KPIT Cummins Infosystems Limited

Transcription

1 KPIT Cummins Infosystems Limited

2 Recommendation Buy Snapshot 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 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 /88.00 going forward once tested and launched successfully. Avg. volume BSE (Monthly) Increase in IT spending on Manufacturing: The economic activity Face Value Rs 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% % 20.82% Sensex -4.10% 7.23% 15.33% 90% 60% 30% 0% -30% Nov-09 Feb-10 May-10 Jul-10 Oct-10 SENSEX KPIT Shareholding Pattern as of 30/09/2010 Promoters Holding 30.03% Institutional (Incl. FII) 24.89% Corporate Bodies 13.38% Public & others 31.70% Ashish Khetan Research Analyst ( ) ashish.khetan@nirmalbang.com Strong presence in automobile to provide growth opportunities: 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. KPIT being the leading player in this space is expected to benefit from this opportunity. Inorganic growth to propel top-line: Acquisition of Sparta Consulting and CPG Solutions to further propel company s top-line. Strong guidance for FY 2011: Management has provided a guidance of 30% growth in revenues for FY 2011 in US dollar terms. Valuation & Recommendation We believe that KPIT s sales will grow at a CAGR of 26.0% over next two years driven by improved demand for IT services and higher contribution from Sparta & CPG whereas the net profit is expected to grow at a CAGR of 25.5%. At the current market price of Rs.148 per share, KPIT is currently trading at a PE of 12.52x FY11E and 8.56x FY12E EPS estimates, which looks quite attractive. Based on our estimated EPS of Rs for FY 2012 and a target PE multiple of 11.0x we arrive at a target price of Rs. 190 per share for KPIT indicating a potential upside of 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 % % % FY 2010A % % % FY 2011E % % % FY 2012E 1, % % %

3 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% 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 USA Europe ROW 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.

4 Initiating Coverage 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 ERP-SAP / Oracle Movex / Mapics CFO / COO BPO / KPO Enterprise Software Support MES Risk Management & Compliance PLM / PDM Finance & Accounting Supply Chain Technical Help Desk E- Business Globalization Equation Efficient & Integrated Cost Equation 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

5 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.

6 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) 6.4% 3.6% 11.7% 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 SAP Auto & Engineering Semiconductor Solutions Group Source: Company data, Nirmal Bang Securities

7 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 to Rs 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 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.

8 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 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 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.

9 20 US Auto Sales 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.

10 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 % 40.00% 30.00% 20.00% 10.00% 0.00% % Revenue from Cummins 40.93% 33.26% 33.76% 32.14% 30.63% 24.87% 24.39% 23.00% 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 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 Consistent Margin Improvement During FY , 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 bps in 2H FY11.

11 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.

12 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 In 2010, CRISIL research expects the IT industry to grow 3.3% to US$1,610 bn E 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 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 FY FY IT Services FY Software products & eng ser FY FY ITES-BPO y-o-y FY E 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

13 India s IT-BPO industry s export revenues are estimated to be approximately US$49.7 bn in FY 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 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 to FY ). This reaffirms that the long term growth prospects of the industry remains intact. Healthcare, 4% Construction & utilities, 3% Media, publishing & entertainment, 2% INDIAN IT SERVICE EXPORTS Airlines & transportation, 3% Retail, 9% Other, 2% BFSI, 41% 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.

14 The Recent Quarter KPIT Cummins reported revenues grew 14.0% q-o-q to Rs 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 crs in Q2 FY11 as compared to Rs 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 crs in Q2 FY11 as compared to Rs 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 for Q2 FY11. Q2 FY11 Result Analysis (in Rs Crs.) Q2 FY11 Q1 FY11 Q-o-Q Q2 FY10 Y-o-Y Revenues % % Software development exp % % Gross profit % % General & Administration exp % % Selling & Marketing exp % % EBITDA % % margin 15.5% 16.5% -96 bps 26.5% -1,096 bps Depreciation & Amortization % % Finance charges % % Other income % % Income before taxes % % margin 11.6% 10.8% 76 bps 14.5% -290 bps Income taxes Net Income for the period % % margin 10.1% 9.4% 71 bps 12.0% -187 bps Diluted EPS % % Source: Company data, Nirmal Bang Research

15 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 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 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 , % % Infotech Enterprises 1, , % % Geometric % % MindTree Ltd 1, , % % Polaris 1, % % Industry Average 14.6% % * 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

16 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 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 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 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. 250 P/E Band (Forward) 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

17 Income Statement (in Rs Crs.) FY 2009 FY 2010 FY 2011E FY 2012E Revenues ,162.2 Software development expenses Gross profit General & Administration exp Selling & Marketing exp EBITDA margin 21.4% 22.1% 16.9% 17.6% Depreciation & Amortization Finance charges Other income Income before taxes Income taxes Net income before Minority Interest Income from JV Net Income for the Period margin 9.2% 11.7% 9.7% 11.6% EPS (Diluted) Source: Company data, Nirmal Bang Research

18 Balance Sheet (in Rs Crs.) FY 2009 FY 2010 FY 2011E FY 2012E Sources of Funds Share capital Reserves Share Holders Funds Secured Loans Unsecured Loans Minority Interest Deferred Tax Liability Total Liabilities and Equity Application Of Funds Gross Fixed Assets Less:Depreciation Net Fixed Assets Capital WIP Investments Goodwill Curent Assets, Loans & Advances Cash & Bank Balances Sundry debtors Loans & advances Total Current Assets Current Liabilities & Provisions Current Liabilities Provisions Total Curr.Liabs & Provisions Net Current Assets Total Assets Source: Company data, Nirmal Bang Research

19 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 P/BV EV/EBIDTA M.Cap/Sales Per Share Data BV EPS Cash per share Source: Company data, Nirmal Bang Research

20 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 meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in anyway be responsible for the contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document.