Stock Fundamentals

KPIT Cummins: Buy

K. Venkatasubramanian | Updated on March 12, 2018

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Sustained momentum in its key segments, expansion in top clients and large deals in the pipeline are key positives for the company.



Mid-tier IT services player KPIT Cummins Infosystems (KPIT) has been able to strongly tap into the revival in outsourcing from 2010, post the financial meltdown. Despite focussing on limited segments, the company is among the select set of mid-tier players to have matched the growth rates of most top-tier players in revenues in FY11 and even outpace them in FY12. Robust traction in its key vertical comprising three segments — automotive, transportation and manufacturing — expansion in the contribution of top clients and healthy large-deals pipeline are key positives for the company.

At Rs 163, the KPIT trades at nine times its likely per share earnings for FY13. This is at a discount to peers such as Infotech Enterprises and presents a reasonable entry point for investors with a two-year horizon.

In terms of its service-mix too, revenues from high-margin services such as SAP implementation have increased, and key markets, including the US and Europe, remain healthy. In the first nine months of this fiscal, KPIT witnessed a 51.5 per cent increase in revenues to Rs 1044.1 crore over the same period in FY11, while net profits rose 48.9 per cent to Rs 101.6 crore. The company has increased its revenue guidance for the current fiscal by about $10 million to $303 million, up 44 per cent increase over FY11.

Key segments expand

KPIT has seen its key ATM vertical (automotive, transport and manufacturing) which accounts for over 70 percent of its revenues continue to grow at a rate faster than the company's revenue growth rate . Manufacturing as a vertical has been growing at a healthy pace for Infosys, HCL Technologies and TCS as well. This indicates a large potential market. It has also managed to sustain in a scenario where large customers undertook a vendor rationalisation exercise. With increased investments in ‘electronics' in cars, automotive too is set to deliver higher revenues for players such as KPIT . The company is among the largest third party vendors in India in auto-embedded electronics.

KPIT acquired a SAP implementation company SYSTIME in late 2010, which has increased the scope of its offering to customers, especially large ones. It has enabled the company to win some $10-million plus deals (rare earlier) in the manufacturing and automotive industries.

Deal pipeline

The company has seen its top client, Cummins, and 10 other top customers grow at 38.2 per cent and 32 per cent respectively. This indicates KPIT's execution and client mining capabilities.

KPIT had signed three large deals worth $100 million in the September quarter, which ensures revenue visibility and adds to annuity-based revenues. These apart, the number of $1 million customers has increased from 40 in December 2010 to 54 now.

Utilisation rates, which reflects volumes (person-months billed) growth, is up for the company. From mid-60 per cent levels earlier, offshore utilisation is up to over nearly 72 per cent now . Onsite utilisation rates too continue to rise.

Risks

Attrition, though falling, is still at a relatively high 17 per cent. Any wage hikes to stem this may hurt margins. KPIT derives nearly 48 percent of its revenues from onsite delivery, which are high cost in nature, and is steadily rising. These will have to managed well to optimise costs.

Published on February 11, 2012

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