Buy KPIT Cummins Infosystems - Results outperform; growth trajectory lifts up - BRICS

Results outperformed our expectations but were broadly in-line with consensus. KPIT reported US$95.4 mn in revenue, up 30% qoq aided by 12% organic growth and US$13mn from the Systime consolidation. It aims to generate US$500mn in sales by Q4FY13 with an EBITDA margin of 18%. Since guidance is for US$408-418mn (32-35% yoy) sales in FY13, we believe more acquisitions are likely. We raise our target to Rs120 (from Rs105) as we up our earnings estimates for FY13 and 14 by 1% and 19%. Maintain BUY.

Strong results; margin improves despite FX headwind:

In Q4, KPIT reported 27% qoq revenue growth to Rs4.8bn and 6.3% growth in earnings to Rs437mn, boosted by Rs100mn in exceptional items. EBITDA margin of 15.8% was better than our expected 13.2% as its recently-acquired Systime business delivered 10% margins (vs. our estimate of 4-5%) and operational efficiency nullified FX headwind impact.

Will need a few more acquisitions to achieve sales guidance:

KPIT's revenue growth guidance is the strongest in its peer group at 32-35%. Adjusting for Systime, organic implied guidance is 20-24% and is comparable with Hexaware. It aims for US$500mn sales by Q4FY13 and US$1bn sales by 2017 - we believe it would need a few more acquisitions to achieve this target. It has acquired 20% stake at US$2mn (with option to go up to 90% in three years) in Japan-based Embedded Software specialist company GAIA Systems Solutions Inc, which has annual revenues of around US$12mn.

Outlook and valuation:

The stock trades at a P/E of 8.2x FY13 and 6.2x FY14 earnings. KPIT has Rs2.3bn total debt and Rs1.84bn cash. We have revised our estimates to include Systime in FY13 numbers, changed currency rate to Rs50.9/US$ (from 52), and tweaked interest charges and FX losses. We raise our target to Rs120 (keeping target multiple unchanged at 10x average FY13-14 earnings) and maintain our Buy rating based on strong organic as well as inorganic growth momentum from robust deal pipeline, and margin expansion potential in Systime and SAP businesses.

Margin improvement headroom from Systime and SAP business:

KPIT's EBITDA margin has improved to 16% in Q4FY12 from 12.6% in Q1FY12 because of the contribution of all business units. However, margins in its SAP and Systime businesses are much lower than the company average and therefore, present an opportunity to improve overall margins.

Estimates upped:

We have revised estimates as we incorporate Systime in our FY13 and 14 numbers, change exchange rate to Rs50.9/US$ (from 52), and tweak interest charges and FX losses based on outstanding hedges of US$138.6mn (of which US$69mn is at an exchange rate of 49.09 maturing within a year, and the remaining is at 52.07, maturing after a year).

Source : Equity Bulls

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