KPIT Cummins

Infosystems Limited
Initiating Coverage KPIT Cummins Infosystems Ltd.
Recommendation Buy Snapshot
KPIT Cummins Infosystems Ltd. provides IT and ITES services to clients
CMP (01/12/2010) Rs. 148
across the world. KPIT Cummins’ services include development,
Target Price Rs. 190 maintenance and support of software applications; implementation of
Sector IT software packages; supply chain management solutions; embedded
Stock Details software and networking solutions for automotive companies and ERP
consulting.
BSE Code 532400
NSE Code KPIT Investment Rationale
Bloomberg Code KPIT IN  JV with Bharat Forge: KPIT has formed a JV with Bharat Forge to
Market Cap (Rs. cr) 1168 manufacture REVOLO (an indigenously developed hybrid
Free Float (%) 70.0 technology solution for automobiles) which will increase fuel
efficiency of vehicles substantially and is likely to see good traction
52- wk HI/Lo 192.90/88.00
going forward once tested and launched successfully.
Avg. volume BSE (Monthly) 121648
 Increase in IT spending on Manufacturing: The economic activity
Face Value Rs. 2.00
in the manufacturing sector, world over has seen a revival in the
Dividend 35%
past 8-9 months as indicated by Global Manufacturing PMI which
Shares o/s (Crs) 7.80 will positively impact the demand for IT services and benefit KPIT
Relative Performance 1Mth 3Mth 1Yr specifically as KPIT gets most of its revenues from the this sector.
KPIT Cummins -10.4% -13.98% 20.82%  Strong presence in automobile to provide growth opportunities:
Sensex -4.10% 7.23% 15.33% With the increasing focus on hybrid vehicles, fuel efficient cars,
90% infotainment and safety features, auto electronics will be the key
growth driver for the automotive industry. KPIT being the leading
60%
player in this space is expected to benefit from this opportunity.
30%  Inorganic growth to propel top-line: Acquisition of Sparta
Consulting and CPG Solutions to further propel company’s top-line.
0%
 Strong guidance for FY 2011: Management has provided a
-30%Nov-09 Feb-10 May-10 Jul-10 Oct-10
guidance of 30% growth in revenues for FY 2011 in US dollar terms.
SENSEX KPIT
Valuation & Recommendation
We believe that KPIT’s sales will grow at a CAGR of 26.0% over next two
Shareholding Pattern as of 30/09/2010 years driven by improved demand for IT services and higher
contribution from Sparta & CPG whereas the net profit is expected to
Promoters Holding 30.03%
grow at a CAGR of 25.5%. At the current market price of Rs.148 per
Institutional (Incl. FII) 24.89% share, KPIT is currently trading at a PE of 12.52x FY11E and 8.56x FY12E
Corporate Bodies 13.38% EPS estimates, which looks quite attractive. Based on our estimated EPS
Public & others 31.70% of Rs 17.30 for FY 2012 and a target PE multiple of 11.0x we arrive at a
Ashish Khetan – Research Analyst (+91 22 3027-8201) target price of Rs. 190 per share for KPIT indicating a potential upside of
ashish.khetan@nirmalbang.com 30%. Therefore, we recommend a BUY rating on the stock with a long
term view.

Year Net Sales Growth % EBITDA Margin % PAT EPS PE P/BV ROE %
FY 2009A 784.6 30.7% 167.8 21.4% 72.0 9.23 16.03 7.08 44.2%
FY 2010A 731.6 -6.8% 161.4 22.1% 85.7 10.97 13.49 2.98 22.1%
FY 2011E 948.6 29.7% 160.0 16.9% 92.2 11.82 12.52 2.44 19.5%
FY 2012E 1,162.2 22.5% 204.6 17.6% 110.9 17.30 8.56 1.92 18.4%
Initiating Coverage KPIT Cummins Infosystems Ltd.
Company Background

KPIT Cummins Infosystems Limited, headquartered in Pune, provides IT and IT enabled

services to clients across the world. KPIT Cummins’ services include development,
maintenance and support of software applications; implementation of software packages;
supply chain management solutions; development of PC-based tools; embedded software
and networking solutions for automotive companies; development of business
intelligence tools; chip design, verification and testing for semiconductor companies; ERP
consulting; risk management and compliance services; transaction processing; technology
based and knowledge based services. These services are delivered from KPIT Cummins’
offshore delivery centres in Pune and Bangalore in India and from Wroclaw in Poland.
Services are also delivered from onsite locations at the customers’ premises across the
world.

Revenues by Geography (Q2 FY11)

13.2%

19.9%
66.9%

USA Europe ROW

Source: Company data, Nirmal Bang Securities

KPIT Cummins operates not only in the traditional markets e.g. USA and Western Europe,
but also in the emerging markets e.g. Eastern Europe, Japan and Asia-Pacific. Revenues
from USA and Europe however continue to form majority of the revenues.

The company services clients around the globe who operate in these industry segments in
relation to their Information Technology and Business Process needs. The company
operates in two verticals: Manufacturing and Diversified Financial Services.

Verticals

Manufacturing

At KPIT Cummins, manufacturing industry is a focus vertical with great emphasis on

Automotive, Industrials and Hi-Tech domains. The manufacturing vertical is at the heart of
the world economy. The demand created by the end consumer is on the rise with the
purchasing power of people going up, especially in the emerging markets. The
manufacturing vertical caters to a wide range of demands from capital gods to consumer
goods. The Emerging services areas like eCommerce and Mobile Commerce are fast
catching up as the next big growth driver of the enterprise IT market. It partners with
global manufacturing corporations in bringing products faster to their target markets and
helps customers globalize their processes & systems efficiently through a unique blend of
domain-intensive technology, process expertise and uncompromising quality standards.
Initiating Coverage KPIT Cummins Infosystems Ltd.
KPIT Cummins also provides consulting expertise projects in Supply Chain Management
(SCM), Product Lifecycle Management (PLM), Manufacturing Execution Systems (MES),
etc. It has also developed strengths in ERP Audits, Risk Management and Compliance
consultancy services and Activity based costing amongst many others.

KPIT Cummins, provides business and technology solutions catering to the needs of the
CTO and CIO of global customers. Its specialized & niche set of offerings span from
Engineering (Advanced Technology Solutions - Automotive and Semiconductor Solutions),
through Enterprise IT & Business Intelligence to Business / Knowledge Process
Outsourcing (BPO / KPO) solutions.

Revenue Equation –
Faster& Reliable

CTO / VP Engg
Advanced Technology
Solutions
Electronics for Automotive &
Semiconductor

CIO
Enterprise IT CFO / COO
ERP-SAP / BPO / KPO
Oracle Enterprise Software
Movex / Support
Mapics Risk Management &
MES Compliance
PLM / PDM Finance & Accounting
Supply Chain Technical Help Desk
E- Business

Globalization Equation – Cost Equation

Efficient & Integrated

Source: Company data, Nirmal Bang Securities

Within the Manufacturing vertical, KPIT Cummins provide specialized and integrated
solutions for the following industry segments:

 Automotive

With the increasing spending power, consumers are demanding better features
and functionalities. Also automobile manufacturers are being subjected to
stringent regulations and compliance norms. Under such tight constraints,
automotive OEMs and Tier 1s are moving from High Cost Centers to Low Cost
Centers (HCCs to LCCs) in a bid to build faster and better products and at lower
costs. At the same time, dampening demand in developed countries is forcing
OEMs and suppliers to consider investing in emerging economies. To be a leader
Initiating Coverage KPIT Cummins Infosystems Ltd.
in such scenarios, OEMs and Tier 1s will need to centralize purchase, globalize
product development, blend product architectures, and manage global
inventory. KPIT Cummins’ range of service offerings for the Automotive industry
extends from Engineering, Enterprise IT to BPO solutions.

 Hi-Tech

In the ever changing environment, it becomes crucial for the Hi-Tech industry to
keep reinventing its products. A killer application will lose its zing value unless it
keeps pace with the customer demands. KPIT Cummins has been part of various
innovation programs in Hi-Tech industry from idea generation, conceptualizing,
actual development, rollout support and servicing the needs of customers as
well as end users over the lifecycle of products. KPIT Cummins offer end to end
solutions to its customers ranging from Semiconductor Design services, Board
Development to the complete suite of embedded software development. Some
of the illustrious clientele of the company are SAP, Oracle, Microsoft, IBM,
Apriso, Intentia, Business Objects, ARM, Cadence, Mentor Graphics, Synopsis.
KPIT Cummins is one of the founder members of the “India Semiconductor
Association” (ISA).

More and more system manufactures are outsourcing the designing of their
chips. KPIT Cummins’ engineering design skills help R&D Teams reduce product
development costs and reduce time to market for a product. KPIT Cummins’
services address the end to end value chain including IT Specific processes like
supply chain management, Analytics, BPO and Engineering.

 Industrials

Growth in Industrial manufacturing is vital for the growth of any nation’s

economy. IT is being increasingly used to streamline the processes and
manufacture products in an efficient manner.

Financial Services

The Financial Services group provides customers with software engineering services,
research and development services, risk management and compliance consulting,
information systems design, business intelligence consulting and business process
outsourcing. KPIT creates applications through IT, support through BPO, and manage
change through consulting. It works with Investment and Retail banks, Asset Management
and Financial Platform institutions, with a focus on securities services, credit cards, fund
administration, insurance and leasing.

Its offerings include Application Decommissioning, Maintenance, Development,

Implementation, Re-engineering and Integration for global banks and financial
organizations. KPIT Cummins also offers an end-to-end methodology and services around
Testing of financial platforms. Its proprietary tools include Data-on-move Suite of
products, e-purse framework, and Mobile Payment frameworks.
Initiating Coverage KPIT Cummins Infosystems Ltd.
Energy & Utilities
KPIT partner with Energy and Utility corporations to improve operational efficiencies,
optimize asset utilization, deliver management reporting, and integrate planning solutions
and regulatory compliance. KPIT’s Program Managers, Architects and Leads have deep
domain knowledge of their processes and best practices. IT provide offerings across the
entire SAP Solution value chain, with focused customized offerings in the SAP for Utilities
space including IS/U-CCS (CIC) and Smart Grid etc.

Revenues by Verticals (Q2 FY11)

11.7%
6.4%
3.6%

78.3%

Manufacturing BFSI Energy & Utilities Others

Source: Company data, Nirmal Bang Securities

In Q2 FY11, over 78% of the revenues were derived from the manufacturing vertical. This
vertical constitutes of three lines of business, viz., manufacturing business IT, auto
electronics and semiconductor solutions group.

Segments
KPIT has broken its revenues in 4 Strategic Business Units (SBU) based on its products and
services offerings. The SBUs will own practice based organizations with an objective to
build best-in-class practices. The following are the 4 SBU’s:
 Automotive Engineering (A&E) SBU
 Integrated Enterprise Solutions (IES) SBU
 SAP SBU
 Semiconductor Solutions (Hardware) Group (SSG) SBU

Revenues by SBU (Q2 FY11)

3.56%

34.61% 34.95%

26.88%

Integrated Enterprise Solutions Auto & Engineering

SAP Semiconductor Solutions Group
Source: Company data, Nirmal Bang Securities
Initiating Coverage KPIT Cummins Infosystems Ltd.
Recent Developments

REVOLO
In June 2010, KPIT entered into a Joint Venture with Bharat Forge Ltd, the flagship
company of the USD 2.4 billion Kalyani Group and a leading global supplier of forged and
machined components to manufacture and market an indigenously developed hybrid
technology solution for automobiles - REVOLO, that will enable both existing and new
vehicles to dramatically increase fuel efficiency and engine performance, while
significantly decreasing green house gas (GHG) emissions.

The technology for this intelligent plug-in, parallel, full-hybrid solution has been designed
and engineered by KPIT, while the solution for automobiles would be manufactured
through a joint venture (JV) between Bharat Forge Limited and KPIT. As part of the joint
venture, KPIT will license the technology to the JV while Bharat Forge would bring in its
manufacturing, assembly & integration expertise to the JV. The solution will be marketed
to OEMs and fleet & individual vehicle owners through a network of certified and
authorized dealerships.

The Automotive Research Association of India (ARAI), which tested the new hybrid
solution (REVOLO), confirmed fuel efficiency gains of more than 40%. Under city driving
conditions the increase in efficiency has been above 60% and reduction in Greenhouse
Gas Emissions (GHG) has been more than 30%. The product is expected to be priced
between Rs. 65000 to Rs. 150000 depending on the size of vehicle. The company intends
to launch in Q4 FY11 and expect the product to generate a total revenues of Rs. 300 to
Rs. 500 Crs in FY 2012.

CPG Solutions
CPG, founded in 1997 and based in Boca Raton Florida, provides Engineering,
Manufacturing and Supply Chain companies with Oracle Applications consulting services.
CPG’s consulting services encompass installations and upgrades of Oracle ERP, Oracle
Business Intelligence, Hyperion Financial software and the integration of Agile and other
Product Lifecycle Management software into Oracle ERP systems. The company has
entered into an agreement to acquire CPG Solutions for a total consideration of Rs.60 Crs
which includes a guaranteed consideration of Rs.27 Crs and a milestone based
consideration of Rs. 33 Crs to be made over a period of 3 years. The acquisition of CPG
Solutions will further strengthen KPIT’s strategic position as preferred Oracle partner for
manufacturing companies and is designed to complement KPIT’s strengths in global ERP
roll-outs, implementation and support & maintenance services.

Sparta Consulting
In October 2009, KPIT announced that it has entered into a definitive merger agreement
with Sparta Consulting, a California, USA based firm and a leading provider of high end
SAP solutions. The merger was in an all-cash agreement for a milestone based
consideration of $38 mn which includes a bonus of $4 mn. Sparta’s footprint in the
Energy & Utilities sector provides KPIT a headstart into this adjacent space.
Initiating Coverage KPIT Cummins Infosystems Ltd.
Investment Rationale

Increase in IT spending in Manufacturing sector

Over 78% of KPIT Cummin’s revenues are derived from the manufacturing sector. The
economic activity in the manufacturing sector across developed economies has seen a
revival in the past 8-9 months as indicated by PMI index of the US and the UK. Also the
manufacturing sector in India has been seeing a revival as seen by the healthy Index of
Industrial Production (IIP) as well as IIP for Manufacturing witnessed over the past few
months. Increased competition, customer demand for high-quality products, and the
need for integration of different business functions are driving more and more
manufacturers to escalate their investments in IT. The US has shown increase in IT
spending in manufacturing sector while Europe is expected to follow suit. KPIT being a
niche player in manufacturing vertical is set gain from this uptick in demand.

US & UK PMI
70
60
50
40
30
20
10
0

US PMI UK PMI

Source: Bloomberg, Nirmal Bang Research

Automotive industry expected to drive top-line going forward

The global automotive market has seen significant turnaround after the recessionary
environment which was seen in late 2008 and 2009. China, India, Japan, Korea are fast
emerging as key markets for the global automotive industry. Automakers are shifting
production base from high-cost regions like North America and EU to low cost regions like
China, India and South America. India is also fast emerging as a major production hub for
the global auto companies. The cost advantage coupled along with high engineering skills
has made India a preferable choice for automotive and component manufacturing. In
automotive manufacturing, electronics now forms a very significant part. Electronic
components currently comprises of 20-25% of the total cost for all car categories. With
the increasing focus on hybrid vehicles, fuel efficient cars, infotainment and safety
features, auto electronics will be the key growth driver for the automotive industry. With
growing share of auto electronics, there is growth potential for the semiconductor
products market for auto industry. Computer chips bring in major improvements in three
areas of the car—power train, safety systems such as air bags, anti-collision systems and
body electronics including power windows to climate control.
Initiating Coverage KPIT Cummins Infosystems Ltd.
US Auto Sales
20

17

14

11

8
Nov-05 Jul-06 Mar-07 Nov-07 Jul-08 Mar-09 Nov-09 Jul-10
Source: Bloomberg, Nirmal Bang Research

JV with Bharat Forge for 'Revolo' to provide a impetus to profitability

KPIT Cummins has entered into a strategic alliance with Bharat Forge to manufacture and
market 'Revolo', an automotive solution to reduce the emission and improve the
efficiency of the automobiles. The trial tests conducted by the company have inferred a
decrease of over 35% in the cost of travel on account of fuel efficiency improvement and
emission reduction. This product can be retrofitted in new as well as existing automobiles
and KPIT Cummins' plans to target OEMs as well as existing fleet operators owning
commercial vehicles and private vehicle owners.

KPIT will provide the technical knowhow while existing manufacturing facilities of Bharat
Forge will be utilized to develop it. The cost for this solution ranges from Rs. 65,000 to Rs.
150,000 depending on the engine capacity of the vehicle. KPIT Cummins and Bharat Forge
has established a separate entity under a 50:50 JV to manufacture and market 'Revolo'
and the company is targeting total revenues of anywhere between 300 Crs to 500 Crores
for FY 2012, and expects the EBIT margin to be in the range of 15% to 18%. From FY 2012
onwards KPIT would be getting royalty plus a share in profit. The royalty would be in the
region of 6% to 8% of the top-line. And that would be a non-linear income to KPIT.

Increasing focus on the emerging markets

The company is increasingly focusing on the emerging markets; India, China, Korea; which
are becoming the manufacturing and automobile hubs. As more and more revenues come
from these geographies, it will reduce dependence on US and Europe and hedge the
company against negative movements in these developed markets. The company can
capitalize on the economic growth being witnessed in the emerging markets which will
offset the sluggish growth in the developed countries.

An extensive knowledge repository with 28 patents filed

KPIT Cummins has setup Center for Research in Engineering Sciences and Technology for
development of new technologies and new offerings. The company has filed 28 patents till
date in the areas of powertrain, hybrid automotive technology, vehicle safety and
semiconductor offerings. This asset repository increases the productivity by reducing the
rework time and effort and also reduces the product development cost by the reuse of
existing modules. The company currently reuses about 15% of the total assets in its
repository. Also the IP led offerings helps the company to grow its non linear revenues.
Initiating Coverage KPIT Cummins Infosystems Ltd.
Reducing dependence on Cummins

The revenue contribution for the company from its top client, Cummins has been steadily
declining over the years. This will reduce the dependence of the revenue growth on
orders from Cummins. During the recession when the manufacturing industry took a hit,
order book by Cummins declined negatively hampering the revenue growth. As the
company focuses on its STAR customers along with Cummins, it will enable it to have a
balanced revenue portfolio and insulate it from major revenue declines due to some
specific client.

% Revenue from Cummins

50.00%
40.93%
40.00% 33.26% 33.76% 32.14% 30.63%
30.00% 24.87% 24.39% 23.00%
20.00%
10.00%
0.00%
Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11

Track Record of Successful M&A

Over the years KPIT Cummins has grown both organically and inorganically. Inorganic
route has played a vital role in the growth of company by enabling it to enter new
geographies and develop domain expertise. KPIT Cummins has achieved many fold
increase in the revenues of the companies it has acquired. CG Smith Software Pvt. Ltd. had
revenue of $.6.25 million when it was acquired in March 2006. In just 4 yrs, the revenues
have increased to over $ 25 million. Similarly revenue of Panex Consulting increased from
$ 7.2 million in 2004 to over $ 20 million as of now post the acquisition. KPIT Cummins has
gained a foot hold in SAP Practice through the acquisition of Sparta Consulting in October
2009.

Consistent Margin Improvement

During FY 2008-2010, EBIDTA margins of KPIT Cummins have improved from around 12%
to over 21%. This improvement has been achieved through building an asset repository
which can be reused for product development thereby reducing rework efforts. However,
post the consolidation of Sparta the company’s margins has declined. Moreover the wage
hike and addition of employees further impacted the margins in Q2 FY11. Going forward,
we expect the margins to improve driven by higher utilization rate, improvement in
employee pyramid and better operational efficiency. The Management expects the
utilization rate to go up by 200-300 bps in 2H FY11.
Initiating Coverage KPIT Cummins Infosystems Ltd.
Risks & Concerns

Excessive dependency on manufacturing sector

The company derives over 78% of its revenues from the manufacturing sector. Any
slowdown in the manufacturing industry will hamper the revenue growth.

Revolo not being a commercial success

KPIT Cummins is banking on the launch of Revolo in FY 2012 to provide a further boost to
its revenues and profitability. In the event of Revolo being not much of a commercial
success, it will hamper the future top-line growth factored by us in arriving at the
company’s valuation.

Client concentration can hamper top-line growth

The company derives around 23% of its revenues from Cummins Inc. Downturns in the
industries in which Cummins operate may cause it to postpone or cut down its IT budgets
which will have an adverse impact on the top-line of KPIT Cummins.

High Attrition rate remains a concern

Over the past few quarters, Indian IT industry has been witnessing significantly high
attrition rate because the supply of qualifies resources has not been able to match the
increasing demand. For Q2 FY11, KPIT Cummins had an attrition rate of over 30% which
remains a major concern as loss of trained resources will hamper the company’s ability to
bid for projects going ahead.
Initiating Coverage KPIT Cummins Infosystems Ltd.
Industry Analysis
Global IT Industry

According to International Data Corporation (IDC), the global IT industry de-grew 3% and
aggregated revenues of US$1,558 bn. This decline was due to reduction in spending and
delays in decision making in developed economies during the recessionary environment
from late 2008 till 2009. In 2010, CRISIL research expects the IT industry to grow 3.3% to
US$1,610 bn.
2000

1500 644 680

600 550 570 608
1000 336 357 381
304 307 318 148
110 112 119 127 137
500
591 589 604 628 659 695
0
2008 2009 2010E 2011E 2012E 2013E
IT Service ITES-BPO Software Hardware
Source: CRISIL Report (October 2010), IDC

According to IDC, the global IT Services industries expected to grow at a moderate CAGR
of 3.3% from 2009-2013 to US$695 bn. The majority of this growth will be driven by Asia
Pacific and Middle East region.

Indian IT Industry
The Indian IT industry (excluding hardware) has grown at a CAGR of 29.7% over the last 4
years (FY 2005-FY 2009). However, the growth rate declined significantly to 6.2% in FY
2010 owing to recession in key markets of the US and the UK. The US continues to be the
largest export market for Indian IT and ITES services accounting for approximately 60% of
the India’s total IT exports. Moreover, clients across all regions were adopting cost cutting
measures and seeking concessions on billing rates from the vendors to combat the
recession.
70 40.0%
60 35.0%
12.8
12.3 30.0%
50
10.5 25.0%
13.6 14.7
40
8.2 11.5 20.0%
30 5.3 8.7 15.0%
20 3.8 7.2
5.2 30.1 34.1 36.2 10.0%
10 17.8 22.6 5.0%
13.5
0 0.0%
FY 2004- FY 2005- FY 2006- FY 2007- FY 2008- FY 2009-
05 06 07 08 09 10E
IT Services ITES-BPO
Software products & eng ser y-o-y
Initiating Coverage KPIT Cummins Infosystems Ltd.
India’s IT-BPO industry’s export revenues are estimated to be approximately US$49.7 bn
in FY 2010. The IT industry’s export growth rate plunged to around 6% in FY 2010 as
compared to growth of 29%-35% during FY 2004 and FY 2008. However, the growth
prospects for the IT sector looks bright with the improvement in the global economy. In
fact in 1H 2011, the tier I IT players in India has recorded a growth of 20-23% YoY
indicating the renewal in discretionary spending.

According to CRISIL report, IT services exports are expected to grow at a CAGR of 17 over
next five years (FY 2009-10 to FY 2014-15). This reaffirms that the long term growth
prospects of the industry remains intact.

INDIAN IT SERVICE EXPORTS - 2009

Airlines &
Healthcare, 4%
transportation, Other, 2%
Construction & 3%
utilities, 3%
Media,
publishing &
entertainment,
Retail, 9% BFSI, 41%
2%

Manufacturing,
16%

Hi-tech /
Telecom, 20%

Source: NASSCOM

After BFSI, Hi-tech and Manufacturing are the largest customer of the IT services together
accounting for approximately 36% of the India’s total IT-ITeS exports. The revival of the
industry with the US and UK economy is likely to boost the demand for these verticals.
KPIT being a prominent player in Manufacturing industry is expected to reap the benefits
from the revival in the industry.
Initiating Coverage KPIT Cummins Infosystems Ltd.
The Recent Quarter

 KPIT Cummins’ reported revenues grew 14.0% q-o-q to Rs.234.9 crs in Q2 FY11
primarily driven by strong growth under SAP and Auto SBUs transforming in an
overall volume growth of 8% during the quarter. On a y-o-y basis, revenues
increased by 32.7% indicating a revival in demand scenario.

 The company reported EBITDA of Rs. 36.4 crs in Q2 FY11 as compared to Rs.
33.9 crs in Q1 FY11. During Q2 FY11, EBITDA margin declined 96 bps to 15.5%
due to increase in the overall revenue share of SAP SBU which has got lower
EBITDA margin.

 KPIT Cummins reported net profit of Rs. 27.2 crs in Q2 FY11 as compared to Rs.
22.3 crs in Q1 FY11 registering growth of 22% q-o-q. The decline in EBITDA
margin was offset by lower Forex loss and interest expense resulting in an
improvement of 71 bps in PAT margin during Q2 FY11.

 The company reported a diluted EPS of Rs. 2.91 for Q2 FY11.

Q2 FY11 Result Analysis (in Rs Crs.)

Q2 FY11 Q1 FY11 Q-o-Q Q2 FY10 Y-o-Y

Revenues 234.9 206.1 14.0% 177.0 32.7%

Software development exp 151.0 130.5 15.7% 95.9 57.5%
Gross profit 84.0 75.6 11.1% 81.1 3.5%

General & Administration exp 28.2 25.9 9.1% 19.0 48.4%

Selling & Marketing exp 19.3 15.8 22.4% 15.3 26.4%
EBITDA 36.4 33.9 7.3% 46.8 -22.2%
margin 15.5% 16.5% -96 bps 26.5% -1,096 bps
Depreciation & Amortization 8.4 8.1 3.8% 7.6 10.3%
Finance charges 0.3 0.6 -49.2% 0.5 -39.7%
Other income -0.6 -3.0 -80.4% -13.2 -95.5%
Income before taxes 27.2 22.3 22.0% 25.6 6.2%
margin 11.6% 10.8% 76 bps 14.5% -290 bps
Income taxes 3.4 2.9 4.4
Net Income for the period 23.7 19.4 22.6% 21.2 12.0%
margin 10.1% 9.4% 71 bps 12.0% -187 bps
Diluted EPS 2.91 2.38 22.3% 2.72 7.1%
Source: Company data, Nirmal Bang Research
Initiating Coverage KPIT Cummins Infosystems Ltd.
Peer Comparison

We are comparing KPIT with Infotech Enterprises Ltd (Infotech), Geometric Ltd
(Geometric), Polaris Software Laboratories Ltd (Polaris) and Mindtree Ltd. as some of
these company’s operate in similar business. KPIT has witnessed a CAGR growth of 40% in
its top-line during FY 2002-2010 which is higher than its peer group companies. KPIT’s
margin is also highest amongst the peer group. On the valuation front, KPIT is currently
trading at 12.52x P/E based on FY 2011E EPS which is in line with the group. The company
is currently trading at 2.44x E/Sales which is above the peer group average of 2.20x. While
KPIT’s estimated RONW is also higher than the peer group average. We believe that KPIT
should continue to get higher multiple than its peers considering the growth KPIT is
expected to achieve in FY 2011 along with improvement in margins. While couple of its
peers are expected to see a decline in its EPS for FY 2011.

Company Sales Price M. Cap EBITDA EPS PE RONW EV/ S EV/ EBIDTA P/ BV
(Rs Crs) (Rs Crs) Margin % (x) (%) (x) (x) (x)
KPIT Cummins 949 148 1,155 16.9% 11.82 12.52 19.5% 1.08 6.39 2.44
Infotech Enterprises 1,181 153 1,701 15.9% 13.04 11.73 16.0% 1.08 6.75 1.88
Geometric 593 72 448 13.4% 8.52 8.45 27.5% 0.73 5.47 2.32
MindTree Ltd 1,531 501 2,039 12.4% 22.36 22.40 12.8% 1.26 10.12 2.88
Polaris 1,575 153 227 14.4% 20.00 11.73 16.0% 0.54 3.75 1.47
Industry Average 14.6% 13.37 18.4% 0.94 6.50 2.20
* Income statement numbers are for FY 2011E, BS numbers are as of Q2 FY11 for Mindtree, Infotech Enterprises and Geometric
Source: Company Data, Capital Line, Bloomberg, Nirmal Bang Research
Initiating Coverage KPIT Cummins Infosystems Ltd.
Valuation & Recommendation

KPIT continues to expand its business both organically and inorganically. The new initiative
of REVOLO can be great turnaround story in the automotive segment if successful.
Moreover, the acquisition of Sparta and CPG Systems is expected to drive the top-line in
near term. KPIT has demonstrated great skills to acquire smaller companies and make
them large. KPIT’s first acquisition of CIT currently generates US$40 mn as compared to its
revenue of US$1 mn at the time of acquisition in 2002. KPIT has laid an aggressive plan for
Sparta and expect it to grow rapidly. We expect strong top-line growth in FY 2011 driven
by increase in demand and acquisition of CPG which has an annual run rate of US$11 mn.
Company has guided for a 30% y-o-y increase in top-line in US dollar terms for FY 2011.
We expect FY 2012 to be better in terms of profitability as the income from the JV is
expected to kick in from Q1 FY12 once the company successfully launches Revolo in Q4
FY11. Consequently, we expect the company to achieve a CAGR of 26.0% in Sales and
25.5% in PAT over next two years.

During March 2005 to March 2008, company’s PE multiple has remained above 12.0x.
However, after the financial meltdown and global slowdown the multiple declined very
sharply. Currently KPIT is trading at a PE multiple of 12.52x. Looking at the historical
trading range and the growth prospects of the company we assign a target multiple of
11.0x for KPIT which is broadly in line with the average of the peer group multiple. Based
on the target PE of 11.0x and our estimated EPS of Rs 17.30 for FY 2012 we get a target
price of Rs. 190 per share for KPIT which represents a potential upside of 28% from the
current levels. Therefore, we initiate our coverage on KPIT with a BUY rating on the
stock with a long term view.

P/E Band (Forward)

250

200

150

100

50

Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

KPIT PER - 5 PER - 7 PER - 10 PER - 12 PER - 15

Source: Nirmal Bang Research

Initiating Coverage KPIT Cummins Infosystems Ltd.
Income Statement (in Rs Crs.)
FY 2009 FY 2010 FY 2011E FY 2012E

Revenues 784.6 731.6 948.6 1,162.2

Software development expenses 446.7 409.1 594.9 717.5
Gross profit 337.9 322.6 353.7 444.6

General & Administration exp 84.7 94.8 118.8 152.1

Selling & Marketing exp 85.4 66.4 74.9 87.9
EBITDA 167.8 161.4 160.0 204.6
margin 21.4% 22.1% 16.9% 17.6%

Depreciation & Amortization 43.6 30.8 37.2 42.6

Finance charges 4.5 2.7 1.5 1.2
Other income -41.8 -25.3 -11.6 -13.0
Income before taxes 77.8 102.6 109.7 147.8
Income taxes 5.8 16.9 17.5 37.0
Net income before Minority Interest 72.0 85.7 92.2 110.9
Income from JV 0.0 0.0 0.0 24.1
Net Income for the Period 72.0 85.7 92.2 135.0
margin 9.2% 11.7% 9.7% 11.6%
EPS (Diluted) 9.23 10.97 11.82 17.30
Source: Company data, Nirmal Bang Research
Initiating Coverage KPIT Cummins Infosystems Ltd.
Balance Sheet (in Rs Crs.)
FY 2009 FY 2010 FY 2011E FY 2012E
Sources of Funds
Share capital 15.6 15.7 15.7 15.7
Reserves 147.5 371.4 457.2 585.8
Share Holders Funds 163.1 387.1 472.9 601.5
Secured Loans 118.0 110.8 112.8 112.8
Unsecured Loans 0.5 0.0 0.0 0.0
Minority Interest 0.3 0.0 0.0 0.0
Deferred Tax Liability 6.0 5.1 5.1 5.1
Total Liabilities and Equity 287.8 503.0 590.9 719.5

Application Of Funds
Gross Fixed Assets 220.5 251.4 310.0 355.0
Less:Depreciation 104.2 127.8 165.0 207.6
Net Fixed Assets 116.3 123.6 145.0 147.4
Capital WIP 34.8 28.6 0.0 0.0
Investments 0.0 74.7 74.7 74.7
Goodwill 28.5 95.0 95.0 95.0
Curent Assets, Loans & Advances
Cash & Bank Balances 167.1 105.2 171.0 256.2
Sundry debtors 177.6 138.8 179.2 219.5
Loans & advances 44.9 67.7 91.8 121.4
Total Current Assets 389.6 311.7 442.0 597.1
Current Liabilities & Provisions
Current Liabilities 271.6 107.6 138.3 162.2
Provisions 9.7 23.0 27.4 32.5
Total Curr.Liabs & Provisions 281.3 130.6 165.8 194.7

Net Current Assets 108.3 181.1 276.2 402.4

Total Assets 287.8 503.0 590.9 719.5

Source: Company data, Nirmal Bang Research
Initiating Coverage KPIT Cummins Infosystems Ltd.
Ratios
Profitability Ratios FY 09 FY 10 FY 2011 E FY 2012E
Gross Margin 43.1% 44.1% 37.3% 38.3%
EBITDA 21.4% 22.1% 16.9% 17.6%
PAT 9.2% 11.7% 9.7% 11.6%
RoNW 33.7% 31.2% 21.4% 25.1%

Growth Ratios
Sales 30.7% -6.8% 29.7% 22.5%
EBITDA 81.8% -3.8% -0.9% 27.9%
PAT 36.8% 19.0% 7.6% 46.3%

Valuation Ratios
PE 16.0 13.5 12.5 8.6
P/BV 7.1 3.0 2.4 1.9
EV/EBIDTA 6.6 7.2 6.9 4.9
M.Cap/Sales 1.5 1.6 1.2 1.0

Per Share Data

BV 20.9 49.6 60.6 77.1
EPS 9.2 11.0 11.8 17.3
Cash per share 21.4 23.1 31.5 42.4
Source: Company data, Nirmal Bang Research
 Initiating Coverage KPIT Cummins Infosystems Ltd.

Note

Disclaimer
This Document has been prepared by Nirmal Bang Research (Nirmal Bang Securities PVT LTD).The information, analysis and estimates
contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This
document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is
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