KPIT Cummins Good Quarter, maintains annual guidance; Reiterate Hold:: Sunidhi

KPIT’s Q2FY13 revenue at US$103.4 mn was up 5.5% QoQ, higher than our
estimate. On lower-than-expected SG&A costs, operating margin increased
157bps QoQ to 16.7%. Forex loss of `213mn marred PAT for Q2FY13. Volume
growth for Onsite was ~9% and offshore was ~3% (blended ~4%).We maintain
our HOLD rating on the stock with a Target Price of `140 on account of recent
deal wins providing visibility and KPIT maintaining its FY13 US$ revenue
guidance (31-34% growth), focus on profitability and broad-based growth.

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Improved revenue visibility leads to robust guidance. On account of improved
visibility due to large deal wins in the earlier quarters, KPIT has maintained FY13
revenue guidance of US$408-418mn, translating to a 31-34% YoY growth.
Organically KPIT grew 6% in constant currency terms QoQ. SYSTIME grew 15.7%
QoQ this quarter (11.6% in Q1FY13). Integrated Enterprise Solutions (IES) and
Automotive & Engineering (A&E) grew 9% and 8.5% QoQ respectively, while SAP
SBU declined 2% QoQ. Cummins (Top client) grew by 52% YoY (revenue share
stood at 19.7% in Q2FY13). Top 5 and Top 10 clients (excluding Cummins) grew
2.4% and 4.6% QoQ respectively.
KPIT has margin leverage going ahead: KPIT’s Q2FY13 margin was positively
affected by lower-than-expected SG&A costs. G&A expenses were down 7.2%
QoQ to `634mn, while S&M costs increased by just 2.3% QoQ. Integrated
Enterprise Solutions (IES), Automotive & Engineering and SAP SBU had margins
of 17%+ in Q2FY13 (including SYSTIME), 23%+ and 7%+ respectively. The
company is looking at increasing profitability across all its SBU’s as well as
SYSTIME going forward. We believe, KPIT has some margin levers such as
employee pyramid broadening, better productivity mix and higher offshoring
going ahead.
REVOLO update: 1) Government recently announced National Electric Mobility
Mission for which ~`230bn funds are being set aside. These funds would be used
for demand creation, infrastructure creation and Research & Development. KPIT
Cummins is participating in various working groups as a part of this National
Mission. 2) We, in our modeling have not modeled in for any revenues from
REVOLO. Any commercial success would be an upside risk to our estimated
revenues.
Outlook and Valuation: With strong R&D budgets in US Automotive Engineering
and rising discretionary spending in the US, KPIT Cummins is well positioned with
a core focus on Automotive Engineering and Enterprise Application Services
(EAS). We continue to value KPIT at 12xFY14E earnings of `11.8, translating to a
Target Price of `140 (`140 earlier) and thus retain our HOLD rating.