KPIT Cummins

KPIT Cummins’ stock has been a major outperformer recently, more than doubling in the last six months, wherein the BSE IT index and BSE Sensex gave flat returns. Most of the outperformance was in line with its improving business performance from a below-par first quarter. Besides improving outlook, semblance of stability returning from its largest client Cummins, after having declined in each of the previous four quarters, was a positive. Overall, KPIT delivered 4.4 per cent sequential revenue growth (in rupee terms) in December 2009 quarter. Pricing has improved sequentially, and integration of Sparta (acquired in November) not only added to its pricing power but also aided in garnering higher revenues from the US region.
Although the margins are comfortable at above 20 per cent, rupee appreciation, wage hikes and lower utilisation put pressure in the recent quarter. Expect some margin pressures in the coming quarters on these counts. In terms of segments, manufacturing segment has shown signs of revival (grew 10.7 per cent sequentially), while the semi-conductor vertical is yet to come onto the recovery path. Going ahead, auto electronics segment could be a growth driver in the next two-three years, while the company is focusing on the emerging markets to drive revenues in the business IT segment. For 2010-11, analysts expect its revenues and profits to grow by 15-16 per cent each. At Rs 112.2, the stock is trading at 8.8 times its 201011 estimated earnings, and can deliver 15-20 per cent returns in a year’s time.