3QFY2013 Result Update | IT

January 29, 2013

KPIT Cummins
Performance Highlights
(` cr) Net revenue EBITDA EBITDA margin (%) PAT 3QFY13 563 88 15.7 60 2QFY13 567 95 16.7 41 % chg (qoq) (0.7) (6.7) (100)bp 47.3 3QFY12 379 58 15.3 41 % chg (yoy) 48.7 52.1 35bp 45.8

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code IT 2,065 (41) 0.6 142/73 162,536 2 19,991 6,050 KPIT.BO KPIT@IN

`115 `140
12 Months

Source: Company, Angel Research

For 3QFY2013, KPIT Cummins Infosystems (KPIT) reported in-line revenue numbers but operational performance of the company disappointed. Growth was sluggish due to lower billing days and shut downs of 2-3 days across the organization. For FY2013, the Management has maintained its USD revenue growth guidance of 32-35% yoy, which is 2.5x more than Nasscoms guidance of 11-14% growth and includes ~US$45mn inorganic revenue from Systime. We recommend a Buy rating on the stock. Quarterly highlights: For 3QFY2013, KPIT reported revenue of US$103.5mn, almost flat qoq. In INR terms, the revenue came in at `563cr, down 0.7% qoq. The companys EBITDA margin declined by 100bp qoq to 15.7%, due to loss of billing days, and lower realization rates as a result of change in business mix (decline in revenues from SAP SBU). The adjusted PAT came in at `60cr, up 47% qoq, aided by other income of `8cr as against loss of `19cr in 2QFY2013. Outlook and valuation: KPITs Management has maintained its FY2013 USD revenue growth guidance of a whopping 32-35% yoy (US$408mn-418mn), which is the strongest amongst its peers. On the PAT front, the company has revised its guidance upwards to 35-38% yoy growth to `196-200cr. The company is growing ahead of other IT companies in terms of revenue; and on the operational front, the companys performance has been improving since the last three quarters. KPIT has reiterated its positive tone and does not witness any delay in decision making. Hence, we expect the companys revenue to post a CAGR of 21.8% and 28.5% in USD and INR terms, respectively, over FY2012-14E. On the EBITDA and PAT fronts, the company is expected to post a 31.6% and 32.0% CAGR over FY2012-14E. The stock is currently trading at 9.0x FY2014E EPS of `12.8. We value the company at 11x FY2014E EPS, which gives us a target price of `140. We recommend a Buy rating on the stock. Key financials (Consolidated)
Y/E March (` cr) Net sales % chg Net profit % chg EBITDA margin (%) EPS (`)* P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) FY2010 732 (7.8) 86 30.3 22.1 10.8 10.7 2.4 22.2 26.0 2.8 12.8 FY2011 1,007 37.6 95 10.6 15.1 5.7 20.3 1.6 15.7 15.5 1.9 12.8 FY2012 1,500 49.0 135 42.5 14.5 8.0 14.4 2.9 19.0 17.3 1.4 9.8 FY2013E 2,234 48.9 203 50.4 15.8 10.9 10.6 2.3 22.2 25.9 0.9 5.6 FY2014E 2,477 10.9 236 15.9 15.2 12.8 9.0 1.8 20.5 23.1 0.7 4.8

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 24.3 10.7 30.3 34.6

Abs. (%) Sensex KPIT Cummins

3m

1yr

3yr 22.2 108.3

7.3 16.0 (4.3) 53.1

Ankita Somani
022-3935 7800 Ext: 6819 [email protected]

Source: Company, Angel Research; Note: *FY2010 numbers not adjusted for bonus

Please refer to important disclosures at the end of this report

KPIT Cummins Infosystems | 3QFY2013 Result Update

Exhibit 1: 3QFY2013 performance (Consolidated)

Y/E March (` cr) Net revenue Cost of revenue Gross profit SGA expenses EBITDA Depreciation EBIT Interest expense Other income Exceptional item PBT Income tax PAT Minority interest Share in profit of ass. Adj. PAT EPS EBITDA margin (%) EBIT margin (%) PAT margin (%)
Source: Company, Angel Research

3QFY13 563 371 193 104 88 12 76 4 8 (9) 71 18 52 2 60 2.7 15.7 13.6 10.5

2QFY13 567 370 197 102 95 11 83 3 (19) 5 66 19 47 1 1 41 2.5 16.7 14.6 7.4

% chg (qoq) (0.7) 0.1 (2.2) 2.0 (6.7) 2.9 (8.0) 20.6

3QFY12 379 249 130 72 58 13 45 2 11 -

% chg (yoy) 48.7 48.7 48.7 45.9 52.1 (11.7) 71.2 160.9

9MFY13 1,669 1,091 577 313 264 35 229 11 (8) (1)

9MFY12 1,020 675 345 203 142 34 108 4 24 128 29 99 1 3 102 5.6 13.9 10.6 9.7

% chg (yoy) 63.6 61.7 67.3 54.3 85.8 0.7 112.9 184.8

6.9 (4.6) 11.6

54 13 41 1 1

30.8 42.4 27.2

209 56 153 4 (1)

63.0 94.8 53.8 349.6 46.7 42.3 189bp 318bp (75)bp

47.3 6.4 (100)bp (107)bp 307bp

41 2.3 15.3 11.8 10.5

45.8 17.7 35bp 178bp (5)bp

149 8.0 15.8 13.7 9.0

Exhibit 2: Actual vs Angel estimates

(` cr) Net revenue EBITDA margin (%) PAT
Source: Company, Angel Research

Estimate 565 17.2 57

Actual 563 15.7 60

Var. (% ) (0.4) (154)bp 4.2

Disappointing operational performance

For 3QFY2013, KPIT reported revenues of US$103.5mn, almost flat qoq. Growth during the quarter remained sluggish as volume growth remained flat qoq due to lower billing days and shut downs of 2-3 days across the organization; without the loss of billing days, revenue growth would have increased by 3%. Onsite revenues grew 1.6% qoq while offshore revenues declined by 1.9% qoq during the quarter. In INR terms, the revenue came in at `563cr, down 0.7% qoq.

January 29, 2013

KPIT Cummins Infosystems | 3QFY2013 Result Update

Exhibit 3: Trend in revenue growth (qoq)

110 100 90 95.4 98.1 29.9 103.4 103.5 35 30 25

(US$ mn)

70 60 50 40

73.4 5.5 0.0 3QFY12 4QFY12 1QFY13 2QFY13 qoq growth (%) 3QFY13 Revenue (US$ mn)

15 10 5 0

4.3

2.8

Source: Company, Angel Research

KPITs revenue performance came on the back of a decent growth in its major strategic business units (SBUs). IES emerges as the companys primary growth driver: The integrated enterprise solutions (IES) SBU (contributed 48.7% to revenue) reported a robust 6.1% qoq growth in USD revenue, aided by revenue from Systime. The company is witnessing increasing traction for Oracles and JD Edwards offerings in the US market, driven by clients focus on leveraging and optimizing disparate systems within the enterprise. In emerging markets, the company is getting spends from clients preference towards evaluating and adopting cloud, analytics, mobility and social media solutions. The Management indicated that a major upgrade rolled out in JD Edwards will drive demand for Systime services for at least a period of 18-24 months, with clients going for either new implementations or technology upgrades. Systime registered a healthy revenue growth of 7.15% qoq to reach US$18.2mn and margins were maintained at 14% in 3QFY2013. Auto and engineering SBU posts sluggish growth: The auto and engineering SBU (contributed 23.4% to revenue) posted a 4.2% qoq de-growth in USD revenue, with revenue coming in at US$24mn, due to loss of billing days. In this SBU, demand for practices such as power train, infotainment, mechanical engineering & design services, in-vehicle networks and hybrid technologies was spread across geographies. SAP SBU muted: The SAP SBU (contributed 27.9% to revenue) registered a 5.8% qoq decline in its revenue. The impact of loss of billing days was maximum on SAP SBU due to relatively higher proportion of onsite revenues. The Management indicated that good momentum is seen across practices such as mobility, analytics, customer relationship management (CRM) and success factors, especially in geographies like APAC, India and China. KPITs Management also indicated that the company has a strong order pipeline in this SBU for solutions from utilities as well as auto industry verticals. This SBU saw revenue decline for the second consecutive quarter and it may still be two quarters away from a pick up as KPIT continues to make investments to cater to the changing market demands in the segment.

January 29, 2013

(%)

80

20

KPIT Cummins Infosystems | 3QFY2013 Result Update

Exhibit 4: Revenue growth (SBU wise)

SBU Integrated enterprise solutions Auto and engineering SAP
Source: Company, Angel Research

% of revenue 48.7 23.4 27.9

% growth (qoq) 6.1 (4.2) (5.8)

% growth (yoy) 87.7 19.6 18.0

The companys anchor vertical, automotive and transportation (contributed 40.3% to revenue) registered a revenue growth of 3.9% qoq during the quarter. The company is witnessing modest traction in this vertical as automobile companies try to improve efficiency, safety and comfort and adhere to regulatory standards. Also, increased demand is being witnessed for infotainment and power train and invehicle networks. Smaller vehicles, especially in India and China, is one of the drivers of the building deal pipeline for this vertical. The Management indicated that more traction is expected in the alternative fuel vehicle market, mainly hybrids, as consumers show more inclination towards fuel-efficient vehicles. The manufacturing industry vertical emerged as the primary growth driver for the company with revenues growing by 4.8% qoq.

Exhibit 5: Revenue growth (Vertical wise)

Service verticals Automotive and transportation Manufacturing Energy and utilities Others
Source: Company, Angel Research

% of revenue 40.3 34.0 14.2 11.5

% growth (qoq) 3.9 4.8 (7.2) (14.5)

% growth (yoy) 34.0 60.0 83.5 (3.6)

Geography wise, revenue from Europe grew by 15.2% qoq while the US geography saw a decline by 2.1% qoq. The Management indicated that APAC presents the highest growth opportunity in the coming years while in US, the company observes a mixed scenario in terms of customer spends. Europe is expected to move slowly. There is good momentum witnessed by the company from Latin America and China.

Exhibit 6: Revenue growth (Geography wise)

Geography U.S. Europe Rest of the World
Source: Company, Angel Research

% of revenue 74.7 13.9 11.4

% growth (qoq) (2.1) 15.2 (1.7)

% growth (yoy) 49.3 3.0 52.9

Hiring and utilization

During the quarter, KPITs total employee base witnessed a net addition of 175 employees, taking its total employee base to 8,286. Onsite as well as offshore utilization declined by 165bp and 185bp qoq to 92.8% and 72.9%, respectively during the quarter.

January 29, 2013

KPIT Cummins Infosystems | 3QFY2013 Result Update

Exhibit 7: Employee addition

Particulars Net addition Development Sales and support Total Total employees Development Sales and support Total 6,178 529 6,707 160 3 163 3QFY12 4QFY12 1QFY13 2QFY13 229 9 238 7,447 664 8,111 3QFY13 169 6 175 7,616 670 8,286

893 119 1,012 7,071 648 7,719

147 7 154 7,218 655 7,873

Source: Company, Angel Research

Exhibit 8: Trend in utilization

100 95 90 85
(%)

94.5 90.6

94.7

94.5

92.8

80 75 70 65 60 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 Onsite utilisation Offshore utilisation 71.9 74.6 74.1 74.7 72.9

Source: Company, Angel Research

Margins decline
On the operational front, KPITs EBITDA and EBIT margins declined by 100bp and 107bp qoq to 15.7% and 13.6%, respectively, due to loss of billing days coupled with lower realization rates due to change in business mix (decline in revenues from SAP SBU). In addition to this, the companys SG&A costs as a percentage to sales went up by ~40bp qoq to 18.5%.

January 29, 2013

KPIT Cummins Infosystems | 3QFY2013 Result Update

Exhibit 9: Margin profile

45 34.2 33.6 34.9 34.7 34.2

35
(%)

25 15.3 15 11.8 5 3QFY12 4QFY12 1QFY13 EBITDA margin 2QFY13 3QFY13 EBIT margin Gross margin 13.7 13.0 15.8 15.1 16.7 14.6 15.7 13.6

Source: Company, Angel Research

Client pyramid
KPIT added two new clients during 3QFY2013. The total active client base of the company stands at 178 as of 3QFY2013 as against 176 in 2QFY2013. The USD revenue from Cummins declined by 3.0% qoq to US$19.8mn. Cummins expects CY2013 to be a similar year as C20Y12 and while the Management sees some growth challenges in the first half, they remain cautiously optimistic for the second half of the year. We expect revenue from the Cummins account to remain soft in the near term. KPITs revenue from top 10 clients excluding Cummins grew by 8.8% qoq.

Exhibit 10: Client metrics

(% of revenue) Top client-Cummins Top-10 client billing No. of customers added No. of active customers Customers with run rate >US$1mn
Source: Company, Angel Research

3QFY12 23.9 47.1 2 165 54

4QFY12 19.5 42.2 4 169 59

1QFY13 20.6 44.0 3 172 65

2QFY13 19.7 43.7 4 176 69

3QFY13 19.1 45.2 2 178 72

Outlook and valuation

KPITs Management has maintained its FY2013 USD revenue growth guidance of a whopping 32-35% yoy (US$408mn-418mn), which is the strongest amongst its peers, even on the back of a strong 40% yoy revenue growth recorded in FY2012 because of the companys strengthening deal pipeline as well as incremental revenues from Systime. This guidance includes ~US$45mn of inorganic revenue in FY2013 from Systime. On the PAT front also, the company has revised its guidance upwards to 35-38% yoy growth to `196-200cr. The company is growing ahead of other IT companies in terms of revenue; and on the operational front, the companys performance has been improving since the last three quarters. KPIT has reiterated its positive tone and does not witness any delay in decision making. The company sees an increase in discretionary spend and improved pipeline driving growth in FY2014 in both the enterprise IT services and auto
January 29, 2013

KPIT Cummins Infosystems | 3QFY2013 Result Update

engineering services. Hence, we expect the companys revenue to post a CAGR of 21.8% and 28.5% in USD and INR terms, respectively, over FY2012-14E. On the EBITDA and PAT fronts, the company is expected to post a 31.6% and 32.0% CAGR over FY2012-14E. The stock is currently trading at 9.0x FY2014E EPS of `12.8. We value the company at 11x FY2014E EPS, which gives us a target price of `140. We recommend a Buy rating on the stock.

Exhibit 11: Key assumptions

FY2013 Revenue growth-USD terms (%) USD-INR rate Revenue growth-INR terms (%) EBITDA margin (%) Tax rate (%) EPS growth (%)
Source: Company, Angel Research

FY2014 12.0 54.0 10.9 15.2 26.0 17.4

32.4 54.5 48.9 15.8 26.6 36.0

Exhibit 12: One-year forward PE

250 200 150
(`)

100 50 0
Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

Price
Source: Company, Angel Research

22x

17x

12x

7x

2x

January 29, 2013

KPIT Cummins Infosystems | 3QFY2013 Result Update

Exhibit 13: Recommendation summary

Company HCL Tech Hexaware Infosys Infotech Entp. KPIT Cummins MindTree Mphasis NIIT^ Persistent TCS Tech Mahindra Wipro Reco. Accumulate Buy Neutral Neutral Buy Accumulate Accumulate Buy Neutral Accumulate Accumulate Accumulate CMP (`) 692 81 2,798 178 115 124 799 370 27 539 1,343 1,001 408 Tgt. price (`) 765 118 140 868 396 36 1,465 1,087 429 Upside (%) 10.6 46.5 21.4 8.6 6.9 33.1 9.1 8.6 5.2 FY2014E EBITDA (%) 20.7 19.0 28.8 17.4 15.2 19.3 19.3 17.5 10.9 24.1 28.9 19.0 19.4 FY2014E P/E (x) 13.1 7.5 16.2 9.1 9.0 11.5 9.2 9.8 4.4 10.0 17.0 9.4 14.7 FY2011-14E EPS CAGR (%) 13.6 6.3 5.9 10.3 16.9 2.1 17.4 0.0 (2.7) 15.1 13.3 6.5 6.8 FY2014E EV/Sales (x) 1.5 0.8 2.9 0.6 0.7 1.3 0.9 0.7 0.2 1.1 3.5 1.8 1.7 FY2014E RoE (%) 22.9 22.0 21.3 13.6 20.5 23.5 21.7 13.5 14.1 18.0 29.7 21.6 17.9

Mahindra Satyam Neutral

Source: Company, Angel Research; Note: ^Valued on SOTP basis

Company Background
KPIT Cummins (KPIT), a mid-tier Indian IT company, specializes in the manufacturing segment, with a focus on automotive and industrial solutions and services. The company focuses on three areas of solutions enterprise services, auto & engineering and SAP. KPIT has been growing strongly, both organically and inorganically. The company has successfully acquired eight companies in eight years, which scaled up KPIT's revenue many fold.

January 29, 2013

KPIT Cummins Infosystems | 3QFY2013 Result Update

Profit and Loss statement (Consolidated)

Y/E March (` cr) Net sales Cost of revenue % of net sales Gross profit % of net sales S&M expenses % of net sales G&A expenses % of net sales EBITDA % of net sales Depreciation EBIT Interest expense, net Other income, net Exceptional item Profit before tax Provision for tax % of PBT PAT Minority interest Share in profit of ass. Adj. PAT EPS (`) FY2010* 732 409 55.9 323 44.1 66 9.1 95 13.0 161 22.1 31 131 3 (25) 103 17 16.5 86 86 10.8 FY2011 1,007 644 64.0 363 36.0 76 7.6 134 13.3 152 15.1 41 111 3 3 110 15 14.0 95 95 5.7 FY2012 1,500 993 66.2 507 33.8 112 7.4 177 11.8 218 14.5 44 174 8 13 10 189 44 23.1 145 3 3 135 8.0 FY2013E 2,234 1,462 65.4 772 34.6 160 7.2 258 11.6 354 15.8 46 307 15 (7) (1) 284 75 26.6 208 6 (1) 203 10.9 FY2014E 2,477 1,641 66.3 836 33.7 178 7.2 280 11.3 377 15.2 54 323 14 15 324 84 26.0 240 4 236 12.8

Note: *FY2010 numbers not adjusted for bonus

January 29, 2013

KPIT Cummins Infosystems | 3QFY2013 Result Update

Balance sheet (Consolidated)

Y/E March (` cr) Liabilities Share capital Application money ESOP outstanding Preferential shares Reserves and surplus Share premium Total shareholders funds Secured loans Unsecured loans Total debt Minority interest Deferred tax liability, net Other liabilities Long term provisions Total liabilities 16 0 2 370 387 111 111 5 503 251 16 0 2 458 128 603 111 111 6 5 718 327 36 0 677 713 82 140 222 33 (3) 26 10 1,001 399 213 185 3 362 22 62 438 147 60 53 176 106 49 367 1,001 496 277 89 53 200 126 74 515 1,186 550 446 99 53 225 146 82 694 1,398 139 105 68 64 43 23 181 503 229 208 33 73 94 76 20 352 718 474 260 214 3 362 30 62 549 314 234 3 362 42 62 36 0 879 914 82 120 202 33 26 10 1,186 36 0 1,111 1,147 82 100 182 33 26 10 1,398 FY2010 FY2011 FY2012 FY2013E FY2014E

Assets
Gross block - fixed assets

Accumulated depreciation
Net block

128
124

169
158

Capital work-in-progress
Goodwill

29
95

3
130

Investments
Loans and advances Current assets Sundry debtors Cash and bank balance Loans and advances Other current assets Less:- Current liabilities Sundry creditors Other liabilities Provisions Net current assets Total assets

75
-

76

January 29, 2013

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KPIT Cummins Infosystems | 3QFY2013 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Pretax profit from operations Depreciation Pre tax cash from operations Other income/prior period ad Net cash from operations Tax Cash profits (Inc)/dec in Current assets Current liabilities Net trade working capital Cash flow from operating activities (Inc)/dec in fixed assets (Inc)/dec in investments Inc/(dec) in deferred tax liability (Inc)/dec in intangibles Inc/(dec) in minority interest Inc/(dec) in other non-current assets 16 (151) (135) (18) (38) (75) (1) (67) (0) 6 (128) 60 (68) 68 (76) 75 0 (35) 1 (34) (217) 141 (75) 107 (72) (22) (8) (232) 32 34 (268) 129 (22) (7) 100 (61) 208 147 (87) 69 (18) 238 (75) (8) 3 (80) (20) (7) (27) 131 147 277 (64) 53 (11) 283 (75) (12) (87) (20) (7) (27) 169 277 446 FY2010 128 31 159 (25) 133 (17) 117 FY2011 108 41 149 3 151 (15) 136 FY2012 169 44 214 13 226 (44) 183 FY2013E 292 46 339 (7) 331 (75) 256 FY2014E 309 54 363 15 378 (84) 294

Cash flow from investing activities

Inc/(dec) in debt

(174)
(8)

(68)
(18)

Inc/(dec) in equity/premium
Dividends

145
(6)

128
(7)

Cash flow from financing activities

Cash generated/(utilized)

131
(62)

104
103

Cash at start of the year

Cash at end of the year

167
105

105
208

January 29, 2013

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KPIT Cummins Infosystems | 3QFY2013 Result Update

Key ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BVPS Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS Cash EPS Dividend Book value Dupont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/Sales) Asset turnover ratio (Sales/Assets) Leverage ratio (Assets/Equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios (x) Asset turnover (fixed assets) Receivables days Payable days 1.9 79 67 1.6 67 45 1.7 81 50 2.0 81 50 1.9 81 50 26.0 47.6 22.2 15.5 29.2 15.7 17.3 35.3 19.0 25.9 56.3 22.2 23.1 54.7 20.5 0.8 0.8 0.2 1.5 1.3 22.2 0.9 1.0 0.1 1.4 1.2 15.7 0.7 1.1 0.1 1.5 1.4 19.0 0.7 0.9 0.1 1.9 1.3 22.2 0.7 1.0 0.1 1.8 1.2 20.5 10.8 14.7 0.9 48.8 5.7 16.7 0.9 73.9 8.0 10.6 0.9 39.8 10.9 14.2 0.9 51.1 12.8 16.4 0.9 64.1 10.7 7.9 2.4 0.7 2.8 12.8 4.1 20.3 6.9 1.6 0.7 1.9 12.8 2.7 14.4 10.9 2.9 0.7 1.4 9.8 2.1 10.6 8.1 2.3 0.7 0.9 5.6 1.7 9.0 7.0 1.8 0.7 0.7 4.8 1.3 FY2010 FY2011 FY2012 FY2013E FY2014E

January 29, 2013

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KPIT Cummins Infosystems | 3QFY2013 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

KPIT Cummins No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

January 29, 2013

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