Result Update on KPIT for 4QFY2011

KPIT Cummins Infosystems (KPIT) reported its 4QFY2011 results, which outperformed street as well as our expectations on the revenue front but came in line with expectations on the PAT front. For FY2012, the company has guided for USD revenue of US$275mn–285mn, i.e., 23–27% yoy growth, and has given PAT growth guidance of 22–27% yoy. Management stated that its demand pipeline is strengthening on account of recovery in its anchor vertical, manufacturing. Over FY2011–13E, we expect a strong CAGR of 23.0% in USD revenue with 25.3% CAGR in PAT. Thus, we maintain our Accumulate view on the stock with a target price of `200.

Quarterly highlights:  For 4QFY2011, KPIT posted revenue of US$67.9mn
(vs. our estimate of US$60.0mn), up by whopping 12.5% qoq. This growth was a combination of volume growth of 10.6% qoq and pricing growth of 2.2% qoq. However, operational performance was subdued with EBITDA and EBIT margins declining by 3bp and 218bp qoq to 14.1% and 8.8%, respectively, due to a 10.8% qoq increase in employee costs. PAT stood at `26.3cr (vs. our expectation of `26.8cr), up 4.7% qoq.

Outlook and valuation: Management has guided for strong revenue growth even on the back of strong 40% yoy organic growth recorded in FY2011, with strengthening of the demand environment for discretionary spend. This has been highlighted by growth in the manufacturing vertical for tier-I companies as well  as comeback  in license sales witnessed by likes of Oracle and SAP. We expect the company’s revenue to post a CAGR of 23% in USD terms and 20.7% in INR terms over FY2011–13E, with EBITDA and PAT CAGR of 28.6% and 25.3%, respectively. We maintain our Accumulate rating on the stock with a target price of `200, valuing it at 12x FY2013E (five-year historical one-year forward median P/E) EPS of `16.7.