Stock Market Result Update on KPIT for 2QFY2012

Stock Market Result Update on KPIT for 2QFY2012 with an Neutral recommendation. 

For 2QFY2012, KPIT Cummins Infosystems (KPIT) reported lower-than-expected performance. The company has transferred its diversified financial services (DFS) business to Intrasoft Technologies, as it was not the focus area of the company and was having just 2-3 clients. For FY2012, management maintained its USD revenue guidance of US$275mn-285mn i.e., 23-27% yoy growth. We recommend a Neutral rating the stock.

Quarterly highlights: For 2QFY2012, KPIT reported revenue of US$70.1mn, up merely 0.4% qoq, majorly led by 5.0% volume growth. Excluding revenue from the DFS business, on a like-to-like basis, revenue came in at US$70.16mn vs. US$67.08 in 1QFY2012, up 4.6% qoq. In INR terms, revenue came in at `325cr, up 2.8% qoq. The company’s EBITDA margin improved by 108bp qoq to 13.6% due to qoq INR depreciation against USD. PAT stood at `34cr, aided by higher other income, which includes net income of `2.3 from the transaction related to DFS carried out during the quarter.

Outlook and valuation: KPIT’s management has guided for 23-27% yoy revenue growth for FY2012 (excluding ~US$9mn due to Systime). Although the company is growing ahead of other IT companies in terms of its revenue, on the operating front it is standing muted since the last few quarters. Also, the company’s focus on the manufacturing vertical makes us slightly cautious on its FY2013 growth outlook, if any slowdown kicks in developed economies. Hence, we expect the company’s revenue to post a CAGR of 24.7% and 25.2% in USD and INR terms, respectively, over FY2011-13E. On the EBITDA and PAT fronts, the company is expected to post a 26.4% and 24.9% CAGR over FY2011-13E. We value the company at 10x FY2013E EPS of `16.3, which gives us a target price of `163. We recommend a Neutral rating on the stock.