KPIT Cummins - Strong guidance and margin outlook - Reliance Securities

Key highlights of the result

- Strong top-line growth: KPIT's revenue grew 29.9% qoq to US$95.4mn in 4QFY2012, reflecting strong volume growth. Consolidation of SYSTIME (acquired in 2QFY2012) added US$13mn to the top-line, as expected. Moreover, organic revenues also witnessed a healthy growth of 11.9% qoq on account of large deal wins, which was ahead of our estimates. In INR terms, revenues grew 26.7% qoq to Rs480cr.

- Improvement in EBITDA was a surprise: EBITDA margin improved ~50bp qoq to 15.8% despite consolidation of SYSTIME, which had EBITDA margin of 10%. Strong volume growth led to improvement in margins across all SBU's, which enabled the company to improve its overall margins.

- Forex loss affected the bottom-line: In 4QFY2012, forex loss resulted in negative other income of ~Rs11cr, compared to a gain of ~Rs11cr in 3QFY2012. Further, effective tax rate increased marginally impacting bottom-line. Consequently, adjusted PAT declined ~18% qoq to Rs33.7cr. Company had reported exceptional income of ~Rs10cr during the last quarter.

- Robust outlook by the Management: KPIT has given a strong top-line growth guidance of 32-35% in USD terms (US$408-420mn) for FY2013E. Considering a USD/INR rate of Rs50, growth in INR terms is expected to be in the range of 36-39% in FY2013E. Further, the management has guided for 15-20% growth in PAT. The company is also targeting to achieve a revenue run rate of US$500mn by the end of 4QFY2013. KPIT's long term vision is to become a US$1bn revenue company by 2017 with 18% EBITDA margins.

Outlook and Valuation

KPIT has continued to impress in terms of top-line growth and has positively surprised on the margin front. The large deal wins across all the SBU's over the last 3-4 quarters is likely to boost the growth prospects of the company. KPIT's strategy of acquiring small companies and increasing their revenues and profitability has paid rich dividends to the company in the past. We expect the company to report top-line CAGR of 28.5% over FY2012-FY2014E. However, we expect the margins to decline slightly in FY2013E, considering wage hikes, higher visa costs and lower margins of SYSTIME.

Consequently, we expect PAT to report a CAGR of ~22% during FY2012-FY2014E. The stock had appreciated more than 28% post our last report (dated January 25, 2012) to surpass our target price. We are now rolling over to FY2014E estimates, which gives us a target price of Rs111. Thus, we recommend a Buy on the stock.

Risks to the view

- The uncertainties plaguing the US and European economies can lead to volatility in the earnings in the short term
- We have factored in USD/INR rate of Rs51 and Rs50 for FY2013E and FY2014E respectively. Any sharp appreciation in INR will negatively impact our estimates
- Any delay in commencement of deals or cancellation due to uncertainty in US can result in deviation from our estimates.

Source : Equity Bulls

Keywords