KPIT Cummins Infosystems - Limited triggers to support next leg of growth in the stock price - K R Choksey

We met KPIT's management to understand the business prospects and margin outlook in FY13E. The key takeaways from the meet are as follows:-

Revenue growth rate to taper down in Q2 FY13E: The management expects revenue to increase by around 3% QoQ in Q2 FY13E (in USD terms) against 5% QoQ growth (excluding revenue from SSG in Q4 FY12) in Q1 FY13.The company had outperformed our expectation in terms of revenue growth in H1 CY12 on back of the ramp up of 3 large deal signed (i.e. PACCAR and 2 deals in SAP) in Q2 FY12; however we believe there is limited scope for positive surprise at revenue front in H2 FY13E in absence of any large deal signed by the company in recent past.

Marginal improvement in EBITDA margin: The management expects EBITDA margin to improve marginally in Q2 FY13E on QoQ basis led by one time visa cost in Q1 FY13, which impacted margin by 35 bps.

Hedging losses will pressurize PAT margin: The company has outstanding hedges of around $50 mn at average rate of Rs.51.8/USD expiring in FY13E. The recent spike in INR rate against the global major currencies will result into forex and translation losses of around Rs.8 crore in Q2 FY13E against forex and translation gain of Rs.0.2 crore in Q1 FY13, which will result into decline in adjusted PAT (excluding exceptional item of Rs. 3 crore in Q1 FY13) by around 5% QoQ to Rs.46 crore in Q2 FY13E.

Limited growth opportunity in largest client i.e. Cummins in near term: Cummins outsource major portion of its IT related work and more than 50% of the same is being carried out by KPIT. Hence, revenue from Cummins for KPIT is directly dependent on Cummins' IT budget. KPIT has registered 9% CQGR from Cummins over the span of last 4 quarters; which was supported by stellar financial performance of Cummins in CY11. However, recent downward revision by Cummins in revenue & EBIT margin guidance and CAPEX plan for CY12, raises concern regarding growth prospects from Cummins which contributes about 21% of the KPIT's total revenue. Further, Cummins has expressed caution about IT spending, going forward, and hence KPIT's management expects lackluster growth from Cummins in near term.

No major development at Revolo front as regulatory process is taking its own sweet time: The management has refrained from commenting on the time line for commercial launch of Revolo unlike past as government regulatory process is causing unforeseen delay.

Earn-out payment will pressurize FCF in Q2 FY13E; DSO remains more or less unchanged: Free Cashflow to Firm will be under pressure in Q2 FY13E led by earn-out payment and increase in stake in subsidiary. Moreover, DSO remains unchanged as the traction in revenue continues to be led by Systime and SAP segment which has relatively higher debtor days.

Valuation and viewTaking into account, the limited growth opportunity in the largest client which reduces scope for upside in our and consensus revenue estimates, premium valuation in comparison to peer sets and pressure on the company's cash position; we recommend "HOLD" on the stock with a price target of Rs.130 by assigning P/E multiple of 10 times to its FY14E EPS of Rs.13.

Source : Equity Bulls

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