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KPIT CUMMINS INFOSYSTEMS LIMITED: Merger Moves

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DQI Bureau
New Update

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.

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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
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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.

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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.

Financial

Performance

  2003 2004 2005* 2006*
Sales 76 127 180.8 224.6
Operating

Profit
10 20 31.4 43.8
Operating

Profit Margin (%)
13 15 17.4 19.5
Net

Profit
6 14 24.2 37.8
Equity

Capital
6 6 6.3 6.3
Earnings

Per Share
10 25 41.2 64.4
*Projected

Face value per

share is Rs 10

Year

ended 31st March
Note:

All figures in Rs crore unless indicated otherwise
All

figures are rounded-off
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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.

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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

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