Buy KPIT Cummins; target of Rs 195: SPA Research

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Buy KPIT Cummins; target of Rs 195: SPA Research

SPA Research is bullish on KPIT Cummins and has recommended buy rating on the stock with a target of Rs 195 in its January 16, 2012 research report.

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SPA Research is bullish on KPIT Cummins and has recommended buy rating on the stock with a target of Rs 195 in its January 16, 2012 research report.

"KPIT, a mid-tier IT service provider in the Manufacturing domain especially automotives, is landing good growth numbers on the back of (i) focused approach in tapping high domain expertise, high growth markets and (ii) filling the service gaps in those verticals through inorganic route. It has had 10 successful acquisitions in last 9 years with an impeccable integration record. Thus, even after letting go of the non-core businesses the company has recorded a c.8% USD revenue CQGR in the past 10 quarters."

"At the start of 2QFY12, KPIT's management realized the need to move out of the non-core businesses. Thus, the company divested its Diversified Financial Services (DFS) business, which contributed 4% to the topline with c.2% net profit margin against c.10% of the company average. This has freed the sales team and the management to concentrate more on selling high margin core capabilities. The company obtains c.66% of its revenue from Manufacturing sector with c.47% contribution from the Automotives alone. US contributes c.68% to KPIT's revenue, hence an improvement in the Car sales in US (c.11.0% growth in CY11), has a direct impact on the company's revenue (c.46% $ revenue growth in FY11, fig. 12). KPIT's membership in AUTOSAR and JASPAR has landed it big deals from OEM's in China and Japan, 2nd and 3rd largest auto markets."

"KPIT's strategy to acquire companies which can provide either (i) requisite domain expertise in a related field (ii) service portfolio extension capabilities (iii) increased geographical reach or (iv) crossselling opportunities, has helped the company filling gaps to its Automotive and ERP service. Its recent acquisition of Systime, second largest deal ever, would add significant "ERP - JD Edwards" software and service capabilities to its repertoire (Auto and E&U largest market). We expect the integration to be complete by mid-FY13, as was the case with Sparta, KPIT's largest acquisition till date. KPIT's growth unlike other mid-tier Indian IT vendors has not been dependent on the growth of its top-5/10 clients. Its non-Top 10 clients have grown faster at 13.8% CQGR over the last 10 quarters. This is an outcome of both organic and inorganic initiatives the company's been taking. Cummins account though stable and showing sustained growth now accounts for c.22% of overall revenues vis-a-vis c.50% in FY06."

"With strong foothold in the Automotive, Engineering and Enterprise services we expect KPIT to register a c.22% $ revenue growth over FY11-13E. Significant currency tailwind helped by margin levers like (i) correction of employee pyramid and (ii) headroom to improve utilization rate (iii) higher offshoring and (iv) more FPPs, would optimize costs and improve the EBITDA Margins. We expect FY12E/13E EBITDA Margins to be at 15.0%/16.1% respectively. As a result of improving margins and strong volume growth we expect the EPS to grow at c.51% CAGR over FY11-13E. Thus we recommend BUY with a 15 month target price of INR 195.0 based on 10x FY13E earnings of INR 19.5," says SPA Research report. 

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To read the full report click on the attachment