Kotak Securities puts BUY on KPIT Cummins

Kotak Securities puts BUY on KPIT Cummins

The management, in its interactions has stated that it is yet to experience client specific ramp-downs; however it has noted that given the macro-uncertainty it is cautious on its own business prospects.

In line with other IT services peers; the company believes that the macro remains uncertain, challenging and weak in pockets. It believes that decision making cycles have turned longer with clients holding back on finalizing spends, especially in the US and European geographies.

For KPIT, the failure of the Big 3 in US automobile industry is yet to impact operations significantly. The company claims only 5% of its revenues being directly attributable to the segment.

In the India and Japan geographies the company believes traction remains okay though a sharper downturn in client spends will likely impact financials negatively.

On the hiring front, KPIT remains hopeful of adding close to 800 employees on a net basis i.e. around our estimates for FY09. However the company has stated that it may be obliged to defer campus-hiring commitments for the next fiscal given the unfavorable macro environment.

We have made relevant changes to account for the uncertain demand environment and the management commentary.

For FY09, we estimate a 23% growth in profits to Rs629 million; an EPS of Rs7.9 (Rs8 earlier). We estimate revenue growth of 29% y-o-y for FY09 accompanied by lower EBITDA margins (due to higher G&A expenses) in comparison to FY08.

We note that our estimates are lower than company’s guidance on the net profit line. We believe caution is prudent on this front given the uncertainty in demand environment reflected in delayed decision making cycles on the client s’ end.

We have also moderated our medium term growth expectations for the company given the expected impact of a weak macro environment on medium term growth rates for a smaller player like KPIT.

Our DCF-based price target works out to Rs50 (Rs56 earlier). At our price target of Rs50, our FY09E earnings will be discounted by 6x.

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.