KPIT Cummins - Good Quarter, maintains annual guidance; Reiterate Hold - Sunidhi

KPIT's Q2FY13 revenue at US$103.4 mn was up 5.5% QoQ, higher than our estimate. On lower-than-expected SG&A costs, operating margin increased 157bps QoQ to 16.7%. Forex loss of Rs.213mn marred PAT for Q2FY13. Volume growth for Onsite was ~9% and offshore was ~3% (blended ~4%).We maintain our HOLD rating on the stock with a Target Price of Rs.140 on account of recent deal wins providing visibility and KPIT maintaining its FY13 US$ revenue guidance (31-34% growth), focus on profitability and broad-based growth.

Improved revenue visibility leads to robust guidance. On account of improved visibility due to large deal wins in the earlier quarters, KPIT has maintained FY13 revenue guidance of US$408-418mn, translating to a 31-34% YoY growth.

Organically KPIT grew 6% in constant currency terms QoQ. SYSTIME grew 15.7% QoQ this quarter (11.6% in Q1FY13). Integrated Enterprise Solutions (IES) and Automotive & Engineering (A&E) grew 9% and 8.5% QoQ respectively, while SAP SBU declined 2% QoQ. Cummins (Top client) grew by 52% YoY (revenue share stood at 19.7% in Q2FY13). Top 5 and Top 10 clients (excluding Cummins) grew 2.4% and 4.6% QoQ respectively.

KPIT has margin leverage going ahead: KPIT's Q2FY13 margin was positively affected by lower-than-expected SG&A costs. G&A expenses were down 7.2% QoQ to Rs.634mn, while S&M costs increased by just 2.3% QoQ. Integrated Enterprise Solutions (IES), Automotive & Engineering and SAP SBU had margins of 17%+ in Q2FY13 (including SYSTIME), 23%+ and 7%+ respectively. The company is looking at increasing profitability across all its SBU's as well as SYSTIME going forward. We believe, KPIT has some margin levers such as employee pyramid broadening, better productivity mix and higher offshoring going ahead.

REVOLO update: 1) Government recently announced National Electric Mobility Mission for which ~Rs.230bn funds are being set aside. These funds would be used for demand creation, infrastructure creation and Research & Development. KPIT Cummins is participating in various working groups as a part of this National Mission. 2) We, in our modeling have not modeled in for any revenues from REVOLO. Any commercial success would be an upside risk to our estimated revenues.

Outlook and Valuation: With strong R&D budgets in US Automotive Engineering and rising discretionary spending in the US, KPIT Cummins is well positioned with a core focus on Automotive Engineering and Enterprise Application Services (EAS). We continue to value KPIT at 12xFY14E earnings of Rs.11.8, translating to a Target Price of Rs.140 (Rs.140 earlier) and thus retain our HOLD rating.

Source : Equity Bulls

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