Investment Idea - KPIT Cummins Infosystems Ltd - BUY

November11, 2010

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KPIT CUMMINS INFOSYSTEMS LTD BUY

KPIT Cummins Infosystems Ltd (KPIT) is a Pune based Information Technology

company focused on serving the Manufacturing Industry. KPIT caters to the Automotive,

Semiconductors, Enterprise IT and BFSI segments

After a significant downtrend, the Manufacturing Industry globally is looking in

better shape. Also, the outlook on KPIT’s top client Cummins has improved

significantly this year, compared to last year where lower IT spending by Cummins

contributed to negative sales growth.

The company has launched “REVOLO” with Bharat Forge, a product to improve fuel

efficiency. REVOLO is in final testing stage & is expected to add to revenues from

Q4FY11 and has the potential to be a major growth driver.

KPIT recently acquired Sparta Consulting, which services companies in the Energy &

Utilities space. The company will also cater to Defense & PSU companies, which will

help diversify its revenue stream from manufacturing vertical and widen its client

base.

We estimate KPIT Cummins’ revenues to grow at a CAGR of 31% over FY2010-12 to

Rs 12.59bn by FY2012. We further estimate that PAT would grow at a CAGR of 26%

over FY2010-12 to Rs 1.36bn.

Based on a consolidated FY12 P/E multiple of 11, the fair value for the

company works out to Rs. 191.

Recommendations <= 1 year 1 - 2 yrs 2 - 5 yrs

Strong Buy

Buy

Hold

Reduce

SellStrong Buy – Expected Returns > 20% p.a.

Buy – Expected Returns from 10 to 20% p.a.

Hold – Expected Returns from 0 % to 10% p.a.

Reduce –Expected Returns from 0 % to 10% p.a. with possible downside risk

Sell – Returns < 0 %

STOCK DATABSE / NSE Code

Bloomberg Code

No. of Shares (Mn)

Sensex / Nifty

PRICE DATACMP Rs (9th Nov '10)

Beta

Market Cap (Rs mn)

52 Week High-low

Average Daily Volume

STOCK RETURN (%)30D 3M 6M 1Y

KPIT Cummins -1% -3% 38% 61%

Sensex 3% 14% 25% 27%

Nifty 3% 15% 26% 28%

SHARE HOLDING PATTERN (%)Promoter

Institution

Non Institution

Total

1 Year Price Performance (Rel. to Sensex)

532400 / KPIT

KPIT IN EQUITY

79

20,931 / 6,302

158.8

24.9

45.1

100.0

0.91

12,528

193 / 87

307,849

30.0

-20

0

20

40

60

80

100

Sensex KPIT Cummins

Financial SnapshotProjections (Rs Mn) FY08A FY09A FY10A FY11E FY12E

Revenue 5,835 7,932 7,316 9,089 12,589

Y-o-Y Growth % 25.8% 35.9% -7.8% 24.2% 38.5%

EBIDTA 937 1,290 1,402 1,626 2,166

Y-o-Y Growth % 26.1% 37.7% 8.7% 16.1% 33.2%

PAT 513 659 857 983 1,362

Y-o-Y Growth % 1.6% 28.4% 30.2% 14.6% 38.6%

EPS Rs 6.5 8.3 10.8 12.5 17.4

BVPS Rs 33.5 20.9 49.3 61.8 79.2

EBIDTA % 15.5% 16.2% 19.0% 17.8% 17.1%

NPM % 8.9% 8.4% 11.9% 10.8% 10.8%

ROE % 19.3% 39.9% 21.9% 20.3% 21.9%

PER x 12.7 9.2

P/B Ratio 2.6 2.0

http://www.fullertonsecurities.co.in/

November11, 2010


KPIT Cummins is a Pune based Information Technology company primarily focused to the Manufacturing sector. Cummins

entered as a partner in 2002, and is a major client of the company contributing to 23 percent of revenues and holds a 15% stake.

The relation with Cummins has contributed to KPIT’s strong expertise in the Manufacturing sector. The company has won

accolades with membership in various groups in the automotive space & has SAP & Oracle Certified products in its portfolio.

In FY2010, 82% of KPITs revenues came from the manufacturing sector, BFSI contributed to 6.7% of revenues while Energy &

utilities contributed to 3% of revenues. In the automotive segment, KPIT’s work is in the R&D space, rather than in the

discretionary spending. While this segment slowed significantly after the financial Crisis, the management doesn’t expect

spending to fall again. In the semiconductor Industry, revenue growth was negative only the last 2 years, which indicates that

this segment is not expected to see the downtrend as seen in 2008-10. With offerings in SAP & Oracle, the company offers

solutions for Supply Chain Management, Business intelligence and Enterprise Resource Planning.

KPIT and Bharat Forge have launched REVOLO, an add-on to improve fuel efficiency in various vehicles. REVOLO is a cross

platform product and is in final stages of testing, has seen strong interest from various manufacturers. REVOLO has a price of

Rs. 60,000-140,000 & the company expects REVOLO to contribute to about 300-500crores of revenue in FY2012.

In the acquisitions space, the company acquired Sparta Consulting, which has offerings in SAP for Defense & utilities. This

acquisition doubled the SAP business of KPIT. In FY11, KPIT acquired a German company, In2Soft, which has products in Vehicle

Diagnostics & Telematics. In Q2FY11, the company acquired US based CPG solutions, which provides Oracle Consulting Services

to Manufacturing & Supply Chain companies.

KPIT added 600 employees in Q2FY11 & has total employee strength of about 6,000 employees. KPIT expects revenues of Rs. 300-500crores in FY2012 from REVOLO. Like most midsize IT companies, KPIT has high client concentration.

Cautiously positive outlook with an eye on concerns The outlook on KPIT’s revenues is encouraging, given its acquisitions to diversify its revenue base & bring more product offerings.

REVOLO has seen strong response from various clients and will contribute significantly in FY2012. The company is also looking at

Cloud Computing as another vertical.

While Cummins’ pie of the total revenue has been falling slowly, concerns persist with high client & sector concentration. Heavy

exposure to the US (67% of revenues) & depreciating Dollar make the company highly vulnerable to country & currency specific

risks. However, worries should reduce as the discretionary spends rise & acquisitions pay off.

BUSINESS PROFILE

Integrated Enterprise Solutions

35%

SAP35%

Auto &

Engineering27%

Semiconducter

Solutions Group3%

Revenue Composition by SBU on Q2FY11

USA67%

Europe20%

Rest of World13%

Geographical Segmentation of Revenues in Q2FY11


November11, 2010


Revenue Diversification, Profitability growth to improve ahead… In FY10, KPIT’s revenues fell by 7.7% because of reduction in Cummins’ IT budget. However, the management

maintains that fall was only in Q1FY2010 and is not expected to continue.

For the quarter ended Q2FY11, KPIT Cummins added 3 clients, taking the total clients to 147 with strong growth

across verticals. It reported revenues of Rs. 2.35 billion with Q-o-Q revenue growth of 14% and 33% on a Y-o-Y basis.

EBITDA improved by 8.8% on a Q-o-Q basis and 6.4% on a Y-o-Y basis & PAT increased by 14.2% & 12% for the same

period. For the current quarter EBIDTA margins were 15.25 % while PAT was at 10.1%, declining from 16.7% & 10.1%

over the previous quarter. The strongest growth was seen in APAC, where revenue growth of 20% was seen.

KPIT added 3 clients, taking the total client base to 147. Attractively valued at a P/E of 9.2 times its FY12E EPS

Peer Comparison KPIT Cummins’s margins are close to Tata Elxsi, but lower than Infotech Enterprises on the EBIDTA and Net Levels. RoE

at 22% is higher than that of Infotech Enterprises but lower than Tata Elxsi. However, KPIT trades at a higher P/E multiple

than Infotech Enterprises and Lower than Tata Elxsi. We believe that KPIT Cummins is Attractively valued at a P/E of 9.2

times its FY12E EPS.

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November11, 2010


Based on a consolidated FY12 P/E multiple of 11, the fair value for the company works out to Rs 191.

VALUATION

We estimate KPIT Cummins’ revenues to grow at a CAGR of 31% over FY2010-12 to Rs 12.59bn by FY2012.

We further estimate that PAT would grow at a CAGR of 26% over FY2010-12 to Rs 1.36bn in FY2012 from Rs

857mn in FY2010.

Based on a consolidated FY12 P/E multiple of 11, the fair value for the company works out to

Rs. 191

We recommend a ‘BUY’ rating on the stock.

Financial Analysis and ProjectionsParticulars (Rs Mn) FY08A FY09A FY10A FY11E FY12E

Net Revenue 5,835 7,932 7,316 9,089 12,589

Other Income 220 30 56 45 63

Total Income 6,054 7,962 7,373 9,135 12,652

Operating Expenditure 5,117 6,672 5,971 7,508 10,486

Depreciation 255 437 308 354 408

EBIT 682 853 1,094 1,272 1,758

EBIT Margin (%) 11.7% 10.8% 14.9% 14.0% 14.0%

Interest 94 76 67 81 107

Profit Before Tax 588 778 1,027 1,191 1,651

Less: Tax 76 120 169 208 289

Profit After Tax 512 658 857 983 1,362

PAT Margin (%) 8.9% 8.4% 11.9% 10.8% 10.8%

ROE (%) 19.3% 39.9% 21.9% 20.3% 21.9%

EPS (Rs) 6.5 8.3 10.8 12.5 17.4

BVPS (Rs) 33.5 20.9 49.3 61.8 79.2

Valuation Ratios (x) FY11E FY12E

P/E 12.7 9.2

P/B 2.6 2.0


November11, 2010


Board of Directors

Director Name Current Position Description

Kishor Patil CEO, MD

Mr. Kishor Patil serves as Chief Executive Officer, Managing Director, Executive Director of KPIT Cummins Infosystems Ltd. He is a

Fellow member of The Institute of Chartered Accountants of India and an Associate member of The Institute of Cost and Works

Accountants of India. He has 21 years of experience in various areas like information systems and Design, Marketing, Organization

Methods and Systems etc. He is in-charge of the overall management of the Company. Kishor is the member of the

Shareholders'/Investors' Grievance Committee and the Share Transfer Committee.

Deepak Malik Independent Director

Mr. Malik serves as Independent Director of KPIT Cummins Infosystems Ltd. He was co-opted as an Additional Director of the

Company by the Board of Directors as per the Investment Agreement entered by the Company with Cargill Mauritius Ltd. Pursuant

to Section 260 of the Companies Act, 1956 he will hold office of Director up to the date of ensuing Annual General Meeting. Mr.

Malik is a Managing Director of Black River Asset Management, a global asset management company with more than US$ 9 billion

of assets under management. He has knowledge of the information services and software industry, with discipline around

operational performance, margin and cost structures underlying those businesses. Earlier in his career, he was an investment

associate with Merrill Lynch. Mr. Malik holds a B.A in Economics from Delhi University, a M.A. in Economics from the Delhi School of

Economics and an M.B.A. from Cornell University. He is a Charter Member of TiE.

S. Pandit

Non-Executive

Chairman of the Board,

Group Chief Executive

Officer

Ravi holds a MS (Management) degree from Massachusetts Institute of Technology. He possesses experience of over three decades

in the fields of IT, Corporate Strategy Formulation and Management Consulting. Ravi was an Audit Professional at Alexander Grant

& Co., USA, following which he became a partner at Kirtane & Pandit Chartered Accountants (KPCA) from 1975-1990. Ravi is a

Fellow member of the ICAI and an Associate member of ICWAI. At KPIT Cummins, he leads the team in formulating corporate

strategy, performance goal setting, investor relations, strategic transactions, external communication and other Board matters. He

also plays a strategic role in community initiatives and corporate governance.

Girish WardadkarPresident, Executive

Director

Mr. Girish Wardadkar serves as President, Executive Director of KPIT Cummins Infosystems Ltd. He is B.E. (Mechanical) from VJTI,

Mumbai and M.M.S. from JBIMS, Mumbai in Operations Management & Advanced Financial Management. He bringswith him over

two decades of professional experience and business leadership with companies such as Wipro and General Electric. His

experience extends across areas such as IT, BPO, Sales & Marketing, Manufacturing & Engineering, Implementing and Operating

Global Programs and General Management. At KPIT Cummins, he is responsible for Operations Management. He has played an

active role in formulating the operational policy - One Team, One Goal, Zero Surprises

Bruce CarverNon-Executive

Director

Mr. Bruce Carver is currently the Vice President and Chief Information Officer at Cummins Inc. Prior to joining Cummins, he was

the Vice President and Global Chief Information Officer at Dana Corporation and served on the Executive and Operating

committees. Bruce earned a Bachelor of Science degree in Finance from Virginia Tech and a Master’s degree in Human Resources

and Organizational Development from DePaul University in Chicago. In 2000, Carver was listed among the top 100 Information

Technology Executives by Computerworld magazine. Bruce is the member of the Quality Council Committee of the Company.

Elizabeth CareyNon-Executive

Director

Ms. Elizabeth Carey is Non-Executive Director of KPIT Cummins Infosystems Ltd. Elizabeth is presently the Sponsor of the Power

Generation Corporate Social Responsibility (CSR) where she draws on her long personal history of volunteerism to guide Power

Generation’sCSRfocus. Elizabeth isalso the Sponsor of the Women’sAffinity Group at Power Generation. She joined Cummins Inc.

in 1993 as the Director of Electronic Controls. In 1998, Elizabeth became the Executive Director for High Horse Power Engineering

where she led the development of the natural gas engines and functional responsibility for HHP diesel and natural gas engine

design and analysis. Elizabeth has a B.S. in Mathematics and B.S. in Statistics from the California Polytechnic State University, San

Luis Obispo and completed MSrequirements in 1990 for Electrical Engineering — emphasis on controls from the California State

University, Long Beach.


November11, 2010


Board of Directors Contd..

Sudheer Tilloo Independent Director

Mr. Sudheer Tilloo serves as Independent Director of KPIT Cummins Infosystems Ltd. He is an Electrical Engineering Graduate from

the Birla Institute of Technology, Pilani and holder of a Masters Degree in Electrical Engineering from the University of Wisconsin,

Madison, USA, is the Managing Director of Mahindra Hinoday Industries Limited, a joint venture of DGP Enterprise with Hitachi

Metals, Japan. Sudheer advises the Company in defining business strategy, building close client relationship and managing

people’s performance which are critical areas for the Company’s success.

Anant TalaulicarNon-Executive

Independent Director

Mr. Anant J. Talaulicar serves as Non-Executive Independent Director of KPIT Cummins Infosystems Ltd. He is BEMechanical from

Mysore University, MS from the University of Michigan in Ann Arbor and MBA from Tulane University, USA. He has worked for

Cummins for 17 years in U.S. in varied fields like Finance, Manufacturing Product Management, Strategy, Marketing and General

Management. Prior to this, he led the USD 300 Mn. North & South American Power Generation business. Mr. Talaulicar isamember

of the HR & Compensation (Remuneration) Committee of the Company.

Shrikant DatarNon-Executive


Dr. Datar serves as Non-Executive Independent Director of KPIT Cummins Infosystems Ltd. He is is Arthur Lowes Dickinson

Professor of Accounting & Senior Associate Dean of Harvard Business School. A Gold Medallist from Indian Institute of

Management, Ahmedabad, Gold Medallist from Institute of Cost and Works Accountants of India, a Chartered Accountant, he

holds a Ph.D. from Stanford University. Dr. Datar had also won the prestigious George Leland Bach Award for Excellence in the

Classroom at Carnegie Mellon University and Distinguished Teaching Award at Stanford University. Dr. Datar’s areasof interest are

Strategy implementation and execution, Cost management and management control and Corporate Governance and he is also

the co-author of a text book on Cost Accounting. He has worked with many global corporations on consulting and field-based

projects in management accounting and control. He is a member of the HR& Compensation (Remuneration) Committee of the

Company.

Amit KalyaniNon-Executive


Mr. Kalyani serves as Non-Executive Independent Director of KPIT Cummins Infosystems Ltd. He has received his Bachelor’s in

Mechanical Engineering from Bucknell University, Pennsylvania, USA. He joined Kalyani SteelsLimited in 1997 and was deputed to

Carpenter Technology Corporation, USA for technical training and to oversee technology transfer to the new joint venture viz.:

Kalyani Carpenter Special Steels Limited. On completion of the assignment, he returned to India to join Bharat Forge Limited, in

1998 as Vice President & Chief Technology Officer. He is involved in the Company’s strategic planning and global business

development initiatives and contributes significantly across functions such as manufacturing, marketing, exports and technology

up-gradation of the Company. Mr. Kalyani is the Chairman of the HR & Compensation (Remuneration) Committee of the Company.

R. Malshekar Independent Director

Mr. Mashelkar serves as Independent Director of KPITCummins Infosystems Ltd. He was co-opted as an Additional Director of the

Company by the Board of Directors at their meeting held on May 30, 2008. Pursuant to Section 260 of the Companies Act, 1956 he

will hold office of Director up to the date of ensuing Annual General Meeting. He is a well known personality in the country. By

profession he is a Chemical Engineer and Ph. D. holder from University of Mumbai. Twenty-six universities have honoured him with

honorary doctorates, which include Universities of London, Salford, Pretoria, Wisconsin and Delhi. He is only the third Indian

engineer to have been elected asFellow of Royal Society (FRS), London in the twentieth century. He waselected Foreign Associate

of National Academy of Science (USA) in 2005. He is the first Indian to have been elected as the Foreign Fellow of Australian

Technological Science and Engineering Academy (2008). He also served as the Director General of Council of Scientific and

Industrial Research (CSIR), with thirty-eight laboratories and about 20,000 employees for over eleven years. He was also the

President of Indian National Science Academy (2005-2007).

Lila Poonawalla Independent Director

Ms. Poonawalla serves as Independent Director of KPIT Cummins Infosystems Ltd. She was co-opted as an Additional Director of

the Company by the Board of Directorsat their meeting held on May 30, 2008. Pursuant to Section 260 of the CompaniesAct, 1956

she will hold office of Director up to the date of ensuing Annual General Meeting. Ms. Lila Poonawala isChairperson of DeLaval Pvt.

Ltd. and Lila Poonawalla Foundation. By profession she is engineer. She is the first woman mechanical engineer in Pune. In the

journey of her career, she became the first woman CEO in India’sbusinesshistory. She wasawarded by the Padmashree in 1989 by

the then President of India for her exemplary service to the industry and to recognize women’s contribution in a mans world of

engineering and Industry. She has also received International recognition from the King of Sweden. In 2003 she was decorated

with the Polar Star award by the King of Sweden and named as the officer of the Royal Order. Ms. Poonawalla is a member of the

Audit Committee of the Company.


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