KPIT CUMMINS INFOSYSTEMS LIMITED: Merger Moves

While the technology ser vices markets is show ing signs of recovery, the
challenges ahead for mid market companies can hardly be underestimated. Faced
with pricing pressures from clients and high unit marketing costs, margins of
these companies remain significantly below the larger competitors and
consequently affect their valuation and seriously hinder their ability to fund
future growth.

To get out of this vicious circle of low margins, low valuations and lack of
available funds for future growth, such companies need to deploy innovative
strategies for survival and growth. Among the companies, that have tried to use
M&A as a key element of strategy for crossing the chasm, is Pune-based KPIT
Infosystems.

Incorporated in 1990, Pune based K & P Information Technology was formed
by Kirtane and Pandit, a charted accounting firm. In the year 1999, KPIT made an
initial public offering and became a public limited company changing its name to
KPIT Infosystems. In 2002, Cummins Infotech, an IT subsidiary of US-based
Cummins Incorporated and Cummins India were merged into KPIT Infosystems to form
KPIT Cummins Infosystems.

F A C T S H E E T Website: www.kpitcummins.com KPIT House, Tejas Society, Kothrud, Pune 411 038. India. Tel: +91 20 5380217, 5382358 Fax: +91 20 5381141 Area of Specialization Software development and service in the area of BFSI, manufacturing and telecom. Revenues (March 2004): Rs 127 crores Offices US, UK, Dubai, Japan and India Listing (Stock Exchanges): BSE, NSE Face Value Rs 10 per share Current Market Price Rs 321 52 Week High/Low Rs 347/130 BSE Code 532400 NSE Code KPIT

The chairman is S B Pandit and the CEO and Managing director of the company
is Kishor Patil. The company’s current equity stands at Rs 5.9 crore with
promoters holding 34.8%, FIIs holding 4.7%, Indian public holding 28.1% and
others holding the balance 32.5% of the stake.

KPIT Cummins is a provider of software services in the area of software
development and management, business solutions, Internet consulting and
development, oracle applications, control automation and engineering solutions.
KPIT Cummins has four development centers in Pune within a seating capacity of
750, measuring 53,000 sq. ft.

For the financial year ended March 2003, the company reported impressive
figures with revenues amounting to Rs 127 crore, up 66% as compared to Rs 76.3
crore in the previous year. In terms of revenues, the manufacturing vertical
contributed 67% of the total revenues earned during the fiscal amounting to Rs
85.1 crore, growing 118% as compared to fiscal 2002, followed by the BFSI
vertical contributing 26% of the total revenues of Rs 33.0 crore, up 30%
year-on-year and the balance 5% contributed by rendering services in other
verticals amounting to Rs 8.9 crore. The net profit for the same period grew
151% to Rs 14.4 crore as against Rs 5.7 crores year-on-year.

KPIT Cummins’ customers include Renesas (a joint venture between Hitachi
and Mitsubishi Electric Corporation), Hewlett Packard, Pepsi, Royal Bank of
Scotland, BNP Paribas and Airtel. These customers are referred to by the company
as ‘Star’ customers and contribute 87% of the total revenues earned during
the financial year ended March 2004.

In August 2003, KPIT Cummins acquired Houston-based SAP consulting firm,
PANEX Consulting at an agreed amount of $1.7 million, which would be payable
over a period of 3 years in the form of $0.3 million in cash and $1.4 million
through equity shares of the company. By doing so, the former aims to offer its
services to existing major clients of PANEX like Hewlett Packard, Hercules,
Accenture and SAP America, anticipating a major opportunity for growth and
offshoring services to additional clients in US.

The company reported a healthy revenue growth of Rs 38.0 crore for the last
quarter of the financial year ended March 2004, up 12% and 70% as compared to Rs
33.8 crore sequentially and Rs 22.4 crore year-on-year. Revenues earned from
services provided in the manufacturing vertical lead from the front,
contributing 68% of the total revenues amounting to Rs 25.8 crore. The BFSI and
other verticals contributed 27% and 5% amounting to Rs 10.3 crore and Rs 1.9
crore respectively. Net profit for the quarter stood at Rs 4.6 crore, growing
22% as compared to Rs 3.8 crore for the immediate previous quarter, and as
compared to the net profit of Rs 2.5 crore in the same quarter last year, the
net profit grew 82%.

The company presently has a staff strength of 914 people, which includes 799
IT professionals and 115 support staff including staff overseas. The attrition
rate during the year was 16%. During the last quarter, 68 more employees were
added taking the tally for the financial year 2004 to 363.

Going ahead, KPIT Cummins is targeting new markets in the Asia Pacific region
and has also identified new growth potential within the manufacturing vertical
in areas such as Embedded Software and VLSI (Very Large Scale Integration). The
company expects to earn revenues in the range of Rs 173 crore to Rs 176 crore
for the fiscal 2005, 40% growth over the latest fiscal year. The net profit for
the period is expected to grow 63%, in the range of Rs 22.5 crore to Rs 24.5
crore.

The share of the company presently trades at Rs 321 discounting our estimated
March 2005 and March 2006 EPS by XX eight and XX five times respectively. KPIT
shares are poised to outperform other mid market software services companies.
Market Outperformer

Sushanto Mitra is the founder
of Technology Capital Partners The views reflected here are of the author and
not of this publication. No liability is accepted for losses based on the
information presented here