KPIT Cummins- Mid-sized IT vendor levered to manufacturing sector  Macquarie Research,

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KPIT Cummins
Mid-sized IT vendor levered to manufacturing sector  
 We met with the management of KPIT Cummins (KPIT IN) to understand the
outlook for the company and manufacturing sector and their positioning vs.
the offerings of the larger Indian IT vendors.
 KPIT is a mid-cap company that offers solutions in the manufacturing vertical.
Its portfolio of offerings is spread across Enterprise solutions, Auto &
Engineering and SAP solutions, contributing 38%, 27% and 32% respectively.
Challenge of increasing margins in FY12
 EBITDA margins declined to 15% in FY11 (vs 22% in FY10). Based on
management comments, margin pressure is likely this year as a result of
wage inflation from a 12-14% salary increase in April and the tax rate shooting
up to ~25% this year from 14% in FY11.  For the company to maintain or
increase margins, the levers of fixed-price projects, pricing, revenue growth,
and fresher-lateral pyramid structure would have to be fully utilized in FY12.
High concentration poses risk due to top clients and sector
 The top client, Cummins, contributes 23% of revenue, and the top 5 and 10
clients contribute 42% and 52% of revenues, respectively. KPIT’s
manufacturing sector focus and the strong client list is a key differentiating
factor vs. other mid-sized IT companies. This also leads to it being highly
levered to the manufacturing sector, which contributes 77% of revenues.
Recent M&As, Revolo to boost revenues going forward
 KPIT expects FY12 to see the full benefit of its inorganic growth strategy,
having made the following acquisitions recently:
 In2Soft Gmbh, a German vehicle diagnostics and telematics specialist, in
Oct 2010.
 CPG Solutions, provider of premium Oracle consulting services to
manufacturing & supply chain companies, in Sept 2010 for Rs600m.
 50:50 JV with Bharat Forge to manufacture and market ‘Revolo’,  a hybrid
technology to increase fuel efficiency and engine performance, in June
2010.
 Sparta Consulting, a SAP solutions and consulting company in the USA,
in Sept 2009 for US$38m.
Time for cherry picking mid caps
 We have a positive view on the Indian IT Services sector.  Our preference is
for mid-cap companies that are seeing strong demand conditions and
increasing margin profiles, resulting in better earnings in FY12-13E.
 Among mid caps, we prefer Hexaware and Mindtree on the back of their
better valuations and earnings growth in FY12E. Among large caps, we like
Infosys and TCS.