02 January 2012

Buy KPIT CUMMINS INFOSYSTEMS:: Target: RS.211:: Kotak Sec,

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KPIT CUMMINS  INFOSYSTEMS LTD
PRICE: RS.142 RECOMMENDATION: BUY
TARGET  PRICE:  RS.211 FY13E P/E: 8X
In our recent interaction, the management of KPIT indicated comfort in
achieving the revenue and PAT growth guidance of about 25%, given
earlier. The recent rupee depreciation should help further. While there have
been no project cancellations there is some slowdown in decision making in
a few accounts, of late.
The partnership with PACCAR is ramping up as scheduled, with the initial
team already set up. Cross selling opportunities with Systime have also led
to successes. The regulatory processes for REVOLO are progressing but the
final launch date is not known. Attrition has trended down during the
quarter.
We opine that, the company is strategically well positioned with focus
verticals doing well. It has also made well - directed acquisitions which
should help it penetrate clients and geographies. These acquisitions should
scale up in FY12 and FY13.
KPIT is now increasingly focusing on non-linear revenues and has filed
about 39 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 maintain our FY12E and FY13E estimates. We expect earnings at Rs.15.5
per share for FY12E and Rs.17.5 per share for FY13E. Our PT stands at Rs.211
based on FY13E earnings. There could be upsides based on Revolo
financials. At our TP, the stock will be valued at about 13.5x FY13E earnings,
a suitable discount to larger peers. We maintain BUY.

Belied hopes of volume-led-growth in IT services demand in major user
economies and a sharper-than-expected appreciation in rupee remain the
key risks for earnings. Revolo earnings can provide significant upsides, if
successful.
We recently spoke to the management of KPIT. The main takeaways of the interaction are as under.
Comfort in achieving the revenue and PAT growth guidance of n This slow-down is seen only in a few accounts and is not across the board. Most
of the large accounts are ramping up on schedule.
n These clients are also looking at short term projects rather than taking decisions
on long term spends.
n We will track this trend closely. In case there are delays with more accounts, it
will be a cause of concern.
Cummins - visibility remains good
n Revenues from Cummins have been scaling up nicely over the past 2 - 3 quarters. In 2Q, revenues rose 12% QoQ in INR terms.
n The visibility from Cummins continues to remain good.
n KPIT is witnessing traction in both, engineering services and IT services.
n Cummins itself is witnessing a revival in its own fortunes and KPIT is looking at
more options to penetrate it further.
n KPIT has enough clarity on the work it wants to do within Cummins and expects
to get more orders from this client.
SYSTIME - cross selling yielding results
n The integration of SYSTIME is complete and the cross selling of services between
clients has already started yielding results in terms of business. The combined
entity has already closed a few orders.
n We note that, with the SYSTIME acquisition, KPIT has strong Oracle and JD
Edwards practice.
n The initial target of KPIT was to rationalize costs by consolidating offices, moving
staff, etc. This process has already started. The results are expected to be seen
by 4QFY12, we understand.
n KPIT is also looking at increasing the productivity of the sales and delivery teams.
SYSTIME's margins are targeted to reach KPIT's levels in FY13.
n SYSTIME had mid-single digit margins at the start of the fiscal, we believe.
Partnership with PACCAR
n The company has set up the initial team for this partnership and plans to scale it
up in the next 2 - 3 quarters.
n KPIT has entered into a partnership with PACCAR, which is a global technology
leader in the design, manufacture and customer support of light, medium and
heavy duty trucks. It launched its first technical center in Pune in partnership with
KPIT Cummins.
n This partnership is a significant achievement as it is one of the largest deals in
our business history and it is spread across different business units.
n The technical center will focus on engineering, IT and component sourcing for
worldwide production and aftermarket operations. The center will employ approximately 200 people.
n We view this as a reflection of the company's capabilities in the automotive sector.
about 25%
n The management has indicated that, it is comfortable with regard to the growth
guidance given at the start of the fiscal.
n KPIT had guided to a revenue growth of 23% - 27% and a PAT growth of 22%
- 27% for FY12.
n The guidance was at Rs.45 / USD. So, the sharp depreciation in rupee should
also provide support to the guidance. We expect PAT to grow by 43% in FY12.
Macro scene concerning; micro largely stable
n The macro scene remains uncertain with the severe debt issues in Europe and
US impacting sentiments.
n However, the company is yet to see any major impact of the same on client
spends.
n There have been no project cancellations. However, the company is experiencing some slow-down in decision making of late.

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