skewed with lateral:fresher ratio of 60:40, c) reaping G&A
efficiency after completion of integration of In2Soft GmbH d) moving more work
offshore and e) tailwinds of improved pricing in 4QFY2011. On the back of these
levers, we expect KPIT’s EBITDA margin to rebound to 15.5% and 16.9% in
FY2012 and FY2013, respectively, from 14.1% in 4QFY2011. Over FY2010–13,
we expect EBITDA to post a CAGR of 28.6% and PAT to register a CAGR of 25.3%,
which is expected to track EBITDA growth despite increased taxation on the back of
hedges turning into at-the-money going forward, ceasing excessive forex losses
like in the previous period, thus aiding profitability further. We maintain our
Accumulate view on the stock with a target price of `200, valuing it at 12x
FY2013E (five-year historical one-year forward median P/E) EPS of `16.7.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
KPIT Cummins Infosystems (KPIT) reported its 4QFY2011 results, which
outperformed street as well as our expectations on the revenue front but came in
line with expectations on the PAT front. For FY2012, the company has guided for
USD revenue of US$275mn–285mn, i.e., 23–27% yoy growth, and has given PAT
growth guidance of 22–27% yoy. Management stated that its demand pipeline is
strengthening on account of recovery in its anchor vertical, manufacturing. Over
FY2011–13E, we expect a strong CAGR of 23.0% in USD revenue with 25.3%
CAGR in PAT. Thus, we maintain our Accumulate view on the stock with a target
price of `200.
Quarterly highlights: For 4QFY2011, KPIT posted revenue of US$67.9mn
(vs. our estimate of US$60.0mn), up by whopping 12.5% qoq. This growth was a
combination of volume growth of 10.6% qoq and pricing growth of 2.2% qoq.
However, operational performance was subdued with EBITDA and EBIT margins
declining by 3bp and 218bp qoq to 14.1% and 8.8%, respectively, due to a
10.8% qoq increase in employee costs. PAT stood at `26.3cr (vs. our expectation
of `26.8cr), up 4.7% qoq.
Outlook and valuation: Management has guided for strong revenue growth even
on the back of strong 40% yoy organic growth recorded in FY2011, with
strengthening of the demand environment for discretionary spend. This has been
highlighted by growth in the manufacturing vertical for tier-I companies as well
as comeback in license sales witnessed by likes of Oracle and SAP. We expect
the company’s revenue to post a CAGR of 23% in USD terms and 20.7% in INR
terms over FY2011–13E, with EBITDA and PAT CAGR of 28.6% and 25.3%,
respectively. We maintain our Accumulate rating on the stock with a target price
of `200, valuing it at 12x FY2013E (five-year historical one-year forward median
P/E) EPS of `16.7
Blockbuster revenue growth
For 4QFY2011, KPIT reported revenue of US$67.9mn vs. our expectation of
US$60.0mn, whopping growth of 12.5% qoq, on the back of robust volume
growth of 10.6% qoq and pricing growth (including cross-currency benefit) of 2.2%
qoq. In INR terns, revenue came in at `308.2cr vs. our expectation of `272cr, up
12.6% qoq.
For FY2011, KPIT outperformed its USD revenue growth guidance of 38–40% yoy
and reported 45.7% yoy growth in USD revenue to US$224mn. Also, in INR terms,
FY2011 revenue came in at `1,023cr, up 39.8% yoy. On an organic basis, KPIT’s
revenue grew by 39.5% yoy in FY2011, primarily led by growth in non-Cummins
accounts. Cummins account grew by 5.6% yoy and contributed 22.8% to the
company’s revenue in FY2011.
KPIT’s stellar revenue performance came on the back of strong growth across all
its strategic business units (SBUs).
IES records strong growth: The integrated enterprise solutions (IES) SBU
(contributed 38.5% to revenue) reported robust 9.3% qoq growth in revenue.
EBITDA margin for this SBU came at 17–18%.
KPIT’s focus on supply-chain management and logistics through value-chain
planning, oracle transportation management (OTM), manufacturing execution
system, enterprise software support and consulting helped KPIT to retain its
continuous growth momentum. This SBU also gained traction on account of
consolidation of CPG Solutions. In the IES SBU, the company is witnessing good
traction from the US. KPIT has also bagged one of the largest OTM
implementation deals in the Middle East from IFFCO. Moreover, the company is
looking for various opportunities in the government and defense sectors in India
for offerings in the IES SBU.
Auto and engineering continues its growth momentum: The auto and engineering
SBU (contributed 26.9% to revenue) posted whopping 13.9% qoq growth in
revenue. EBITDA margin for this SBU came in at 19–20%.
In this SBU, demand for practices such as powertrain, infotainment, mechanical
engineering and design services, in-vehicle networks and hybrid technologies was
spread across geographies, with Europe leading the growth, followed by the US,
India and Asia Pacific. Acquisition of In2Soft GmbH further aided the SBU’s
revenue. KPIT is looking to increase the share of non-liner revenue in this SBU to
improve the quality of revenue as well as assist in improving margins.
SAP maintains revenue growth trajectory: The SAP SBU (contributed 31.8% to
revenue) registered considerable 13.7% qoq growth in revenue with strong order
pipeline going ahead. EBITDA margin for this SBU came in at 8–9%. In the next
few years, the company expects to pull up its margins to 17–18% by increasing
offshore revenue and capturing volumes in the SAP SME business.
KPIT is witnessing strong demand from the US and India for its practices such as
business intelligence, customer relationship management and application
maintenance and support. Demand from Middle East is also picking up.
Management highlighted that robust license sales by SAP and Oracle in FY2011
should culminate in strong demand for implementation and support and
maintenance services going forward.
SSG leads growth: The semiconductor solutions group (SSG) SBU (contributed
2.8% to revenue) registered 35.1% qoq growth in revenue. Further, KPIT is now
focusing on improving the volume of business from SSG customers by practices
such as analog mixed signal and system on chip.
The company’s anchor vertical, manufacturing (contributed 78.3% to revenue),
registered whopping 21.4% qoq growth in revenue. The company is witnessing
good traction in this vertical on the back of healthy deal pipelines across SBUs.
The BFSI vertical (contributed 3.2% to revenue) posted 19.3% qoq revenue growth.
In this vertical, the company is catering to only two of its old clients, as it is not a
growth-focus area for the company. However, the energy and utilities (contributed
5.0% to revenue) vertical reported a 15.9% qoq decline in revenue, impacted by
base effect of 21.0% qoq growth in 3QFY2011. The company has a healthy deal
pipeline in this vertical for its SAP offerings, especially from the US.
Geography wise, the US and Europe grew by 11.0% and 3.4% qoq, respectively.
Rest of the World (RoW) registered significant 42.1% qoq revenue growth. For the
full year, among emerging markets, while India led the growth, the company has
also started engagements with two major manufacturers of China. Management
indicated that going ahead US will continue to lead growth, followed by Europe,
India and Asia Pacific.
Margins decline
On the operational front, the company’s performance was muted. EBITDA margin
and EBIT margin declined by 3bp and 218bp qoq to 14.1% and 8.8%,
respectively, in 4QFY2011. EBIT margin for the quarter declined due to a) a 10.8%
qoq increase in employee costs, b) integration cost of US$0.5mn occurred because
of In2Soft GmbH’s acquisition and c) amortisation of R&D spends of `7.5cr.
For FY2011, EBITDA margin stood at 14.9% as against 22.1% in FY2010. The
company has announced a substantial wage hike of 12–14% for offshore
employees and 2–4% for onsite employees, effective from April 1, 2011, which will
impact its operating margin in 1QFY2012 by 200–250bp; however, for the full
year FY2012, the company expects to pull up its operating margin by 200bp yoy.
Hiring spree continues
During the quarter, KPIT added 255 technical employees, taking its technical
employee base to 5,998. Total net hiring was 285, taking the company’s total
employee base to 6,514. In FY2011, more than 800 freshers were added.
Offshore as well as onsite utilisation increased by 231bp and 116bp qoq to
69.88% and 90.23%, respectively. The company has still got headroom to increase
its utilisation from the existing level, which can act as an important lever to pull up
its margins.
Client pyramid
KPIT added three new clients during 4QFY2011, taking its total active client base
to 155 as against 152 in 3QFY2011. The company’s revenue from its top client,
Cummins, grew by 5.6% yoy in FY2011. Management foresees an increase in IT
and engineering spends coming in from the Cummins account in FY2012, as
Cummins is making investments in future technologies. Non-Cummins business of
KPIT grew by 54.6% yoy in FY2011.
Guidance
For FY2012, KPIT has guided for USD revenue of US$275mn–285mn, i.e.,
23–27% yoy growth. PAT growth guidance for FY2012 is at 22–27% yoy, i.e,
`115cr–120cr.
Also, for Revolo, the company expects construction at the assembly and
manufacturing location to complete by 2QFY2012. Management has indicated
that it expects volumes for Revolo to pick up in FY2013, with full year target of
`300cr–500cr in revenue. However, we have not factored in any impact of this
product in our estimates, as currently it is difficult to ascertain the product’s
outcome.
Outlook and valuation
Management has guided for strong revenue growth even on the back of strong
40% yoy organic growth recorded in FY2011, with strengthening of the demand
environment for discretionary spend. This has been highlighted by growth in the
manufacturing vertical for tier-I companies as well as comeback in license sales
witnessed by likes of Oracle and SAP. We expect the company’s growth
momentum to continue as most of KPIT’s manufacturing clients, including the top
client Cummins, have returned to their growth trajectories (growing 5% yoy in
FY2011 itself). This strengthening of the demand pipeline is leading the company
to go in for an aggressive hiring strategy, which is expected to lead to
1,200–1,500 net employee additions in FY2012, with 1,000 fresher additions.
Further, on the back of a strong demand environment, the company has managed
to get a 3–5% like-to-like increase in pricing in its 10–12 accounts, effective
January 1, 2011. Hence, we expect the company’s revenue to post a CAGR of
23% in USD terms and 20.7% in INR terms over FY2011–13E.
Management has announced aggressive wage hikes of 12–14% offshore and
3–4% onsite for FY2012, effective April 1, 2011. This is expected to impact the
company’s margin by 200–250bp. However, on the profitability front, KPIT has
many margin levers such as a) improving utilisation, which currently stands at
69.9% offshore and 89.8% onsite b) rationalisation of the employee pyramid,
which is currently skewed with lateral:fresher ratio of 60:40, c) reaping G&A
efficiency after completion of integration of In2Soft GmbH d) moving more work
offshore and e) tailwinds of improved pricing in 4QFY2011. On the back of these
levers, we expect KPIT’s EBITDA margin to rebound to 15.5% and 16.9% in
FY2012 and FY2013, respectively, from 14.1% in 4QFY2011. Over FY2010–13,
we expect EBITDA to post a CAGR of 28.6% and PAT to register a CAGR of 25.3%,
which is expected to track EBITDA growth despite increased taxation on the back of
hedges turning into at-the-money going forward, ceasing excessive forex losses
like in the previous period, thus aiding profitability further. We maintain our
Accumulate view on the stock with a target price of `200, valuing it at 12x
FY2013E (five-year historical one-year forward median P/E) EPS of `16.7.
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