1. C O M P A N Y R E P O R T
India
31 Oct 2012
KPIT Cummins Rs 123.9
Sector: IT/TECH A shining star in mid-cap IT sector
BSE Code 532400 NSE Code KPIT KPIT Cummins (KPIT) has the most well defined
CMP(31 Oct) 124 52W H/L 142/68 business model amongst mid-cap IT companies. Deep
Nifty 5,597 Sensex 18,430 domain expertise in 3 key verticals, and strengths in
Shares (m) 179.02 Face Value(Rs) 2
Market Cap (Rs m) 22,181 Free Float 73.8% two key horizontals - Oracle and SAP, has helped KPIT
Rs mn to outgrow peers on a sustained basis. With a strong
financial performance in H1 FY13, the company is set to
Share holding as per 30 Sep 2012
maintain its growth leadership.
At an expected 8xFY14 earnings, KPIT is attractively
valued. We expect the stock to hit a price of Rs 150 by
26.22%
Promoter Sep’13 based on a 12x forward PE. We expect KPIT to
33.46%
continue to command a premium over midcap peers.
FII
DII Set to outgrow peers in FY13
Others KPIT has grown faster than peers in IT mid-cap space in
26.74% recent years, reporting growth of 41% in 2011 and 43% in
13.58%
2012 and CAGR 50% from 2003-2009. It is expected to
outgrow peers in FY13 as well; KPIT should convincingly cross
its current year guidance of 32-35% growth.
150
Vertical strengths explain growth outperformance
120 With increasing electronics in vehicles, automotive engg
services outsourcing to India is set to grow. Automotive engg
90
services off-shoring is expected to reach $6.4bn with CAGR of
60 18% in FY11-20. KPIT is largest 3rd Party Vendor for
Automotive Electronics in India. Similarly, Energy and Utilities
30 verticals are also expected to see strong tech spends.
Inorganic strategy has worked well
-
Sep-11
Sep-12
Feb-12
Aug-12
Oct-12
Nov-11
Dec-11
May-12
Mar-12
Jun-12
KPIT’s inorganic moves have worked well, allowing it to
develop domain expertise in new areas. Company has
achieved strong growth through ramping up services offering
KPIT Cummins Sensex in Oracle and SAP through inorganic expansion like CPG and
SYSTIME. Q2 FY13 results show strong performance from
Consolidated Financials Systime, where EBITDA margins have expanded from 5.5%
during acquisition to 14%.
FY'11 FY'12 FY'13E FY'14E
15,000 21,861 25,578 Outperformed all IT mid cap stocks for 1 yr, 6 month
Sales 9,870
and 3 month stock performance & top line growth
EBITDA 1,484 2,166 3,226 3,906
The Company gave return of almost 50% in last 6 month and
PAT 946 1,454 2,011 2,618
1 year period, outperforming all the peers. It has consistently
EBITDA (%) 18.4 14.4 14.8 15.3 outperformed Nifty and NSE-IT index through-out the year.
EPS (Rs) 10.8 8.1 11.2 14.6 KPIT Cummins grew highest among almost all mid-cap IT
stock in FY11 and FY12.
ROE(%) 32.4 22.1 24.7 25.1
26.6 23.5 30.7 31.2 Revolo, profitability improvement
ROCE(%)
P/E Ratio(x) 15.6 15.3 11.0 8.5 Couple of key performance drivers for the stock will be what
happens to Revolo and profit margins. If Revolo’s commercial
EV/EBITDA(x) 9.3 10.2 6.8 5.6
launch turns out a success, it will add significant value to
EPS 10.8 8.1 11.2 14.6 company. Also the margins levers such as fixed price projects,
Rs mn improved employee mix and increased off-shoring can further
boost KPIT’s profitability.
Four-s reports are available on BLOOMBERG, Reuters, Thomson Publishers and Market Publishers
2. Company Report: KPIT Cummins 31 Oct 2012
Investment Rationale
Fastest growing mid-cap IT player
KPIT Cummins is the fastest growing mid-cap IT player in India.
KPIT grew at an outstanding CAGR of 50% in the period 2003-2009.
It has maintained superior performance with USD revenue growth of
41% in FY11 and 43% in FY12.
Consistently It has witnessed similar growth in its bottom line too. In FY12 it
growing at registered PAT growth of 54% to Rs 1,449mn, along with 43%
CAGR of above growth in EBITDA and EPS growth of 47% y-o-y. These numbers are
40% better than almost all other mid-cap IT peers.
Company FY12 Rev Growth Rev Growth
Name Rev EBITDA PAT in Fy12 in Fy11
Hexaware
Technologies 15,347 3,354 2,670 37% 3%
Infotech
Enterprises 15,707 2,866 1,514 29% 22%
Mindtree Ltd 19,537 3,315 2,185 27% 12%
NIIT
Technologies 16,068 3,005 1,964 29% 35%
Persistent
Systems 10,339 2,580 1,418 28% 32%
Polaris FT 16,568 2,730 2,023 21% -2%
KPIT
Cummins 15,138 2,304 1,450 52% 35%
(Rs mn)
This extraordinary growth is the result of successful execution of its
chosen strategy of vertical focussed growth and successful inorganic
expansion. This growth is driven by three major verticals, Auto &
transportation, Manufacturing and Utilities. While working in these
verticals the company has developed strong horizontal service
offerings in Auto & Electronics, IES and SAP.
Differentiated vertical-focus strategy driving growth
While the rest of the IT industry started talking about vertical-focus
in the last 2 years, KPIT very early on decided to focus on a few
select verticals to be able to compete better. This company can be
Vertical-focus considered as the pioneer of this differentiating strategy among the
strategy sets it IT mid-caps.
apart
The company has focused from early days on automotive and
manufacturing verticals. This has resulted in deep domain expertise
in its focus verticals. KPIT Cummins is the largest 3rd party vendor
for automobile electronics in India. KPIT has developed a strong
domain expertise in the manufacturing segment and specifically in
automobile sector. In its last more than 20 years of operations it has
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3. Company Report: KPIT Cummins 31 Oct 2012
been working mainly in its niche segment i.e. Automotive-
manufacturing. This resulted in high domain expertise and strong
clientele in the segment.
This gives KPIT advantage among not only their Indian competitors
but also with most of their global competitors. Till now, KPIT has
developed technology solutions for more than 120 global automotive
companies which include 8 out of top 10 global original equipment
manufacturers (OEMs).
Successful inorganic growth strategy
KPIT Cummins has successfully kept firing the growth engine by
supporting strong organic growth with carefully chosen inorganic
acquisitions. These acquisitions have helped the company to grow at
Highly effective a rapid space of 40-50% CAGR in the last decade, resulting in one of
inorganic the fastest growing company in the mid-cap IT space. It has also
growth track been successful in smooth integration of these acquisitions. Through
record these acquisitions it has developed expertise in various services
offering in the likes of ERP implementation, Oracle and SAP services.
These acquisitions were done with focus on gaining ground in terms
of geography entry, or service offering expertise or gaining
important client clusters. For example, KPIT has developed expertise
in SAP practice with the successful acquisitions of Panex Consulting
and Sparta Consulting whereas Oracle practise has been
strengthened with recent CPG and Systime acquisition. It did 10
such strategic acquisition in the last decade with focus on driving the
growth through strong practice offerings in SAP, ERP and Auto
electronics and developed strong client base across the globe.
Systime has given scale in Oracle
If one takes the example of latest acquisition, SYSTIME ($50mn
rev), the largest acquisition till date by KPIT, it gives KPIT strong
Oracle practice, with JDE specialisation. This has helped KPIT
improve its offering to its key manufacturing clients as clients in this
industry prefer JDE solutions. Systime is the largest JD Edwards
solution provider globally. It also gave the company foothold and
strong client base in Brazil where Systime has good chunk of
revenue coming.
Innovation focused and R&D driven company
Unlike most IT companies in India, KPIT invests significantly in R&D.
The investment in these efforts has now increased to ~3% of its
revenue. From these initiatives, the Company has applied for 40
patents in last 18 months.
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4. Company Report: KPIT Cummins 31 Oct 2012
Innovation to KPIT has many innovation based R&D projects, designed to develop
lead non linear new technologies and solution for their customers. This has resulted
growth in growing revenue contribution from its non-linear projects.
It has a department named ‘Center for Research in Engineering
Services and Technology’ (CREST), which is totally dedicated to
these initiatives. It focuses on research in areas such as System
engineering, parallel computing, program analysis tool, security and
surveillance and Energy. These R&D initiatives are again industry
focussed which helps the company to maintain its edge in the
industry and provide best service with IP led solution to its
customers.
Revolo a unique R&D initiative
Revolo is one of the key results of this initiative. Revolo is plug-in,
parallel hybrid solution for the automobiles which converts a regular
vehicle into hybrid vehicle. It has filed 16 patents till date for Revolo
only.
Robust performance in H1 FY13
Top line expands strongly
The company has given strong results in H1FY13 with revenue
growing by 72% yoy from Rs 6,411mn in H2FY12 to Rs 11,054mn
driven by revenue growth from latest acquisition, Systime, and
strong momentum in all verticals. This was supported by outstanding
growth in the US market where it grew by almost 100% from Rs.
4,243mn in H1FY12 to Rs 8,434mn in H1FY13, whereas it witnessed
Strong H1
a flat European market with 11% growth and in ROW it grew by
performance
35%. Manufacturing and energy & utilities verticals grew at strong
sets the tone
265% and 127%, respectively, in H1FY13 whereas Automotives
vertical grew at 30%. All the SBUs showed good growth in this
period with 94% growth in IES and 77% growth in SAP SBU and
53% growth in Auto & engg. Its PAT grew by good 60.8% from Rs.
605mn in H1FY12 to 974mn in H1FY13.
The company also witnessed strong growth on client level with top
client account (Cummins) growing by 60% whereas top 5 clients
grew at 60% and top 10 clients account grew by 55%. The company
added 7 new customers in this period and has 69 >$1mn clients
compared to 59 at the start of the year.
Increases margins as well, helped by Systime
The company has also managed to push up the EBITDA margin from
13% to 14% despite lower EBITDA margins of Systime. Systime has
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5. Company Report: KPIT Cummins 31 Oct 2012
Systime also shown strong performance, with 11.6% and 15.7% revenue
margins are growth q-o-q in Q1 and Q2FY13, respectively, along with EBITDA
moving up margin improvement from 5.5% at the time acquisition to 14% in
Q2FY13.
Q2 Q2 % Q1FY1 % H1 H1 %
FY13 FY12 Change 3 Change FY13 FY12 Change
Net Sales 5,672 3,250 74.5 5,383 5.4 11,055 6,412 72.4
Total Expenditure 4,943 2,808 76.0 4,576 8.0 9,500 5,575 70.4
EBITDA 729 442 65.0 806 -9.6 1,554 837 85.8
Other Income 22 109 -79.5 30 -25.8 34 132 -74.2
Operating Profit 752 552 36.3 837 -10.2 1,589 969 63.9
Interest 32 11 199.9 30 8.2 62 19 224.3
Exceptional Items 55 27 104.7 81 0 100.0
PBDT 774 541 43.2 834 -7.1 1,608 950 69.3
Depreciation 114 116 -1.0 113 0.8 228 210 8.5
PBT 660 425 55.2 720 -8.4 1,380 740 86.5
Tax 191 88 118.3 185 3.6 376 159 137.1
Profit After Tax 468 338 38.8 536 -12.5 1,004 581 72.7
Minority Interest -12 -1 -936.4 -12 0.4 -25 -4 -482.2
Shares of Associates 5 28 -82.4 -10 147.9 -5 28 -119.1
Net Profit 461 365 26.4 513 -10.1 974 606 60.8
(Rs mn)
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6. Company Report: KPIT Cummins 31 Oct 2012
Peer Benchmarking
Strong top-line performance
Company Market EV Sales Sales 3 EBITDA PAT
Cap yr CAGR
Infotech 21,252 21,746 15,531 20% 2,691 1,614
Hexaware 32,005 32,005 14,505 8% 2,513 2,670
Persistent 18,792 18,869 10,003 19% 2,244 1,418
NIIT 16,468 16,593 15,765 17% 2,701 1,972
Mindtree 27,505 27,576 19,152 16% 2,930 2,185
Average 23,204 23,358 14,991 16% 2,616 1,972
KPIT 21,765 22,954 15,000 24% 2,166 1,454
(Rs mn)
KPIT has shown significant growth in last few years over its peers. It
has 3 yr CAGR for sales of 24% despite having not so good
performance in FY10 due to recessionary environment. KPIT grew
Better growth faster than most of the mid-cap IT company in the period with
than peers decent performance on margins level. Such strong growth was
showcased earlier too by KPIT when it grew 50% CAGR in 2003-
2009 period and above 40% growth in FY11 and FY12.
Scope to improve profitability
FY12 Margins
Company EBIDTA PAT
Infotech 17% 10%
Hexaware 17% 18%
Persistent 22% 14%
NIIT 17% 13%
Mindtree 15% 11%
Average 18% 13%
KPIT 14% 10%
KPIT’s profit margins are on the lower side amongst its peers. Its
profitability was also recently impacted by acquisition of Systime.
Systime was a strategic acquisition, but it had the lower margins
(5.5%) compared to company’s margins. The key will be to push up
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7. Company Report: KPIT Cummins 31 Oct 2012
the margins of the business coming from such low margin acquisitions
while striving for the growth through these acquisitions. Higher
margins can also be achieved by various operational levers such as off-
Strong balance shoring, pyramid restructuring etc.
sheet helps in
In H1 FY13, Systime’s margins have started moving up. Systime
inorganic
margins have expanded substantially with 10% and 14% EBITDA
strategy
margin in Q1 and Q2 FY13, respectively.
Liquidity ratios on Par
Current Ratio (x) Cash Ratio (x)
Company
FY10 FY11 FY12 FY11 FY12
Infotech 2.57 6.19 4.81 3.16 2.36
Hexaware 2.08 2.84 2.15 1.56 1.01
Persistent 2.10 1.88 1.82 0.40 0.45
NIIT 1.81 1.93 1.74 0.32 0.41
Mindtree 1.79 2.47 1.75 0.21 0.16
Industry
Average 2.07 3.06 2.45 1.13 0.88
KPIT 2.39 1.82 1.39 0.77 0.30
The company has strong balance sheet with strong cash ratio and
current ratio. Due to strong performance in the past, the company has
managed to continue the inorganic expansion without much strain on
its balance sheet.
Debt Equity (x) Interest Coverage (x)
Company
FY11 FY12 FY11 FY12
Infotech 0.04 0.04 137.15 299.28
Hexaware 0.01 0.00 10.57 74.02
Persistent 0.02 0.01 NA NA
NIIT 0.01 0.01 92.86 60.85
Mindtree 0.03 0.01 266.50 447.00
Average 0.02 0.01 126.77 220.29
KPIT 0.05 0.17 28.40 23.50
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8. Company Report: KPIT Cummins 31 Oct 2012
Valuation
Valuation: Growth momentum to drive valuation up
The company is continuing its growth momentum from last two years
into this year. Revenues grew 72% in yoy in H1 FY13 and 74% yoy in
Q2FY13. The Company is expected to maintain this growth momentum
in the rest of the year and should easily cross its higher range of
guidance of 35% this year.
Given the strong growth environment in its focus verticals, the
Company is expected to carry forward this momentum to the next
year. We expect KPIT to overshoot its guidance of 35% growth in FY13
and to achieve about 17% growth in FY14.
TTM Price Market Price EV/ MCap/
Company Name Sales (Rs) Cap PE /BV EBITDA Sales
Hexaware
Technologies 17,363 112 33,160 10.0 3.1 6.8 1.9
Infotech Enterprises 17,672 188 20,961 10.3 1.7 4.1 1.2
Mindtree Ltd 22,047 660 27,145 9.3 2.9 8.1 1.4
Persistent Systems 11,659 478 19,120 11.4 2.0 5.9 1.6
Polaris FT 22,480 120 11,917 5.0 1.0 3.1 0.5
KPIT Cummins 19,643 124 22,181 11.8 2.8 7.9 1.1
(Rs mn)
Premium valuations imply one year price target of Rs 150
We expect KPIT Although company is traded at premium compared its peers, it will
to command a continue to demand this premium based on its growth prospects and
premium over vertical growth strategy. Currently stock is trading at Rs 124, implying
peers a PE of 10.9x and 8.4x for FY13 and FY14, respectively. We expect
KPIT to reach 150 by Sep’13 based on a forward PE of 12x Sep’13. We
believe KPIT deserves a continuing premium over the midcap space.
1 yr forward PE band chart
160
16x
140
120 13x
100
10x
80
60
40
20
0
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9. Company Report: KPIT Cummins 31 Oct 2012
KPIT’s Business
Differentiated Strategy : Strong Vertical Focus
KPIT has organised its efforts around 3 key verticals: auto and
transportation, manufacturing and energy and utilities. KPIT tries to
provide industry specific holistic solutions to its clients with best in
class service offerings.
With high domain expertise, the company is in a position to provide
Differentiated full range of services to its customers. The company is also investing
strategy sets in R&D to develop and maintain domain excellence in automotive
company apart segment.
Revenue Spread – Verticals
71.38%
11.22%
1.68%
15.72%
Automotive & Transportation
Manufacturing
Energy & Utilities
Others
Automotive and transport vertical contributed more than Rs 10.7bn,
i.e. 71% of FY12 revenue, up from Rs 6.39bn or 64.77% of revenue
in FY11. The contribution from Manufacturing increased from
10.48% in FY11 to 11.22% in FY12. This largely helped drive 41%
and 43% growth in FY12 and FY11, respectively.
Increased outsourcing in Auto industry
With increasing competition in the Auto industry, OEMs are facing
intense pressure to bring in the new models at a quicker pace, with
increased electronics in them. This has worked as a booster to the
Auto industry outsourcing industry as outsourcing helps in bringing down the total
more inclining time required to develop the product and bring it in the market.
towards out-
sourcing Outsourcing helps OEMs and other auto vendors to bring down the
lead time in product development and imparts flexibility to them to
easily adjust to market dynamics. Also growing electrification of the
vehicles and its increasing criticality in product success has further
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10. Company Report: KPIT Cummins 31 Oct 2012
pushed the outsourcing market in auto engineering and Auto
industry.
Technology development in Automotive space to drive top
line
With focus on fuel efficiency, safety, cost cutting and hybrid
technology increasing, auto companies are more and more
incorporating electronics into their vehicles. As OEMs are not looking
to get into technology development, especially IT, which is not their
Technology core domain, this development mainly gets outsourced to company’s
development in working in this domain. KPIT has benefitted in this trend with
Auto to push for increasing projects from Auto OEMs.
more As per Nasscom, the engineering services space is currently
electrification of exploding, thanks to robust growth across Europe, Asia and the US.
vehicles According to the report, the total engineering services market was
worth $746 billion in 2004 and will touch $1,100 billion by 2020. Of
this the outsourced component could be worth around $200 billion.
Currently, the engineering services outsourcing (ESO) market is
worth around $15 billion with India garnering a healthy
12%share. Automotive is second largest contributor in this with 19%
share
US market on the recovery path
US constituted around 70% of revenue in FY12; its share increased
to 76% in Q1FY12. With US economy showing signs of recovery,
prospects US car sales are expected to improve going forward.
US Auto Sales (in mn)
16
15
14
13
12
11
10
9
8
Source:Ycharts.com, Bureau of Economic Analysis and Four-S
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11. Company Report: KPIT Cummins 31 Oct 2012
With improving US car sales numbers, KPIT is expected to get good
demand from its US based clients along with Japan and emerging
markets with improving overall sector condition.
Increasing electronics in Automotives
As the technology is developing, more and more electronics is used
in automotives to improve vehicle’s safety, fuel efficiency. Power-
train, infotainment, interiors, tele/diagnostics. As per databeans,
Increasing roughly 25% of vehicle cost accounts for electronic products which
electronic goes up-to 30% in luxury cars. This will soon reach to 50%. Micro
components in controllers based ECUs are increasing in vehicles with increasing
vehicle, booster features in the vehicle. ECUs per vehicles range from 25 to 35 in an
for KPIT average vehicle to as many as 70 in luxury cars up from single digit
micro controllers few years back. The
automotive microcontroller market is expected to expand to Rs.
328bn ($7 billion) by 2015.
Niche specialisation in other focused verticals driving the
growth
KPIT is now expanding into emerging verticals like Energy & Utilities
and Industrial equipments. Energy & Utilities vertical is expected to
attract large technology investments in the coming years which the
company looking to leverage with domain specialised offerings. In
cognizance with this core sector strategy, KPIT has recently moved
Emerging focus
out of BFSI sector which contributed around 2% to its revenue.
vertical: Utilities
This niche specialisation helps the Company to win larger deals with
the existing and new customers and improves customer mining.
Company moving ahead should also improve the profitability with
plans to improve business mix and increase in offshore services.
IT investment in Utilities on rise
With increasing concerns all over the world over climate changes and
environment issues, and depleting natural conventional energy
Huge
resources, there is rising demand in improving overall efficiency in
opportunity in
this sector with the help of information technology. The opportunities
utilities sector
vary from smart grid applications to billing solutions to customer
management.
For utilities vertical, north America is a vital vertical, where the
company will gain advantage with its strong presence through Sparta
Consulting. Sparta Consulting is one of the fastest growing SAP
services partners in North America, having received the 2012 SAP
Partner Impact Award as the SAP Services Partner of the Year for
Momentum in North America. Sparta has delivered over 250
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12. Company Report: KPIT Cummins 31 Oct 2012
successful projects based on SAP solutions, which have included over
25 leading energy and utilities companies.
Strong positioning in horizontal SBUs pushing up the growth
IES, Automotive & Engg and SAP constitute company’s key SBUs.
IES (INTEGRATED ENTERPRISE SOLUTIONS)
IES is the largest SBU in the company contributing 40% revenue to
company’s top-line and is largely driven by Oracle practice. It grew
57% last year along with new customers deal worth $60mn. IES
IES: Enterprise includes ERP implementation, support and e-biz. In IES, Oracle is the
consulting key practice which includes Business Intelligence (BI), Manufacturing
Execution Systems (MES), JD Edwards (JDE), Oracle Transportation
Management (OTM) and Supply Chain Management (SCM). Through
organic skill developments and acquisitions KPIT has strengthen its
offering. It is third largest partner in Oracle in North America in
Industrial manufacturing and eight largest across the industries.
With latest Systime acquisition, the Company’s standing is further
strengthened in Oracle-JDE offering.
Auto & Engineering
KPIT is the largest third party vendor for automotive embedded
electronics in India. With 50% growth from last year A&E contributes
26% of revenue. Auto & Engg is the highest margin SBU in the
Auto & engg: company with margins ranging in 19-20%.
Strong domain
With increasing electronics in Automotives the company is getting
expertise
good traction from Powertrain, Infotainment, AUTOSAR, MEDS,
Diagnostics and Telematics. This is niche market service line offering
from KPIT with high domain expertise, offering embedded software
and automotive electronics related practices to OEMs and tier I & II
vendors. To further improve its competence in the vertical lot of R&D
work is done in this SBU which results in IP based solutions to its
clients.
SAP
KPIT has strong presence in SAP ERP implementation services for
energy and utilization sector along with manufacturing sector with
SAP: strong
North America as major geography. The SAP SBU grew 57% last
pipeline with
year with the company getting traction across the industries. The
many multi-
SAP SBU is seeing good traction in Core ERP implementation,
million deals
Business Intelligence (BI) & Analytics, Customer Relationship
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13. Company Report: KPIT Cummins 31 Oct 2012
Management (CRM), Human Capital Management, Mobility and
Application Maintenance & Support (AMS) projects. It closed three
deals in SAP with more than $20mn size last year. With technology
reset happening with in SAP company sees good opportunity HANA,
mobility and Success factors in the coming days.
The company is also looking to increase non linear business in SAP
by developing industry specific templates targeted for mid size
business in its focused industries. These templates can be deployed
at much lower cost and time than traditional methods.
SAP is lowest margin SBU in the company with Q2FY13 margins at
7%. Increased bench due to shift in technology and more onsite
implementation projects are one of the key reasons for lower
margins.
Revenue Distribution: SBU wise
3%
IES
31% 40%
Auto & Engg
SAP
Semiconductor
26% Solutions Group
Revolo: A hybrid solution
Revolo is a major output of the Company’s R&D efforts. This could be
a major lever to push up non linear revenue for the company in the
near future. Revolo is a plug-in, parallel hybrid solution for the
automobiles which converts a regular vehicle into hybrid vehicle
using company’s innovative development in power-train technology.
It has filed 16 patents till date for Revolo only.
The solution will be developed and manufactured by 50:50 JV
Revolo: between KPIT and Bharat Forge. Here KPIT will license its technology
Opportunity to whereas Bharat forge will bring in support for manufacturing and
create hybrid kit distribution.
market
As per Automotive Research Association of India (ARAI) tests, this
technology improves fuel efficiency by 40-50% and reduces green
house gas emission by 30%. The kit can be fitted to a vehicle in 4-6
hrs at the cost of 65k-150K depending on type of vehicle. The
Company is currently doing testing on 200 vehicle fitted with the kit
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14. Company Report: KPIT Cummins 31 Oct 2012
and should come up with results near the year closing.
After testing and concluding govt regulatory requirements the
company should be able to launch the product in FY14 commercially.
Revolo was earlier expected to launch in FY13 but due to battery
problems it got delayed. The company expects Rs 3-5bn revenue
from this product.
Revenue Distribution: Geographically
Though KPIT has strong presence across globe, it has strong
dependency on US market like many other IT cos. Another reason
for this could be attributed to its large client Cummins, based out of
US is the key USA, which attributes 20-22% of revenue. In FY12, the US market
market contributed almost 70% of company’s revenue, up from 67% in FY11
and 60% in FY10. This is working in favour of the company, as the
US economy and auto & manufacturing sector is showing the signs of
recovery.
Geographical Revenue Spread
18.20% USA
69.56%
12.24% Europe
Rest of World
Due to lower European market exposure, the Company is
comparatively sheltered from current European crisis. It is looking to
further diversify its geographical reach by gaining market share in
Emerging emerging market like APAC, China and Brazil. The emerging market
market showing grew 56% in FY12 with growth coming from countries like India,
strong growth China, Japan and Korea.
To support good growth in China in automotive business, KPIT has
set up a subsidiary in China. Similarly it has set up subsidiaries in
Brazil and Netherlands too to strengthen its operations in Latin
American nations, Scandinavian and other European regions. With
the acquisition of Systime it has good positioning in the Brazil
market of JDE offerings.
Successful inorganic strategy to plug gaps in business model
The company has successfully implemented its inorganic growth
strategy to plug in gaps in its customer offerings. With 10
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15. Company Report: KPIT Cummins 31 Oct 2012
acquisitions in as many years the company has managed to increase
its top line by 28x in the last 10 years. With these acquisitions
company has increased its foothold geographically and improved its
client base.
Revenue growth strongly supported by acquisitions
16000
14000
Strategic
12000
acquisitions
10000
playing big role 8000
in exponential 6000
growth 4000
2000
0
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Consol Revenue Standalone revenue
(Rs mn)
KPIT’s acquisitions are driven by any of the 3 considerations: domain
expertise, geographical presence, or service expansion. Be it
Cummins at the initial stage which gave them auto-mfg domain
expertise or be it the latest $50mn SYSTIME acquisition which has
strong hold in Oracle and JDE practice.
Acquisitions
Company Year Size Rationale
Anchor Customer – Cummins,
Cummins Infotech 2002 $1mn Vertical Focus - Manufacturing
Panex 2003 $ 7.2 Mn SAP Practice, Anchor Customer
SolvCentral 2005 $ 3.5 Mn BI Practice, Anchor Customer
Direct Presence in France,
Pivolis 2005 $ 1.5 Mn Geography
Auto Electronics Domain, Auto
10 years: 10 CG Smith 2006 $ 6.2 Mn OEM & Tier I Customers
acquisition Harita TVS 2008 $ 1.0 Mn MEDS Practice
SAP Practice, US Geography
Sparta Consulting 2009 $ 3.5 Mn presence in SAP
Vehicle Diagnostic & Telematics,
In2Soft 2010 $ 4.0 Mn German Frontline
CPG 2010 $ 11 Mn Oracle Consulting
SysTime 2010 $ 50 Mn Oracle Consulting, JDE Specialist
With these acquisitions KPIT has developed a strong offering in SAP,
Auto engg and Oracle. This helps KPIT in cross-selling their
Enterprise application services to their existing customer.
Four-S Research 15
16. Company Report: KPIT Cummins 31 Oct 2012
Though these acquisitions have boosted company’s growth,
organically also the company has shown good growth. Organically
company has grown at 40% rate for last few years.
SYSTIME acquisition
SYSTIME is the largest acquisition till date of KPIT Cummins in its
decade long acquisition history. At the time of acquisition in 2010,
Systime:
SYSTIME had revenue of $50mn. Systime is the world's largest JD
Biggest bet till
Edwards solution provider, with manufacturing industry focused
now
offerings. This has further strengthened manufacturing and energy &
utilisation vertical of company as JDE is highly preferred in these
verticals.
With Systime's strong client base in manufacturing sector, including
large manufacturers such as France's Lafarge SA and U.S.-based
industrial gases maker Praxair Inc, it provides strong cross-selling
opportunity to the company.
This acquisition adds-up to the company’s Oracle-based consulting
and services business, making it a $125mn business for FY12. Also
company gets head-start in emerging geography, Brazil, where
Systime is an established player.
Although Systime has lower EBITDA margins compared to company’s
margins, KPIT could improve those with operational levers like off-
shoring, pyramid restructuring and other cost cutting majors. Also it
represents good cross-selling opportunity to KPIT and Systime
customers.
Strong and diversified customer portfolio
KPIT has strong client portfolio with more 176 active clients and 69
clients with run rate more than $1mn. It has been adding 3-4 active
clients every quarter from different verticals and service portfolio.
Include values in the chart below
180 80
69
65
175 70
59
170 54 60
51
48
165 40 40
50
160 40
176
172
155 169 30
163 165
150 159 20
155
152
145 10
140 0
Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2Fy13
No. of Active Customers Customers with run rate of >$1Mn
Four-S Research 16
17. Company Report: KPIT Cummins 31 Oct 2012
Dependency on its top client, Cummins, is also drastically come
down in last 1-2 years. From almost 25% business coming from
Cummins in Q3FY11 it has come down to 19.7% in Q2FY13.
Strong growth potential with $1bn target for FY17
32-35% growth expected in FY13…
The company has the guidance of 32-35% growth in FY13 which is
better than most of major-mid cap IT companies expected growth in
current environment. KPIT plans to achieve this with maintaining
Company edge in auto, mfg and utility sector and driving the growth with
expected to service offering with domain expertise as a differentiator.
outperform its
The company has recently (in last 9 months) closed 3 $20mn+ deals
guidance
and expects similar deal flow from their focused verticals in the
future. The company more than doubled the growth the top-line in
last two years from $154mn in FY10 to $309mn in FY12 with major
boost coming from SAP and auto segments.
FY17 vision to reach $1bn
KPIT has set a vision to become $1bn revenue company by FY17,
with target to achieve EBITDA margin of 18% up from 14.5%. With
strong vertical focused growth and best in class practices in Auto
embedded, SAP and Oracle, company should achieve the target with
the help of inorganic means and organic growth.
Four-S Research 17
18. Company Report: KPIT Cummins 31 Oct 2012
Operational performance
Focus on productivity improvement, Systime margins improve
The company is showing positive developments in productivity
factors. Systime had EBITDA margins of 5.5% at time of acquisitions
compared to the company’s 15% which had impacted on company’s
Systime margins. But as Systime integration is happening one can see
integration positive trend in its margins.
pushing its
In Q4FY12 without SYSTIME EBITDA margin was ~17%, but
margins up
SYSTIME itself had margin of 10%, bringing down overall EBITDA
margin to 16%. With continued successful integration and increased
offshore revenue from SYSTIME the productivity should move up.
Also the company also has other levers available with them to
increase the margins. By flattening the organisation pyramid further
i.e. increasing fresher/experience ratio and improved utilisation on
organisational level could further increase in profitability of the
company.
Improvement in the utilization visible
Utilisation
100%
94.5% 94.7%
95% 90.7% 91.3%
90.2% 90.6%
89.1%
90%
85%
80%
74.3% 74.1%
75% 72.8% 71.9%
71.2%
69.9%
70% 67.6%
65%
60%
Q3FY11 Q4FY11 Q1 FY12 Q2FY12 Q3FY12 Q4 FY12 Q1 FY13
Onsite Utilisation Offshore Utilisation
KPIT is on the mid to lower side of utilisation level if one compares it
to its peers (NIIT 78-79%, Polaris 80%, Persistent 73%, Mindtree
72%). But the company is trying to improve this shortcoming with
Utilisation rate increasing utilisation on both onsite and offshore side.
seen uptrend
Company’s efforts are getting some positive results as offshore
utilisation has gone up from 67.6% in Q3FY11 to 74.1% in Q1 GY13
and 89.1% onsite utilisation in Q3FY11 to 94.7% in Q1 FY13.
Although company is showing this positive trend, it still has plenty of
Four-S Research 18
19. Company Report: KPIT Cummins 31 Oct 2012
ground to catch to come close to its top peers.
Increased Off-shoring required
KPIT has high amount revenue coming revenue coming from onsite
which is in the ratio of 52-53% in recent quarters. This ratio has
Off-shoring to
improve been on growing trend lately increasing from 43% in Q4 FY11 to
more than 53% in Q2 FY13. This growth is has major contribution
margins
from SAP SBU which had most of the project in the implementation
phase. Also acquired company has more onsite revenue compared to
any KPIT.
In the coming days company is expected to improve onsite:offshore
revenue ratio with increasing offshoring. And existing onsite
implementation project going into maintainance phase will also help.
Onsite Revenue
55% 54%
53%
53% 52%
51%
49% 48%
47%
47%
44%
45% 43%
43%
41%
39%
37%
35%
Q4FY11 Q1 FY12 Q2FY12 Q3FY12 Q4 FY12 Q1 FY13 Q2 FY13
Improvement in organisational pyramid
The Company can also use some other majors to improve the
productivity such as flattening the organisational pyramid. As of now
it has more laterals working in the projects and fewer freshers as
compared to its peers. Company is looking to improve this ratio with
increasing fresher recruitment.
Four-S Research 19
24. Company Report: KPIT Cummins 31 Oct 2012
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Four-S Research 24
