KPIT Cummins

Investors with a two-year horizon can buy the shares of KPIT Cummins Infosystems (KPIT), given the company’s cost cutting moves and measures to better realisations by working on key operating metrics.

This apart, improvement in outsourcing figures in verticals such as manufacturing and auto-electronics spends increasing among car manufacturers around the world indicate reasonable prospects for IT companies such as KPIT over the next couple of years.

At Rs 49.5, the share trades at five-six times its likely 2009-10 per share earnings, which is a discount to mid-tier IT companies such as Hexaware and Geometric.

KPIT has remained focused on the manufacturing vertical (to include manufacturing business, IT and auto-electronics contributing to over 80 per cent of its revenues) and to a lesser extent on semiconductor solutions and the BFSI verticals.

The company does not serve GM as a client and has not been affected by bankruptcies in the automotive sector.

The company’s revenues for 2008-09 grew by 36 per cent to Rs 793 crore over the previous fiscal, while net profit grew by 28 per cent to Rs 66 crore.

This growth has been led by growth in the auto-electronics segment (which is provision of automotive embedded software), which has grown by over 64 per cent in 2008-09 in a year where auto majors have gone bankrupt.

This has been made possible by the fact that car manufacturers around the world are increasingly adopting ‘electronics’ for more comfort features and design and also for new concepts such as electric cars and fuel efficient cars.

Studies by Strategy Analytics Automotive Electronics expects electronics to account for 35 per cent of the total cost of a car by 2010.

This creates a strong business case for software companies such as KPIT to provide services that can enable seamless integration.

The manufacturing business IT segment has also grown by over 27.8 per cent, driven by enterprise solutions implementations.

In both these segments the company has won new clients. Overall the number of $1 million clients has increased over the past year from 23 to 28 as of March 2009.
Operational initiatives

Internally, the company has taken several measures for improving realisations as well as for optimising costs.

KPIT has increased the proportion of fixed-price contracts over the last one year. From 12 per cent of revenues in 2007-08, it has grown to 18 per cent in FY09.

Fixed-price contracts ensure better realisations than ‘time and material’ form of billing, as it ensures optimal planning and use of resources for a project. This has also partly led to the debtor days reducing from 77 in FY08 to 69 in FY09.

The offshore component of revenues has also increased over the last one year to 55 per cent presently. Offshore component of revenues are low-cost ones compared to onsite component. This optimises the cost-structure for KPIT.

The company has taken price cuts to the tune of 5 percent, but it has managed to negotiate with clients to bring such projects offshore.

The company hopes to achieve 60 per cent revenues from offshore centres, going forward.

This apart, the company has also increased utilisation levels to drive volumes both offshore and onsite(to a larger extent).

From a cost perspective, it has also decreased the variable component of salaries, limited fresh hiring, deferred the timelines for campus joinees, and reduced bench.

From a geographic diversification angle, KPIT has also increased its revenues from Europe to 36 per cent from 32 per cent a year ago.

With several government utilities and manufacturing companies set to increase outsourcing from there, KPIT appears well positioned to tap into this market.

A recent study from research firm TPI points out that average contract values have increased from the EMEA (Europe and Middle Eastern Asia) region. The TPI report also points out that outsourcing in areas such as utilities and telecom is set to increase over the next few years.
Risks

KPIT continues to have Cummins as its top client and accounts for 39 per cent of its revenues. The concentration of revenues among its top 10 clients is still high at nearly 67 per cent.

These facts give rise to concentration risks. The repeat business percentage continues to be 90 per cent, indicating that ramp-ups among existing clients is not automatically happening.