KPIT Cummins’ 4QFY09 results were a positive surprise with revenues and EBITDA surpassing our expectations.
Losses in the other income line (Rs.155mn) and higher depreciation however inhibited the EBITDA gains, with the PAT modestly above estimates.
Revenues were (Rs2.09 billion, up 2% q-o-q) while margins were 29.4%, up 280bps q-o-q. PAT grew 15% q-o-q at Rs193 million.
We have made relevant changes to account for the above estimate 4QFY09 results, our own expectations of a challenging outlook for smaller IT services players’ and management commentary.
For FY10E we expect weak growth rates given the macro uncertainty at the current point- we expect revenues to contract 4% y-o-y and a modest EPS growth of 3% y-o-y.
Lower losses in other income line and assumed sustainability of cost structures point to an EPS growth despite a loss in revenues.
The management has noted that given the macro-uncertainty it is cautious on its own business prospects.
We also see the moderating pace of client additions and extended decision-making cycles as lead indicators for a challenging medium term. As a result, KPIT has refused to provide any guidance for FY10.
On the forex contracts front, management has said that all the three derivative contracts have been knocked out by Q4FY09. This points to their being no more liabilities on the derivative contracts ($42.6mn, EUR-USD linked) that KPIT entered into in FY08.
Two of these contracts had been knocked out by 9MFY09, with the last one knocked out in Q4FY09.It also indicated that the MTM on its forex positions was nil as of Q4FY09.
Our DCF-based price target works out to Rs.59 (Rs.46 earlier), accounting for a lower beta, cost optimization initiatives and lower losses in the other income line. At our price target of Rs59, our FY10E earnings will be discounted by 7x.
While noting the 90% appreciation in KPIT’s stock price over the last 3m, we continue to recommend a BUY based only on valuations.
At the same time we are cognizant of the challenging macro environment for smaller players and retain our preference for large-caps to weather the uncertain demand environment.