KPIT Q3FY12 result update—Better than expected - Arihant Capital Markets

Key Highlights:

- Better than expectation: KPIT posted their Q3FY12 result which was better than our estimate. In US$ terms, it grew its revenue by 4.3% QoQ at $73.4 mn v/s our expectation of $72.2mn. In INR terms, its revenue went up by a whopping 16.6% QoQ to Rs.378.9cr while its bottom line grew by 12.6% QoQ to Rs.41.1cr vis-à-vis our expectations of a topline and bottomline of Rs.368.4cr and Rs.38.3cr respectively. It also improved its EBIDTA margin by 166bps to 15.3% while we expected an improvement of 152bps. Thus, KPIT managed to beat our expectations on all front.

KPIT's PAT included an other income component of Rs.10.8cr which mainly consisted a forex gain of Rs.9.8 arising out of rupee depreciation; while Systime contributed Rs.0.5cr to the bottom-line compared to Rs.2.8cr in Q2FY12. The weak number of Systime was as a result of one-time expense related to integration and marketing and also due to loss of billing days. Volume growth was healthy at 6.5% onsite and 2.5% offshore.

Strong growth by all geographies, verticals: KPIT exhibited all round growth in Q3FY12 with its 3 main SBUs namely, SAP, IES and Auto & Engg. exhibiting robust growth of 27%, 16.5% and 10.7% on a sequential basis. The Semi-conductor SBU however saw another quarter of de-growth of 10.5% QoQ.

Geographically, US posted a robust growth of 20.6% QoQ, while Europe grew by a healthy 10.2% QoQ and RoW by 3.8%QoQ. The growth in Europe after the moderate degrowth that was seen in Q2 is a positive sign. Going ahead, the management expects the strongest growth to come from the US geography, followed by APAC and Europe.

Healthy growth by top clients: During the quarter, KPIT's top client Cummins' revenue grew by a whopping 23.4% QoQ taking its proportion of total revenue to 23.9% from 22.6% in the previous quarter, while its top 5 and top 10 clients grew by 12.1% and 13.4% sequentially. The management indicated that the Cummins account will continue to exhibit healthy uptick going ahead. The overall deal pipeline also remains strong. During the quarter, the company added 2 new clients taking its customer base to 165.

Strong margin improvement: KPIT improved its EBIDTA margins by 166 bps mainly on the back of a favourable exchange rate which contributed ~300bps. Secondly, operational efficiency especially in the SAP SBU also boosted margin. However, margins were negatively impacted by loss of billing days on account of a seasonally weak quarter which shaved off ~200 bps. A lower utilisation rate also impacted margin negatively.

Ups revenue guidance: On account of healthy traction being witnessed for its services even in a weak macro scenario, KPIT upgraded their organic revenue guidance in US$ terms to 289-291mn (a growth of 30% YoY) from $275-285mn given earlier. Inclusive of Systime's revenue which will be consolidated from the fourth quarter onwards, the management believes it will be able to clock revenues to the tune of $300-303mn.

Valuation: Though KPIT has been putting up good performance on a consistent basis, we believe that the company needs to do more on the margin front. The margin uptick in Q3 is largely on the back of INR depreciation, and with the rupee showing signs of appreciation, it will have to take stronger measures to sustain margin at current level. Another concern is the weakness in the global economy. Therefore, taking into account a weaker rupee, though, we are upping our estimates, we however maintain our previous target price of Rs.213 per share and reiterate our "ACCUMULATE" call on the stock.

Source : Equity Bulls

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