Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
KPIT CUMMINS
PRICE: RS.150 RECOMMENDATION: BUY
TARGET PRICE: RS.199 FY12E P/E: 11X
In our recent interaction, the management indicated that business remains
on track to achieve the guidance provided for FY12E. While the macro scene,
especially in Europe, has turned challenging, growth from clients continues
to be along expected lines. Attrition has remained comfortable during the
quarter. Integration of SYSTIME is progressing on schedule. Business,
functional and sales integration has already been completed. Regulatory
issues are hampering the progress of REVOLO and the exact timing of the
commercial launch is uncertain, in our view. OEM negotiations have still not
concluded. KPIT is now increasingly focusing on non-linear revenues and
has filed about 37 patents. 6-7% of overall revenues (mostly from auto
electronics) currently accrue from non-linear initiatives. KPIT plans to have
25% of revenues from these initiatives in 3 years' time. We believe this is an
important lever to protect and sustain margins. We largely maintain our
FY12 EPS estimates (excluding Systime, which is expected to be earnings
accretive) at Rs.13.7. Our PT stands marginally increased to Rs.199 (Rs.198).
At our TP, the stock will be valued at about 14.5x FY12E earnings, a suitable
discount to larger peers.
A slower-than-expected recovery in major user economies and a sharperthan-
expected appreciation in rupee remain the key risks for earnings.
Revolo earnings can provide significant upsides, if successful.
We spoke to the management of KPIT recently. The key takeaways are as
under :
Macro scene - challenges in Europe continue
n The company continues to witness some challenges in the European economy
due to the possibility of defaults by some countries and also the overall weak
employment scene.
n UK and France are the weak points, along with the PIIGS economies. However,
on the other hand, Germany, where KPIT has a larger presence, has not displayed
any signs of weakness.
n Europe had reported a strong growth of 14% sequentially in 1QFY12. More importantly,
the management expects Europe to show sustainable growth in the
second half of the year.
n We will closely watch the evolving situation in Europe.
n While the management is cautious on the overall macro scene in US, it does not
see any direct impact on the R&D and IT spending by customers in the US.
n In US, the company is not seeing any immediate signs of weakness despite the
weaker economic data coming out in recent months.
n There have been some isolated events of project delays but these may not have
any material overall impact, we believe.
Cummins continues to perform well
n Among clients, it is not seeing any major change in spending patterns, as of
now. The client visits and discussions continue as earlier.
n We understand that, Cummins continues to perform well and this can translate
into continuing business for KPIT in the future.
n Cummins itself is witnessing a revival in its own fortunes and KPIT is looking at
more options to penetrate it further.
n The environment is positive and the company is not experiencing any constraints
in this account.
n KPIT has enough clarity on the work it wants to do within Cummins and expects
to get more orders from this client.
Discretionary spends happening
n IES had reported a 12% growth in INR revenues in 1QFY12, on the back of scale
up and new orders in Oracle offerings in USA, mainly for transformational deals.
n The company has also witnessed an increase in traction from existing clients for
Manufacturing Execution Systems (MES), Enterprise Application Integration (EAI)
and testing services.
n The auto embedded business is more related to the R&D side, which has not
been impacted till date, we understand.
n These expenses are largely discretionary in nature. We view the stability in these
business as a positive.
SSG continues to remain impacted
n The semiconductor business (SSG) revenues have been volatile and had once
again moderated during 1QFY12 after growing sharply in the previous quarter.
n One of the Japanese clients had postponed its testing process because of the
natural calamity. According to the management, the business is stable but we
expect some impact to flow through to 2Q.
n KPIT plans to continue with the operational improvements which will help in
adjusting the cost structure to be in line with the growth in business volume and
also help in improving the quality of revenues.
Attrition
n Attrition has remained at comfortable levels during the quarter, according to the
management. We expect the same to be sub 20% levels.
n KPIT had increased salaries WEF April 2011. While off-shore salaries were increased
by 14% on an average, on-site salaries were about 4% higher.
SYSTIME integration in progress
n The integration process with SYSTIME is progressing along expected lines.
n According to the management, the business integration, functional integration
and sales integration has already been completed.
n The initial target of KPIT is to rationalize costs by consolidating offices, moving
staff, etc. This process has already started.
n The company plans to start cross selling opportunities soon and expects business
to flow in from 3QFY12.
n While KPIT has a strong Oracle practice, SYSTIME is a leading JD Edwards
player.
n KPIT will start accounting for SYSTIME's profits WEF 2Q. It plans to acquire majority
stake in SYSTIME by the end of FY12 and the same is expected to be financed
by internal accruals.
n We see the acquisition of a 50% stake in SYSTIME (to buy remaining stake over
a 3-year period) as a good strategic fit for KPIT.
n The combined practice will be able to compete more effectively in the Oracle /
JD Edwards market.
n This investment will further strengthen KPIT's offerings in the Manufacturing and
Energy / Utilities verticals, which are focus verticals for the company.
n The investment has brought in 600+ JDE and 200+ Oracle Technology practitioners
from SYSTIME and this will make it a 2000+ strong combined practice.
n Oracle continues to add 400+ customers for JPE every year. This throws open a
big market for KPIT in terms of providing implementation / integration services.
The investment is expected to bring in 25 key customers to KPIT.
n This partnership will also add capabilities in providing solutions and services in
JDE ERP and Hyperion space, to KPIT Cummins' clients, thus increasing the wallet
share of KPIT.
n Moreover, cross selling opportunities of services to SYSTIME clients will further
aid KPIT's growth rates. We believe that, this transaction will be earnings
accretive for KPIT.
REVOLO - no certainty on start of commercial production
n The uncertainty around the launch of REVOLO continues.
n The management has indicated that, the progress on the technology side and
manufacturing side is along expected lines.
n However, the company is looking to have some support from the regulatory side.
We understand that, the launch will happen only after it gets the regulatory support.
n KPIT is negotiating with 2 OEMs for fitting REVOLO in their vehicles. The negotiations
have been continuing for a long time.
n If the negotiations are not completed till the time commercial production begins,
KPIT will turn towards the retrofit market, we believe.
n We have not taken any benefit of REVOLO in our estimates.
n REVOLO is a part of the overall thrust of KPIT on non-linear revenues.
n The company plans to have 25% of its revenues from these initiatives in 3 years
as compared to about 6 - 7% of overall revenues.
n It has already filed 37 patents.
Financials
n We largely maintain our FY12 estimates.
n We estimate FY12E revenues to grow by 30% led by volumes. Realisations are
expected to improve marginally over 4QFY11 levels.
n Margins are expected to be marginally lower YoY. The salary hikes WEF April
2011 will impact margins.
n However, the company plans to restrict impact on margins through higher utilization
levels (200-300bps according to the management), better realizations,
SG&A leverage and rationalization of low-margin business which came in as a
part of acquisitions. We have assumed the rupee to appreciate in 2H v/s 2Q levels.
n With higher other income and a higher tax rate (23% v/s 14% YoY), PAT is expected
to grow by 27% to Rs.1.2bn. The EPS works out to Rs. Rs.13.7. FY12
earnings are on diluted equity post the preferential allotment to ChrysCapital.
SYSTIME earnings not included; expected to be earnings
accretive
n We believe that, the SYSTIME transaction will be earnings accretive for KPIT.
n According to the management, SYSTIME had revenues of about $53mn in FY11.
It had PBT margins in mid-single digits.
n The management has guided for revenues of $63 - $65mn in FY12 and a PBT
margin of 12 - 14% (and full tax).
n Thus, assuming high single digit PAT margins for SYSTIME and assuming reasonable
yields on cash (Rs.1.03bn paid in cash), we believe that, there will be a
positive impact on the earnings of KPIT, post consolidation.
n SYSTIME is a debt free company, we understand.
n KPIT will not be doing line-by-line consolidation of SYSTIME's accounts but will
be accounting for only its share of profits initially. The line-by-line consolidation
of numbers will be done WEF 4QFY12.
n KPIT will be funding the investment through internal accruals. KPIT had recently
raised money through private placement to ChrysCapital and this money will be
utilized.
n Due to lack of finer details on the financials of SYSTIME, we have not included
the same in our earnings estimates for KPIT.
Valuations and recommendation
n The stock is currently quoting at 11x FY12E earnings.
n We have accorded KPIT valuations higher than comparable peers, based on the
higher revenue growth and potential upsides to margins. Our PT is at Rs.199
(Rs.198). At our target price, KPIT's FY12E earnings will be discounted 14.5x.
n We maintain BUY. We note that, REVOLO's financials can provide upside to our
PT.
Risks and concerns
n A slower-than-expected recovery in major user economies and a sharper-thanexpected
appreciation in rupee remain the key risks for earnings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
KPIT CUMMINS
PRICE: RS.150 RECOMMENDATION: BUY
TARGET PRICE: RS.199 FY12E P/E: 11X
In our recent interaction, the management indicated that business remains
on track to achieve the guidance provided for FY12E. While the macro scene,
especially in Europe, has turned challenging, growth from clients continues
to be along expected lines. Attrition has remained comfortable during the
quarter. Integration of SYSTIME is progressing on schedule. Business,
functional and sales integration has already been completed. Regulatory
issues are hampering the progress of REVOLO and the exact timing of the
commercial launch is uncertain, in our view. OEM negotiations have still not
concluded. KPIT is now increasingly focusing on non-linear revenues and
has filed about 37 patents. 6-7% of overall revenues (mostly from auto
electronics) currently accrue from non-linear initiatives. KPIT plans to have
25% of revenues from these initiatives in 3 years' time. We believe this is an
important lever to protect and sustain margins. We largely maintain our
FY12 EPS estimates (excluding Systime, which is expected to be earnings
accretive) at Rs.13.7. Our PT stands marginally increased to Rs.199 (Rs.198).
At our TP, the stock will be valued at about 14.5x FY12E earnings, a suitable
discount to larger peers.
A slower-than-expected recovery in major user economies and a sharperthan-
expected appreciation in rupee remain the key risks for earnings.
Revolo earnings can provide significant upsides, if successful.
We spoke to the management of KPIT recently. The key takeaways are as
under :
Macro scene - challenges in Europe continue
n The company continues to witness some challenges in the European economy
due to the possibility of defaults by some countries and also the overall weak
employment scene.
n UK and France are the weak points, along with the PIIGS economies. However,
on the other hand, Germany, where KPIT has a larger presence, has not displayed
any signs of weakness.
n Europe had reported a strong growth of 14% sequentially in 1QFY12. More importantly,
the management expects Europe to show sustainable growth in the
second half of the year.
n We will closely watch the evolving situation in Europe.
n While the management is cautious on the overall macro scene in US, it does not
see any direct impact on the R&D and IT spending by customers in the US.
n In US, the company is not seeing any immediate signs of weakness despite the
weaker economic data coming out in recent months.
n There have been some isolated events of project delays but these may not have
any material overall impact, we believe.
Cummins continues to perform well
n Among clients, it is not seeing any major change in spending patterns, as of
now. The client visits and discussions continue as earlier.
n We understand that, Cummins continues to perform well and this can translate
into continuing business for KPIT in the future.
n Cummins itself is witnessing a revival in its own fortunes and KPIT is looking at
more options to penetrate it further.
n The environment is positive and the company is not experiencing any constraints
in this account.
n KPIT has enough clarity on the work it wants to do within Cummins and expects
to get more orders from this client.
Discretionary spends happening
n IES had reported a 12% growth in INR revenues in 1QFY12, on the back of scale
up and new orders in Oracle offerings in USA, mainly for transformational deals.
n The company has also witnessed an increase in traction from existing clients for
Manufacturing Execution Systems (MES), Enterprise Application Integration (EAI)
and testing services.
n The auto embedded business is more related to the R&D side, which has not
been impacted till date, we understand.
n These expenses are largely discretionary in nature. We view the stability in these
business as a positive.
SSG continues to remain impacted
n The semiconductor business (SSG) revenues have been volatile and had once
again moderated during 1QFY12 after growing sharply in the previous quarter.
n One of the Japanese clients had postponed its testing process because of the
natural calamity. According to the management, the business is stable but we
expect some impact to flow through to 2Q.
n KPIT plans to continue with the operational improvements which will help in
adjusting the cost structure to be in line with the growth in business volume and
also help in improving the quality of revenues.
Attrition
n Attrition has remained at comfortable levels during the quarter, according to the
management. We expect the same to be sub 20% levels.
n KPIT had increased salaries WEF April 2011. While off-shore salaries were increased
by 14% on an average, on-site salaries were about 4% higher.
SYSTIME integration in progress
n The integration process with SYSTIME is progressing along expected lines.
n According to the management, the business integration, functional integration
and sales integration has already been completed.
n The initial target of KPIT is to rationalize costs by consolidating offices, moving
staff, etc. This process has already started.
n The company plans to start cross selling opportunities soon and expects business
to flow in from 3QFY12.
n While KPIT has a strong Oracle practice, SYSTIME is a leading JD Edwards
player.
n KPIT will start accounting for SYSTIME's profits WEF 2Q. It plans to acquire majority
stake in SYSTIME by the end of FY12 and the same is expected to be financed
by internal accruals.
n We see the acquisition of a 50% stake in SYSTIME (to buy remaining stake over
a 3-year period) as a good strategic fit for KPIT.
n The combined practice will be able to compete more effectively in the Oracle /
JD Edwards market.
n This investment will further strengthen KPIT's offerings in the Manufacturing and
Energy / Utilities verticals, which are focus verticals for the company.
n The investment has brought in 600+ JDE and 200+ Oracle Technology practitioners
from SYSTIME and this will make it a 2000+ strong combined practice.
n Oracle continues to add 400+ customers for JPE every year. This throws open a
big market for KPIT in terms of providing implementation / integration services.
The investment is expected to bring in 25 key customers to KPIT.
n This partnership will also add capabilities in providing solutions and services in
JDE ERP and Hyperion space, to KPIT Cummins' clients, thus increasing the wallet
share of KPIT.
n Moreover, cross selling opportunities of services to SYSTIME clients will further
aid KPIT's growth rates. We believe that, this transaction will be earnings
accretive for KPIT.
REVOLO - no certainty on start of commercial production
n The uncertainty around the launch of REVOLO continues.
n The management has indicated that, the progress on the technology side and
manufacturing side is along expected lines.
n However, the company is looking to have some support from the regulatory side.
We understand that, the launch will happen only after it gets the regulatory support.
n KPIT is negotiating with 2 OEMs for fitting REVOLO in their vehicles. The negotiations
have been continuing for a long time.
n If the negotiations are not completed till the time commercial production begins,
KPIT will turn towards the retrofit market, we believe.
n We have not taken any benefit of REVOLO in our estimates.
n REVOLO is a part of the overall thrust of KPIT on non-linear revenues.
n The company plans to have 25% of its revenues from these initiatives in 3 years
as compared to about 6 - 7% of overall revenues.
n It has already filed 37 patents.
Financials
n We largely maintain our FY12 estimates.
n We estimate FY12E revenues to grow by 30% led by volumes. Realisations are
expected to improve marginally over 4QFY11 levels.
n Margins are expected to be marginally lower YoY. The salary hikes WEF April
2011 will impact margins.
n However, the company plans to restrict impact on margins through higher utilization
levels (200-300bps according to the management), better realizations,
SG&A leverage and rationalization of low-margin business which came in as a
part of acquisitions. We have assumed the rupee to appreciate in 2H v/s 2Q levels.
n With higher other income and a higher tax rate (23% v/s 14% YoY), PAT is expected
to grow by 27% to Rs.1.2bn. The EPS works out to Rs. Rs.13.7. FY12
earnings are on diluted equity post the preferential allotment to ChrysCapital.
SYSTIME earnings not included; expected to be earnings
accretive
n We believe that, the SYSTIME transaction will be earnings accretive for KPIT.
n According to the management, SYSTIME had revenues of about $53mn in FY11.
It had PBT margins in mid-single digits.
n The management has guided for revenues of $63 - $65mn in FY12 and a PBT
margin of 12 - 14% (and full tax).
n Thus, assuming high single digit PAT margins for SYSTIME and assuming reasonable
yields on cash (Rs.1.03bn paid in cash), we believe that, there will be a
positive impact on the earnings of KPIT, post consolidation.
n SYSTIME is a debt free company, we understand.
n KPIT will not be doing line-by-line consolidation of SYSTIME's accounts but will
be accounting for only its share of profits initially. The line-by-line consolidation
of numbers will be done WEF 4QFY12.
n KPIT will be funding the investment through internal accruals. KPIT had recently
raised money through private placement to ChrysCapital and this money will be
utilized.
n Due to lack of finer details on the financials of SYSTIME, we have not included
the same in our earnings estimates for KPIT.
Valuations and recommendation
n The stock is currently quoting at 11x FY12E earnings.
n We have accorded KPIT valuations higher than comparable peers, based on the
higher revenue growth and potential upsides to margins. Our PT is at Rs.199
(Rs.198). At our target price, KPIT's FY12E earnings will be discounted 14.5x.
n We maintain BUY. We note that, REVOLO's financials can provide upside to our
PT.
Risks and concerns
n A slower-than-expected recovery in major user economies and a sharper-thanexpected
appreciation in rupee remain the key risks for earnings.
No comments:
Post a Comment