Been on the forum for a few months, but substantively posting for the first time so please do let me know if there is any format/ details that I should put in but Iave missed. I’ve tried to be accurate with the info here but more than happy to be corrected as most info has been taken from news reports, google searches and free broker notes.
I wonder what fellow investors think of KPIT Tech (earlier known as KPIT Cummins). I do own a bit and may be looking to buy more hence look forward to learning what fellow investors think. A brief background of the company follows:
KPIT is an IT services company that provides varied services and products to multiple industries, primarily in USA and Europe. The market capitalisation of the company is about Rs. 3000 crore with FY14 revenue of ~ Rs 2700 crore, Ebitda of Rs 422 crore and PAT of nearly Rs 240 crore (EPS of Rs 13.42). KPIT generates an ROE of 20%, ROCE of 29% and Ebitda margin of 15.7%. The company has grown its revenue and PAT at a 38% Cagr over the last three years. Also, the management has set itself a revenue target of US$1bn for FY17 (Rs6000 crore, at a 20% Ebitda) which translates into a revenue Cagr of over 30% going forward if the target is to be met.
Detailed financials are available at http://www.moneycontrol.com/financials/kpittech/consolidated-profit-loss/KPI02
I am not an IT sector specialist, but it appears to me to not be a run-of-the-mill IT company given that the top management has keen interest in developing the atecha side of the business versus just the business IT side. As per a statement from the CEO in Sept 2013, technology (custom algorithms, own software, development of independent products etc) forms about 33% of the company revenue with the rest being business IT (ERP implementation, portals, website, business applications etc). This mix they want to make 50-50. Also the company doesnat compete in the crowded banking/ insurance space like many other IT cos but concentrates on automotives, manufacturing and energy/ utilities space. Conceptually I like the automotive vertical as intuitively I feel cars and other automotive equipment will have more and more software/ electronics going forward. KPIT is already the largest 3rd party auto electronics vendor in India and so should be a prime beneficiary of this trend.
A key irritant for the stock IMHO has been KPITas relentless acquisitions over the last few years that may have perhaps led to dilution, negative free cash flows and integration issues. But I think that KPIT management is recently through with a restructuring exercise and so perhaps one might see execution capabilities and efficiencies increase. Also, I am unsure if acquisitions can continue indefinitely.
As per a recent MO report on KPITa
aIts FY15 and FY16 EPS stands at Rs 13.5 and Rs 17.1 respectively. However, I notice that the analyst has factored Ebitda margins of 14.8% and 15.9% for the years, which are virtually at par with 4QFY14 levels. I of course donat claim to understand companies as well as sector specialists, esp IT, but wonder if he/ she has been too conservative in factoring in the managementas restructuring exercise or the profitability of the companies that KPIT has bought since 2003/ 2004. Is there then room for investoras assessment of the companyas fortunes to be jerked upward? KPIT has managed to clock Ebitda margins of 18-20% in the past and this is in-line with their target for FY17 so it isnat completely unreasonable to assume that margins will move closer to 20% in the next two years.
But even assuming that the current estimates are correct, KPIT only trades at 8-9x FY16 earnings. It appears to me all the negatives are factored but valuation leaves no room for any positive surprises. Maybe I am wrong, please do share your views on the company!
PS: Owning KPIT also offers an option on the success of Revolo which seems to me is an exciting possibility: http://en.wikipedia.org/wiki/Revolo