Sunday, August 05, 2007

$$ DreamGains !! $$ FW: Weekly Stock Idea By Sanjay Chhabria: 06th Aug 2007

From: ValueNotes.com [mailto:technicals@valuenotes.com]
Sent: 06 August 2007 05:55
To: satish.khetan@gmail.com
Subject: Weekly Stock Idea By Sanjay Chhabria: 06th Aug 2007

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SANJAY CHHABRIA's WEEKLY STOCK IDEA(S) -6^th August 2007

Vol IV No 47

Please read the disclaimer at the end of this page.

"Because people are simple-minded in how they try to understand what goes on in the market, they like to own what is comfortable instead of what's uncomfortable. They make big errors in valuation. Therefore, if you really understand this, you can make money as a value investor". - Peter L. Bernstein

"Because one mistake breeds another, he who buys too high will sell too low".- Leo Dworsky

"What has been the fashion once, will come into fashion again".- Japanese proverb

This Week's Stock Idea(s)- KPIT Cummins Infosystems Ltd(Rs 120)

Given the current market conditions, Investors would do well to accumulate gradually on declines.

Most IT companies have declared their results for the Q1FY08. The results for most of these have been Uninspiring in Rupee terms. The major reasons of spoilsport for most results this quarter have been the appreciating Rupee and, wage impacts. Last year the dollar depreciated by ~10% from Rs. 44 to Rs. 40 and ergo, the downward revision of earning guidance/expectations. While the rupee is presently showing no signs of softening, it is unlikely that it would do a second performance of 10% (big) INR appreciation this year as well. In short, no major threat on the forex front from here on is expected. The concerns on this front shall dilute with the sequential passing of each quarter. With the Dollar at Rs.40.5 factored into stock price for most companies, its time to start taking a look at some of the companies in the sector and start accumulating for the medium-long term. This week, a look at one such company.

KPIT Cummins Infosystems Ltd(Rs 120)(Rs 2 paid up)(BSE Code- 532400 NSE Code-KPIT)- The Pune-based KPIT Cummins Infosystems (KPIT) provides IT and IT-enabled services to clients across the world. The mid-tier IT services provider's focus is on two verticals: manufacturing services and banking, financial services and insurance (BFSI). Within these two verticals, it is focused on a few key customers. In addition to regular application development and maintenance services, the company offers VLSI and embedded software services, package implementation, business intelligence, and BPO services. For the year ended March 2007, KPIT reported revenue growth of 46% to Rs 463.70 cr. backed by 36.2% growth in Manufacturing and 21.4% growth in BFSI. OPM improved by 80bps to 15.3%, the resultant operating profit was higher by 53% to Rs 70.78 cr. Net profit grew by 54% to Rs 50.31 cr.. On a equity of 14.9 cr. the EPS on a Rs 2 paid up share stood at Rs 6.75.

For the Q1 ended March 2007, on the back of growth of 7.4% in Cummins business, KPIT Cummins reported 4% q-o-q growth in consolidated topline to Rs 135.29 cr. with US$ growth at 5%. The operating margins improved 10bps to 15.9% despite wage hike and rupee appreciation on the back of lower S&M expenses. The consolidated bottomline dipped 10% to Rs 12.68 crore on the back of increase in depreciation by 52%. The results were above market expectations. The company upped its US$ revenue guidance whereas lowered its net profit guidance. On Y-o-Y basis, KPIT Cummins reported 32% growth in the topline with the operating margins improving 100bps to 15.9% and the bottomline grew 23% to Rs 12.68 cr.

During the quarter, the company added 7 new customers, 6 in manufacturing, and 1 in DFS taking the total active customer base to 97 from 90 in the sequential quarter. Star customers increased to 18 from 17 in the sequential quarter. There are 18 customers with revenue run rate of over $ 1 Million up from 19 in the sequential quarter. Cummins continues to be the largest customer, constituting 38.96% of the total revenues in the quarter down from 37.53% in the sequential quarter. Revenue from Cummins grew 7.4% compared to sequential quarter. US continued to be a dominant geography with 57.67% (58.77% sequential quarter) up 1.9% sequentially. Europe contributed 30.55% (29.68% sequential quarter) of total revenues up 6.9%. Rest of the World, including Japan and Asia Pacific, accounted for the balance 11.79% of revenues up by 5.9%. Repeat business from customers continues to be high at around 90% of total revenues. Manufacturing vertical accounted for 78.35% of the total revenues for the quarter whereas BFSI as a vertical accounted for 9.68% of revenues.

In other developments, KPIT allotted 1,471,498 equity shares and 1,471,498 convertible warrants of Rs. 2 each to Cargill Mauritius Limited, Mauritius at a unit price of Rs.128.41 (determined in accordance with SEBI (DIP) Guidelines) for an agreed total cash consideration of upto USD 9 million. The warrants are convertible into equity shares over a period of eighteen months, subject to fulfillment of certain financial parameters. After this the equity will increase to 16.72 cr. The company entered into a new partnership with Cummins Inc. to provide F&A BPO solutions. This partnership will help jumpstart F&A BPO business at KPIT Cummins Global Business Solutions (KPIT GBS), the company's wholly owned subsidiary. Over a period of 5 years, the company expects to generate approximately $90Mn of revenues from this business.

The company's business outlook- Consolidated Income from operations is expected to be in the range of Rs 601.8 - 614.2 cr. implying growth rate of 29.8 - 32.5%. Net Profit guidance is expected to be Rs 63 - 68 cr. implying growth of 24.8 - 34.7%. The shares of KPIT Cummins are trading at Rs 120, which discounts the guided FY08 EPS of Rs 8.3 (lower end) on equity of Rs 16.72 crore by about 14.4 times. Investors can accumulate the KPIT stock at this level and add on declines (in the range of Rs 100- Rs 115) for a price target of Rs 165-170 over the medium-long term.

Sanjay Chhabria is an equity analyst and investment consultant based at Raipur (Chhattisgarh). At the time of writing this, he doesn't have any position in the stocks mentioned above. He welcomes comments, feedback & investor queries at valueinv@sify.com. The above report is based on fundamental research and analysis and is meant for investors, who want to invest with a medium to long-term perspective. It is not meant for short-term investors or traders. The name weekly stock idea(s) does not mean that the stocks mentioned as buys in this report are for one week or short term. The name weekly stock Idea(s) only denotes the frequency of this report, which is weekly.

Disclaimer- Sanjay Chhabria (Author), does not accept any liability arising from the use of this report. Under no circumstances does the information in this report represent a recommendation to buy or sell stocks. This report has been prepared solely for information purposes and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Investors are advised to satisfy themselves before making any investments. Though all care is taken in preparing this report, subscribers are cautioned that prices of equity shares may rise or fall in a manner not foreseen. Subscribers and readers using the information contained herein are solely responsible for their actions and shall not hold the Author liable for any investment decisions/ actions based on the Content provided. Investment in stock market is risky and volatile

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