| Investors, too, seem to share the perception if the buying interest at the counter is any indication - the stock climbed 130 per cent in the space of just seven months, with around 62 per cent of the gains coming in since May 2004. | ||||||||||||||||||||||||||||||||||||
| M&As galore The Pune-based KPIT Cummins is a global IT consulting organisation which provides software solutions to its Fortune 500 clients in banking, financial services and insurance (BFSI) and manufacturing sectors. | ||||||||||||||||||||||||||||||||||||
| Incorporated in 1990, the company came out with its IPO in 1999. Cummins Infotech (an IT subsidiary of US-based Cummins Inc and Cummins India) merged with KPIT Infosystems in 2002 to form KPIT Cummins. | ||||||||||||||||||||||||||||||||||||
| Minding its business The company derives a huge chunk of its revenues from its two major verticals - BFSI and manufacturing. In Q1FY05, the manufacturing vertical contributed 66 per cent (excluding Panex Consulting, which the company acquired in 2003), posting a growth of 72 per cent over the corresponding quarter last year, while BFSI contributed 29 per cent, recording a growth of 92 per cent. | ||||||||||||||||||||||||||||||||||||
| Among the practice areas, embedded software grew 123 per cent. Cummins Inc contributed 31 per cent during the quarter while contribution from its star customers stood at 53 per cent. | ||||||||||||||||||||||||||||||||||||
| Acquiring an edge The company acquired US-based SAP (systems applications products) consulting firm Panex Consulting for $1.7 million through a mix of cash and stock options, payable over three years. | ||||||||||||||||||||||||||||||||||||
| Besides SAP, Panex has core competencies in business warehousing and intelligence, and supply chain optimisation. The acquisition has been viewed as a strategic move for the company as it expects Panex to contribute nearly a fourth of its total business by the end of FY05. KPIT has started providing off-shoring services to existing Panex customers. | ||||||||||||||||||||||||||||||||||||
| "In FY03-04, the quantum of off-shore services provided was about $0.6-0.7 million, which should increase to $1.5-2 million in the current financial year," says a company official. | ||||||||||||||||||||||||||||||||||||
| "We are targeting incremental margins from Panex and the process has already begun," he adds. Analysts see a plethora of benefits arising from the acquisition. | ||||||||||||||||||||||||||||||||||||
| SAP, which is one of the major ERP (enterprise resource planning) solutions for the banking and manufacturing sectors, has been an untapped domain for the company. | ||||||||||||||||||||||||||||||||||||
| "In that sense, the acquisition has filled a strategic gap for KPIT, apart from the fact that Panex is about 40 per cent of KPIT Cummins' size," says an analyst. | ||||||||||||||||||||||||||||||||||||
| The acquisition is also likely to provide three star customers, helping the company concentrate on key customers and increase its visibility in the hitherto untapped southern states of the US. | ||||||||||||||||||||||||||||||||||||
| Margin call KPIT's sales and net profit posted robust growth in FY04 and Q105. In Q105, consolidated revenues grew 62.68 per cent sequentially, while net profit surged a healthy 24.54 per cent. | ||||||||||||||||||||||||||||||||||||
| However, the company's EBITDA margins have slipped to 11.79 per cent in the quarter after hovering around 15.3 per cent in the last five quarters. The company attributes the decline to a confluence of factors, the main one being the consolidation of Panex. | ||||||||||||||||||||||||||||||||||||
| "Margins of the company, without considering Panex, are around 14.46 per cent," says Ravi Pandit, chief executive officer, KPIT Cummins. "The drop in margins (without Panex) of roughly 1 per cent is primarily on account of an increase in selling, marketing and general administration expenses from 22.37 per cent in the whole of last year to 24.12 per cent in Q105," he adds. | ||||||||||||||||||||||||||||||||||||
| The company expects expenses of SAP and VLSI (very large scale integration) to fall as the practices mature and as it moves into new consolidated premises towards the end of this year. It expects to see a 150-200 basis-point improvement in margins each year for the next two-three years. | ||||||||||||||||||||||||||||||||||||
| Star power The list of the company's major customers is impressive - Unilever, HP, Capital One, BNP Paribas, Deutsche Bank and Hitachi among others. That apart, Cummins Inc has been a significant contributor to the company's revenue and has grown consistently over the years. KPIT Cummins has targeted revenues of $100 million (Rs 460 crore) by FY07. | ||||||||||||||||||||||||||||||||||||
| "Out of this, $30 million worth of business should come in from Cummins and the balance from our star customers and potential star partners," says a company official. Analysts say creation of new service lines in areas such as VLSI and SAP would help to further churn Cummins' account. | ||||||||||||||||||||||||||||||||||||
| Every cloud... However, analysts cite one sore point: overdependence on star customers (top 10 clients contributed 92 per cent of the company's Q1FY05 revenues). | ||||||||||||||||||||||||||||||||||||
| Another negative is the company's size, which analysts feel could be the inhibiting factor in bagging huge orders and handling large projects. At Rs 460.30, the scrip is trading at a P/E of 19.06. Analysts say given the impressive run so far, valuations may just be looking a bit stretched. | ||||||||||||||||||||||||||||||||||||
| ...has a silver lining Although the current spike in the scrip has made some analysts wary of a further upside, there are others who see the stock touch the Rs 600 levels in a year's time. The company aims to become a $100-million company within three years. | ||||||||||||||||||||||||||||||||||||
| It says its major customers are high IT spenders and that its treatment of customers helps it become a vendor of first choice. It expects its star customers (currently accounting for more than 50 per cent of revenues) to lead its future growth. It also expects consolidated revenues to be in the range of Rs 230-235 crore and consolidated net profit to be around Rs 24-26 crore. | ||||||||||||||||||||||||||||||||||||
| Analysts are positive about the company's high growth practices like embedded software, SAP consulting and VLSI design where it is pumping investments in order to build a strong service practice. | ||||||||||||||||||||||||||||||||||||
The company's move towards off-shoring its service offerings is viewed as a precursor of better margins in future. Analysts say the next growth trigger would be acquisitions in the BFSI vertical. They peg an EPS target of Rs 40-41 for FY05 and Rs 52.5 for FY06.
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