Stock Market Update on KPIT Cummins Infosystems for 1QFY2012

Stock Market Update on KPIT Cummins Infosystems for 1QFY2012 with an Accumulate recommendation and a Target Price of `206 (12 months)

For 1QFY2012, KPIT Cummins Infosystems (KPIT) reported a decent performance. For FY2012, management maintained its USD revenue guidance of US$275mn–285mn, i.e. 23–27% yoy growth, and has given PAT growth guidance of 25% yoy, i.e. `118cr. Management stated that the company’s demand pipeline is strengthening on account of recovery in its anchor vertical, manufacturing. Over FY2011–13E, we expect a strong 29% CAGR in USD revenue, with a 26.8% CAGR in PAT. Thus, we maintain Accumulate on the stock.

Quarterly highlights: For 1QFY2012, KPIT posted revenue of US$70.1mn, up 7.0% qoq, led by 4.0% qoq volume growth. In rupee terms, revenue came in at `316.1cr, up 6.4% qoq. The company’s EBITDA margin declined by 201bp qoq to 12.6% due to wage hikes given from April 1, 2011 (13% for offshore employees and 4% for onsite employees). PAT stood at `24.1cr, down 8.5% qoq due to higher tax rates (22.5% as against 13.8% in 4QFY2011) and lower other income of `2.2cr vs. `4.5cr in 4QFY2011.

Outlook and valuation: KPIT has been growing at a scorching pace of 7.7% CQGR over 3QFY2011–1QFY2012 after the complete integration of In2soft and CPG in 2QFY2011. The company has recently acquired 50% stake in Systime, which is based on Oracle practice and expects it to continue to post a 20% CAGR going forward. Management has been very proactive in terms of acquiring capabilities in the enterprise space to drive growth such as SAP (Sparta) and Oracle space (In2soft, CPG and Systime). Thus, we expect KPIT’s revenue to post a CAGR of 28.9% in USD terms and 27.1% in INR terms over FY2011–13E, with EBITDA and PAT CAGR of 30.9% and 26.8%, respectively. We maintain our Accumulate rating on the stock with a target price of `206, valuing it at 12x FY2013E (five-year historical one-year forward median P/E) EPS of `16.9.