Buy KPIT Cummins - Niche + Catalyst - Dolat Capital

Niche in Automotive: It is leading engineering service provider in automotive segment. It is going to benefit from incremental role of IT in auto manufacturing as it would leverage its strong client profile. Client portfolio includes 16 large OEMs (6 of top 10) and 50 Tier I OES.

'Revolo'-ution: Its inhouse built plug in parallel hybrid solution is likely to get commercial launch in FY14 and could act as a major catalyst in its revenue. Currently, it is undergoing trials for 200 cars and homologation process and should start witnessing commercialization in mid FY14.

Focused approach: It has divested non scalable, BFS division, diverting its entire efforts towards its strength i.e., Automotive, Enterprise segment and emerging Utilities sector in US.

String of pearl: It has mastered the art of acquiring small niche companies and scaling the business by client mining through wider offering and offshoring leverage. It has successfully integrated 5 companies in last five years - Systime, Sparta, CPG, In2Soft and Harita.

Earn outs get funded: Various acquisitions has strained its cash flows in recent past, with total earn out outgo expected at USD 50mn over next 6 quarters. However; it has risen about USD 30mn through private equity placement in Nov'12 and would raise some debt to fund this payments.

Confident outlook: Revenue in H1 has grown by 43% YoY basis on strong organic growth momentum and Systime integration. It has maintained its guidance of 35% revenue growth despite soft outlook for Q3.

View: We remain positive on the stock in view of its focused approach on its niche strength (Automotive, Enterprise services) and sustained strong business traction through new deal wins and through successful integration of acquired entities. We maintain our BUY rating with a TP of Rs.155 (valued at 10x FY15E EPS).

Source : Equity Bulls

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