KPIT Cummins Infosystems - Muted results, rising debt level; downgrade to ADD - BRICS

KPIT reported muted Q3FY13 results, with revenue down 0.7% qoq to Rs5.63bn, mainly due to lower number of billing days, while margins declined by 100bps qoq, owing to additional impact of lower realized rate. Management maintained its FY13 revenue guidance, but raised its PAT guidance to Rs1.96bn-Rs2bn (from Rs1.67bn-1.74bn), due to better margins and Rupee depreciation. We lower our FY14/15 EPS estimates by 2% and 3% respectively, to adjust for KPIT's debt and variation in other income. We lower our target P/E multiple to 10x (from 11x earlier), to factor in KPIT's rising debt required to fund its acquisitions and expected weakness in Cummins account. Downgrade to ADD with target price of Rs130.

Revenue and earnings below expectations: KPIT's revenue remained flat at US$103.46mn, due to 2-3 less billing days in Q3, leading to a revenue loss of 3%. EBITDA margin contracted by 100bps qoq to 15.7%, due to loss of billing days, decline in realized rate, and higher S&M expenses. Impairment charges of Rs94.5mn for acquiring minority stake in a foreign company impacted KPIT's net earnings. Revenue growth is likely to recover in Q4, but will be moderated by continued weakness in Cummins in H1CY13.

Management raises FY13 earnings guidance: Management has maintained its FY13 revenue guidance of US$408-418mn (i.e. US$ growth of 32-35% and Rupee growth of 36-39%) and raised its PAT guidance by 17.4-15% to Rs1960–2000mn (i.e. a growth of 35-38% yoy), led by better margin expansion. KPIT will need to record a US$ revenue growth of -0.4- 9.3% in Q4 in order to meet its guidance.

Valuation: The stock trades at a P/E of 8.9x FY14 and 7.9x FY15. KPIT's total debt stands at Rs3.61bn and it has a cash balance of Rs 4.07bn. KPIT has raised debt (via ECB) of US$20mn (Rs1.1bn) to fund its future acquisitions and will incur an outgo of US$23mn over CY13 towards earn outs for its previous acquisitions. We lower TP to Rs130 (from Rs150 earlier), based on 10x FY14 earnings and downgrade stock to Add, in view of KPIT's plateauing margins, weakness in top account (Cummins), and rising debt for funding acquisitions.

Source : Equity Bulls

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