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KPIT Cummins: Nurturing its core strength says Nirmal Bang

Tactful acquisitions by KCIL have led to a strong foothold in focus verticals and are helping the company to steer ahead of competition, say Nirmal Bang research report.

July 15, 2013 / 11:51 AM IST
 
 
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Headquartered in Pune, KPIT Cummins Infosystems (KCIL) was incorporated in 1990 as KPIT Infosystems. Later in 2002, it merged with Cummins Infotech and formed KPIT Cummins Infosystems. Cummins is the company's top client and contributes almost 17% to the topline.


KCIL is a leading product engineering and IT consulting company, which provides IT and consulting solutions to automotive and transportation, manufacturing and energy and utilities companies.


The company focuses on select strategic business units (SBUs) - integrated enterprise solutions, auto and engineering and SAP.


It is a technology partner to over 165 global corporations including Original Equipment Manufacturers (OEMs), semiconductor companies and automotive Tier I companies. As on 31st Mar '13, KPIT Cummins Infosystems Ltd had 8,321 employees.


Investment Rationale


Tactful acquisitions have led to a strong foothold in focus verticals


KCIL has been actively acquiring companies with strong domain expertise in areas of automotive engineering, electronics, SAP and Oracle, JD Edward Solutions, etc in the last 5 to 6 years.


It acquired CG Smith Software Pvt Ltd (2006), Sparta Consulting (2009), CPG Solutions (2010), In2Soft GmBH (2010) and Systime (2011). The acquisition of CG Smith helped the company to strengthen its automotive vertical.


While eSparta enhanced the company's SAP consulting practices, CPG and SYSTIME acquisitions have helped the company to widen the Oracle services offerings and its geographic presence. During the same period (FY07-FY12), KCIL's revenues and profits grew at a CAGR of 26.5% and 23.6%, respectively.


A major part of this growth of the company is attributed to these acquisitions. The company has a revenue target of USD 1 billion by FY17 with EBITDA margins of 18%.


Automotive vertical to be a major revenue growth catalyst


USA has been facing a slowdown in its economy, which has badly hampered sectors like automotive engineering and manufacturing in the US.


More than 75% of KCIL's revenues come from the US and continual client budget cuts and delayed decision making had affected the company's automotive vertical.


However, the US economy is now on the road to recovery and the US automotive industry is bullish about the coming year and expects a fairly steady continuation of growth momentum in both the economy and in vehicle sales, going forward. This is a positive for KCIL as this segment contributes almost 39% to 40% to the topline.


Moreover, impelled by technological advancement and consumer demand, electronics constitutes the fastest growing segment in the global auto parts industry.


Continual growth in client addition assures good growth potential


In order to reduce the dependence on its top client Cummins, which has not been doing too well since the past few quarters and to reduce the risk of client concentration, KCIL has been focusing on acquiring new clients and mining the existing ones. Its active customers have grown from 152 in Q3FY11 to 183 in Q4FY13.


On the other hand, revenue contribution from its top client has come down from 24.8% in Q3FY11 to 16.6% in Q4FY13, while contribution from its non-Cummins accounts have been increasing during the same period.


In a nutshell


Concerns regarding the weakness in Cummins account has been taken care of by increasing the share of non-Cummins account. Moreover, SAP business is back on track and with recovery seen in the key market - USA, the management is confident of good traction in the automotive business, as well.


Thus, the resolution of ongoing concerns, coupled with improvement in discretionary spend and a strong deal pipeline has resulted in the management guiding for 14% to 16% dollar revenue growth in FY14. The stock is currently trading at a trailing P/E of 11.1x on FY13 EPS and looks attractive.


Source: Nirmal Bang's Beyond Market


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