Stock Review: KPIT Cummins Infosystems

 

KPIT Cummins Infosystems is likely to benefit from a revival in global auto demand

 

SIGNS of a revival in auto and allied sectors in the West have benefited players like KPIT Cummins Infosystems, which offers an array of solutions to these segments. With developed markets looking for a technological shift towards hybrid and eco-friendly automobiles and focusing on reducing costs for the broader manufacturing sector, these developments should provide a growth momentum to KPIT Cummins Infosystems (KPIT), which derives nearly threefifths of its revenues from IT and allied solutions to the global automotive sector.

BUSINESS:

KPIT is engaged in mid-tier product engineering and IT consulting. The company offers technology solutions for manufacturing corporations, including automotive, farm equipments and industrial verticals. While automotive and engineering solutions contribute nearly a quarter of the company's total revenue, integrated enterprise solutions and SAP contribute 35% each. Semiconductor solutions make up for the balance revenue. Geographically, two-thirds of its business comes from the US and one-fifth from Europe. US- based Cummins is KPIT's biggest client. Cummins also holds 12% in this company and contributes almost a quarter of the company's total revenue. Over the years, KPIT has adopted an in-organic route to expand its market reach and product offerings.

GROWTH DRIVERS:

A strong revival in the auto sector, hi-tech and other industrial verticals, across geographies, are the growth drivers for KPIT, which derives nearly 78% of its revenue from these segments. Also, expanding services to energy and utility and defence and government segments are likely to provide the growth momentum for this mid-sized IT company going forward. For instance, KPIT's biggest client, Cummins is back on the growth track after witnessing a sluggish phase during the global economic crisis. It expects the growth momentum to continue in the coming quarters thereby adding to its revenues.

FINANCIALS:

The revival of Western economies, especially in the US, helped KPIT report an average 15% growth in its revenues in the second and third quarters of this financial year. This was considerably faster than the growth reported by the company for the year ended June 2010 quarter. Also, the December 2010 quarter was the first full quarter after consolidation of KPIT's recent acquisitions, including CPG Solutions and In2Soft. And during the third quarter, these two acquisitions added $ 4.62 million to the company's sales.

   Its operating profit margin has been hovering in the range of 14-16% over the past three quarters, a reduction from earlier quarters. This could be attributed to quicker growth in its employee expenses vis-à-vis its sales during this period. Taking into account the consolidation of its recent most acquisitions, KPIT is likely to report similar operating margins in the next quarter as well. A similar trend was also seen in its net profit growth. However, a cause for concern is the high level of attrition and the lower effective utilisation of its resources.

VALUATIONS:

KPIT at 151.4 per share trades at a P/E of 13.5 times on a trailing fourquarter basis. And given the anticipated growth in auto and other industrial segments across geographies, the company is likely to benefit. Other mid-cap IT firms like Hexaware Tech trades at a P/E of 17 times on a trailing basis, while Persistent Systems trades at 10.7 times.