KPIT - CASE (connected, autonomous, shared, electric) - Focused Automotive Play

Vishnu,

I was responding to the post above which referred to lack of FCF and data shows KPIT has had FCF, albeit spotty. Btw, if one refers to the FCF statement of TCS, its no different. That point is made.

Now, how to interpret and act on the FCF statement was not the point there. However, since you bring up WB’s quote, let me respond with what Buffet’s guru - Graham had to say:

  1. Actually, the typical middle-sized listed company is a large one when compared with the average privately owned business. There is no sound reason why such companies should not continue indefinitely in operation undergoing the vicissitudes characteristic of our economy, but earning on the whole a fair return on their invested capital. This brief review indicates that the stock market’s attitude towards secondary companies tends to be unrealistic and consequently to create in normal times innumerable instances of major undervaluation.

  2. The market is fond of making mountains out of molehills and exaggerating ordinary vicissitudes into major setbacks. Thus we have what appear to be two major sources of undervaluation: (1) currently disappointing results and (2) Protracted neglect and unpopularity.

The management has been transparent and honest and not earned any negative marks. The business will earn reasonable ROI and its my belief the business is currently undervalued due to currently disappointing results.

It would be interesting to see if you can explain why past cash flow does not matter for KPIT, or how the future business environment is changing.

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Hi Arun. Your calculation is incorrect. FCFF = CFO- capex and acquisitions. This is the money available yo debt and equity holdwrs from the business every year. If you look at FCFF it has been negative materially every single year.

Perhaps I am missing something here. That calculation is from Screener, not mine. Or am I mis-interpreting Net Cash Flow?

Numbers are right. But Net Cash Flow does not mean anything except for change in cash balance. As an example, a company can keep losing money and as long as they can raise debt > lost cash , net cash flow will be positive.

Debt raised is classified under “Cash from Financing Activity”, which in the table I have pasted above is - 40.33 crore. This exactly matches the number on AR of 2015, page 131. This includes raising, and repayment of loans.

Arun you need to read up on corp finance 101. Suggest damodaran.

What I do need to read is your assessment on AR and Screener data, both of which are consistent and indicate positive cash flow of 131 crore for 2015. The line items capture everything that I can think of, from Capex to dividends, to loans (proceeds and repayments). If you believe there is something missing, or incorrect, or an additional line item needs to be included, pl mention that.

article about the company

http://www.kpit.com/company/newsroom/press-release/2015/pm-narendra-modi-flags-off-kpits-smart-electric-bus-for-indian-parliament

disclosure : missed it around bottom, waiting for fall to invest

Auto vertical will contribute more now as emissions norms are getting stricter.Also vehicles are getting smarter thanks to electronics.Lastly hybrid vehicles will be the future.
So does make a sense that take some exposure.
Disc : Not invested until now
Shadab Hussain

@shadd The KPIT people have been taking about the auto vertical for years now. I had bought KPIT in the past considering upside from Revolo. Somehow, things haven’t worked as planned. Do you think things can change now? Especially Revolo?

@arallan Definitely the benefits of Revolvo will creep in & translates in higher sales growth & net profit.Remember revolvo was in R n D stage in 2010 .Its a long term buy (min 3-5 yrs) & given the quality of KPIT management there is lot of steam left.
Shadab Hussain

I spent time today looking through the conference calls etc. It seems to me that there are two big issues that are a over hang on the stock

  1. the SAP piece where unlike other SAP guys, they are relatively new and much of their revenue comes from implementation which is low margin and not maintenance which is high margin. This is quite a drag. An intelligent divestment of a part of this would help tremendously.

  2. on PES, which is 26 % of their reveneus where they are growing sequentially in excess of 10%, if we can be sure of their product being of a good quality, then this can kick in non linearity in margins

  3. company is doing all the right things on cash flow generation - reducing DSO, improving breadth of pyramid etc.

This is a story to watch given the increasing awareness around fuel efficinecy, emissions etc. but only if mgmt can improve capital allocation skills.

@varadharajanr
I have not studied this company in detail as I was more inclined to hold stocks in SMAC and digital space and hence holding persistent systems and mindtree. However, the recent correction due to bad news has made it really attractive considering the kind of cashflow business generates and the PE at which it is trading (all time low of 8. 7). I am summarizing numbers below. In case you are aware of business and operating model. Can you try to correlate that with numbers and provide your views if these numbers are worth value from future potential of business.I will try to go through all docs but would be difficult for me to catch up on learning curve hence trying to leverage on collective knowledge of forum.
All i am aware is they are a mid cap IT company in auto/manufacturing sector. Any idea what is their take on IOT and mobility on auto sector which is going to be major disruptor how auto companies and auto based IT companies work(have worked/aware of what all is happening in auto IOT/SMAC space).

Disc: Not holding and not considering for long term but can be a potential valuation gap buy for short term until further conviction is build.

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@suru27 Based on my analysis of latest management presentation, management has mentioned IOT as key focus area. However, currently numbers do not match that statement or this focus is not getting reflected in reported number. I am still in learning phase for this company. However, based on research so far I am very-very optimistic. Detailed analysis is available here.

Disclosure: Long (small position) and will accumulate based of further research.

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It will still take at least 2 years for visible and scalable commercial models of IOT. However, can you help me to understand that is kpit constrained to go with Oracle in iot space or they can go ahead and tie up with anyone ? I can see that they have a heavy focus on sap n Oracle certifications which means that they ve been building applications around that and are betting on hana n Oracle iot for future too. It would be great if we can compare these partners with their peers. Like in iot Oracle would be fighting with ibm, ge etc. Also , it is important to understand where each of them play in iot architecture ehich is huge needing multiple vendors each bringing something unique req in iot architecture

@suru27 Let me say this honestly. I do not understand 50% of their business. My investment thesis is based in strong innovation focus of the company, growth opportunities in Auto Sector, REVOLO and benign valuations.

@atulgupta80 Personally, i am too impressed by their pitch of product, innovation, patent but when i see their PAT margin of 9% with respect to higher margin of pure play labor arbitrage companies, i start getting doubts because ideally it should be premium which is not the case.

KPIT had its good days when it was with Cummins and name was KPIT Cummins. They were piggy backing Cummins and also had a sweet deal with Cummins. The deal was as Cummins gives more business to KPIT, Cummins will get more ownership stake in KPIT Cummins. No surprise that KPIT’s rate to Cummins were much higher than market rates. Once Cummins got out of KPIT, they not only lost the high margin business but also lost the sheen of Big company like Cummins backing it up. So now it is another Mid size IT company trying to make money by labor arbritrage!

Disc: Not invested. Not planning to invest

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Of course there are other parameters to consider like FCF, EVA ROIC ( Persistent 36 versus 24 of KPIT), but then the valuation of KPIT is half of Persistent! Isn’t that what Value investing is all about? To spot the difference between how much over, or under valuation the market is placing a business?

From a business perspective, while both are midcaps, the segments they operate in are a bit different. One is more focused on Industrial / Automotive industries, i.e. in the space of “manufacturing Efficiencies” and the other is more focused on “IT efficiencies”. More on this another day.

Disc: Invested in KPIT

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Hi,

Yesterdays kpit result not impressive.
Whats your take on that.
Is it just 1 of the bad quarters?

Rgds
Saumil