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Krishnan Thiagarajan

KPIT Cummins Infosystems represents a good investment choice for investors with a medium-term perspective. The stock trades at a fairly stiff price-earnings multiple of 15 times its annualised per share earnings of 2003-04. But given its strong earnings performance in the first half of 2003-04, scaleable business model and encouraging growth prospects in its focus verticals, KPIT Cummins is well-positioned to capitalise on the offshore outsourcing trend in the coming years.

KPIT Cummins has employed a business model which is focussed on addressing four key areas, from the standpoint of a medium-sized software company:

Focus on two verticals: The company is primarily focussed on two verticals — manufacturing and BFSI (banking, financial services and insurance). While the former contributed 69 per cent of total revenues of Rs 28.94 crore in the second quarter of 2003-04, the latter chipped in with 26 per cent.

Besides, focussing on these two verticals, KPIT Cummins is also building competency in technical areas such as embedded software, e-Business, collaborative computing and ERP. To fill the strategic gaps in the manufacturing vertical, KPIT Cummins acquired 100 per cent of US-based PANEX Consulting for $1.7 million in late August this year. This firm specialises in SAP consulting and the consideration for this deal is payable through a mix of cash and stock options over a period of three years.

Strategic customer focus: KPIT Cummins has chosen to focus on Cummins Inc., US, the largest designer and manufacturer of diesel engines, as its star customer. The company is one of the three preferred vendors for Cummins. In 2003-04 second quarter, Cummins accounted for 51 per cent of the total revenue, up from 34 per cent in the previous year. Excluding Cummins, it offers software services to five Fortune 500 customers.

These customers accounted for 31 per cent of the revenues, with no single customer contributing more than 11 per cent.

The offshore transition: From a pure onsite focus, the company is steadily making an offshore transition. In the latest quarter, the offshore contribution was 47 per cent of total revenues, significantly higher than 34 per cent in the previous year. The operating profit margins improved by around one percentage point at 14.4 per cent in the second quarter and may start inching in the coming quarters.

Geographic diversification: In 2003-04 second quarter, US geography contributed 55 per cent of its revenues and 40 per cent was from Europe.

To further broadbase its geographical presence, the company also plans to target the manufacturing vertical in the promising Asian markets.

Though KPIT Cummins has charted out a prudent business model, it remains exposed to several risks and challenges. These are: The dependence on Cummins as its largest customer, managing the onsite to offshore transition, enhancing offshore billing rates (which are the lower relative to its peers) from its strategic customers and successfully integrating the acquisition with its verticals.

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