The Hindu Business Line : KPIT Cummins: Buy

KPIT Cummins appears to be a good bet for investors with a one-year horizon. Though the price has risen by nearly 20 per cent over the past week, after the announcement of the earnings performance for 2003-04, investors may still take an exposure in the stock.

As the volatile phase in the market is set to continue over the next week, with the Lok Sabha coming in, investors may be use any price weakness to accumulate the stock.

It is important to highlight, however, that in a volatile phase in the market as seen between January and April this year, the stock had swung from a high of Rs 332 in early January to a low of Rs 196 in mid-March.

In this backdrop, the stock has gyrated since our earlier recommendation in mid-December (at Rs 305), but has comfortably sailed past these levels after the recent earnings performance for the year.

On a consolidated per share earnings of Rs 25.4 for 2003-04, the stock trades at a price-earnings multiple of 14 times.

Riding on the strength of a scaleable business model, KPIT Cummins recorded a strong performance for the quarter and year ended March 31, 2004. For 2004-05, the management has forecast a guidance of:

Revenues (excluding that from Panex Consulting, acquired recently) in the range of Rs 173-176 crore, approximately 40 per cent growth over 2003-04;

Post-tax earnings (excluding Panex Consulting) in the Rs 22.5 crore-24.5 crore range, a 56-70 per cent growth over 2003-04;

The per share earnings at Rs 36.90, a 50 per cent growth lower than post-tax earnings growth on account of equity expansion. This earnings guidance appears achievable on account of:

KPIT Cummins has evolved its business model which focusses on only two verticals — manufacturing and BFSI (Banking, Financial Services and Insurance). While manufacturing contributed 67 per cent of total revenues in 2003-04, 26 per cent was from BFSI.

In the manufacturing vertical, KPIT Cummins derives a chunk of its revenues from Cummins Inc., US, the largest designer and manufacturer of diesel engines.

As a strategic customer and one of the preferred vendors of Cummins, the company's ability to step-up revenues from this account remains fairly robust.

In 2003-04, Cummins' contribution rose to $13 million from $5.5 million over the previous year.

For the full year and in the fourth quarter ended March 31, 2003, Cummins accounted for 50 per cent and 53 per cent of revenues. At the same time, the high dependence on Cummins continues to remain a business risk.

Apart from Cummins, the company has focussed on five-star customers (adding one more during the year) which have the potential to ramp-up strongly in the coming year. To achieve this objective, the company has steadily rationalised the non-star customers, thereby reducing their contribution to overall revenues.

Over the coming year, an increase in the offshore contribution on both Cummins' and star customers' account will help expand the operating margins of KPIT Cummins. While operating margins may expand, the company will have to judiciously manage it in line with onsite revenues, which traditionally enjoy higher realisations.

The company has made rapid progress in the embedded system area, with robust growth recorded in the latest year. It has added two new customers in the embedded space from Europe this year and this practice area accounted for Rs 13.8 crore of revenues in the year.

In addition, it has also trained its focus on two new emerging areas — VLSI, for which it has set up a centre at Bangalore, and SAP through its acquisition of its Houston-based Panex Consulting earlier this year. Besides, the company has also stepped up marketing infrastructure, by setting up offices in Japan and Cupertino, US, and doubled the marketing strength.

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