Wednesday, August 22, 2012

>KPIT Cummins: 1QFY13 Results Update

Good quarter, rich valuations; Maintain HOLD

KPIT reported good 1QFY13 with an ahead-of-industry 5% Q/Q US$ revenue growth, limited margin decline despite taking wage hikes ahead of peers and healthy metrics all-across. Further, management expects growth momentum to continue driven by healthy deal pipeline. We believe that KPIT would continue to grow ahead of industry and build revenue/EPS CAGR of 27%/21% over FY12-14E. While we fundamentally like the company, valuations at P/E of 12x FY13E, are at the upper end of mid-cap trading range. Maintain HOLD with a revised Mar’13 target price of Rs130/share.

 Healthy top-line growth: KPIT’s 1Q reported USD revenue came in at USD 98.05mn up 2.8% and broadly in-line with expectations. Adjusted for the SSG divestiture, continuing business grew by a healthy 5% QoQ. SYSTIME’s revenue grew by 11.6% QoQ to USD 14.7 million. We continue to expect a healthy 3-4% CQGR throughout the year which should help deliver a 22% organic growth over full year FY13.

 Manufacturing steady; US, Europe healthy: From a vertical perspective, Energy & Utilities grew by ~22% QoQ on a low base while manufacturing was steady with 3.4% QoQ growth. Among geographies, US and Europe saw healthy growth of 6.9% and 4.2% respectively. Enterprise solutions (Oracle) mix increased to 44.4% (42.6% in Q4), while SAP mix declined to 31.9% (32.4% in Q4).

 EBITDA Margins in-line, PAT beat driven by FX gain: EBITDA margins came in at 15% down 75bps QoQ, slightly ahead of expectations. The company has given a full quarter of wage hikes of 10% offshore and 4% onsite. Margin movement breakup: growth +30bps, forex +230bps, Wage hikes -300bps and Visa costs -35bps.

 Metrics: KPIT added 3 new clients in the quarter and 1mn+ customers increased by 6 to 65. Overall head count increased by 154 in the quarter while development headcount increased by 141. Offshore utilization stayed flat at 74.1%. Debtor days were at 75. Hedges outstanding at the end of 1Q were $120mn.