-
FOR IMPORTANT DISCLOSURE INFORMATION, INCLUDING DISCLOSURES
RELATED TO THE U.S. DISTRIBUTOR OF THIS REPORT, PLEASE REFER TO THE
FINAL PAGES OF THIS REPORT - Please refer to the final pages of
this report for important disclosures, analyst certifications and
additional information. Espirito Santo Investment Bank does and
seeks to do business with companies covered in its research
reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of
this report. Investors should consider this report as only a single
factor in making their investment decision. This research report
has been prepared in whole or in part by research analysts based
outside the US who are not registered/qualified as research
analysts with FINRA (v1.0.5.0)
FUNDAMENTAL INSIGHT
India | Technology | Small & Mid Cap | 1-October-2012
Midcap IT ThematicDon't discount the discountTier-II IT
companies have found favour in the last 12 months, giving
an absolute return of 44% and outperforming the BSE-IT index
by
24%. The bulls argue that owing to higher growth the discount
to
Tier-I should narrow, but we argue that the valuation discount
is less
correlated to the growth gap and more skewed towards the
margin
gap and inherent risks. We are selective Buyers of companies
which
have built competitive advantage, and enjoy entry barriers
and
hence margin cushion, either due to real scale or dominance of
a
niche. We prefer Persistent, Polaris, Tech Mahindra, MphasiS
and
also KPIT Cummins, on which we are initiating coverage.
Extrapolation of growth is fraught with risks
The general investment argument we come across for Tier-II IT
companies is
that growth can take care of everything. This is probably the
reason some of
these Tier-II IT names have gone up 50-
-
Pag
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Page 3 of 14
Contents
Relative Valuation Table 2
Mid-cap IT - discount to Tier-VMXVWLILHG 4
Breaking midcaps into bucket of high performers 7
WKHGLVFRXQWKDVQWQDUURZHG 7
Then why the noise around midcap IT stocks 7
7LHU,,,7KDVKDUGO\JDLQHGDQ\VKDUH 8
DQGLWZLOOQHHGPDQ\PRUHODUJHGHDOV 8
But some Tier 2 stocks have remained strong 8
Commentary has started to moderate 9
Despite these negatives we have four BUY ideas 9
Corporate Governance Framework 11
Company Section:
KPIT Cummins Infosystems (Initiate with BUY) 13
Polaris Financial Technology (Reiterate BUY) 21
MphasiS (Reiterate BUY) 28
MindTree (Initiate with NEUTRAL) 34
Hexaware Technologies (Reiterate SELL) 40
Disclaimer 51
3
-
Page 4 of 14
Mid-cap IT - discount to Tier-1s justified
In the last 10 years, Tier-II IT companies have mostly traded at
a discount to
Tier- I IT and that discount has widened. Mid-cap IT has
RIIHUHGJRRG 6ellcandidates whenever this discount has been close to
single digits. The
discount has widened from an average of 17% in the early part of
the decade
to 37% in the last four years.
Figure 2 Valuation discount to Tier 1 IT has only widened since
FY10
Source: Espirito Santo Investment Bank, Company Data,
Bloomberg
Why should mid-cap IT trade at a discount?
We identify four key reasons: i) differential in growth, ii)
EBIDTA margin
differential, iii) sustained lower margins and iv) highly
acquisitive nature of
midcaps as they seek to build scale and add capabilities.
Differential in growth vs. Tier 1 IT: On a 3 year, 5 year, 10
year CAGR
comparison, we find that the differential in growth between
Tier-I and Tier-II IT
has always existed. It has increased from 0% over a 10 year
period to 6% over
a 3 year period. However based on the next two years expected
CAGR the
differential is down to nil, largely driven by i) company
specific issues leading
WR ORZHU JURZWK LQ ,QIRV\V :LSUR DQG LL LQRUJDQLF FRQWULEXWLRQ
WR .3,7Vrevenues from the Systime acquisition. The differential
would not have
reduced were it not for the acquisition led growth of mid-cap
companies.
Figure 3 Expectations build a zero growth gap v/s Tier II Figure
4 Expectations are based on consensus and our estimates
Source: Espirito Santo Investment Bank Source: Espirito Santo
Investment Bank
Sustained lower margins vs. Tier-1: Lower margins vs. Tier-1s
have historically
led to higher discounts. Figure 4 below indicates how a reducing
margin
differential has led to lower valuation discounts in the past
and vice versa.
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
0
5
10
15
20
25
30
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E
P/E (Tier-I IT) P/E (Tier-II IT) Val discount
Companies 10YR CAGR % 5YR CAGR % 3YR CAGR % Next 2YR CAGR%
TCS 29% 16% 27% 13%
Infosys 28% 14% 21% 10%
Wipro 25% 13% 16% 9%
HCL Tech 29% 22% 24% 17%
Tier - I 28% 15% 22% 12%
OP with Tier-II 0% 3% 6% 0%
Companies 10YR CAGR % 5YR CAGR % 3YR CAGR % Next 2YR CAGR%
KPIT 39% 21% 43% 23%
Hexaware 22% 5% 20% 15%
Infotech 29% 18% 27% 13%
Polaris FT 19% 12% 23% 15%
Mindtree 42% 21% 21% 11%
Persistent 40% 19% 28% 15%
Mphasis 33% 17% 13% 6%
Tech Mahindra 28% 5% 8% 10%
Rolta 23% 8% 5% 4%
Tier - II 28% 12% 16% 12%
4
-
Page 5 of 14
Figure 5 Widening margins have led to increasing valuation
discount and vice versa
Source: Espirito Santo Investment Bank
The margin gap will remain or widen as:
Without scale or niche Tier-,, EHFRPH PH WRR YHQGRUs/HWV WDNHthe
example of TCS with revenue of >$10bn and growing at 10%.
This
means TCS will add incremental $1bn every year to its revenues.
Any
pure play services company with revenue lower than $1bn
becomes
ODUJHO\DPHWRRYHQGRUDVDQ\YHUWLFDORUVHUYLFHOLQHRUJHRJUDSK\of TCS
is bigger than the entire revenue base of any Tier-II IT
company in India. In such a scenario TCS or any other Tier-I IT
vendor
would be able to compete more effectively and manage the
account
specific margins better even if pricing were to fall (read
commodity
offerings), but for smaller players that would be difficult.
Figure 6 TCS' revenues from key verticals Figure 7 Total
revenues of Tier-II IT companies
Source: Espirito Santo Investment Bank Research, Company Data
Source: Espirito Santo Investment Bank Research, Company Data
Lower SG&A leverage: The lower margin profiles can largely
be
attributed to lower scale benefits vs. Tier-1s. SG&A
expenses on an
average are 5pp higher than Tier-1s.
Figure 8 SG&A expenses of Tier-II IT Figure 9 SG&A
expenses of Tier-II IT
Source: Espirito Santo Investment Bank Research, Company Data
Source: Espirito Santo Investment Bank Research, Company Data
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
-60%
-40%
-20%
0%
20%
40%
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E
FY14E
Val discount (LHS) EBIDTA% GAP - Tier2 v/s Tier 1 (RHS) Average
margin gap in last decade
TCS Revenues ($m)
BFSI 4,509
Telecom 1,075
Manufacturing 1,447
Retail 1,315
Lifesciences & healthcare 556
Transportation 393
Energy & utilities 413
Others 551
Total 10,259
Company Revenue ($m)
KPIT 313
Hexaware 311
Infotech 324
Polaris FT 429
Persistent 209
Mindtree 400
Mphasis 1,119
Tech Mahindra 1,146
Rolta 364
Midcap IT SG&A as % of sales
KPIT 20%
Hexaware 17%
Infotech 17%
Polaris FT 19%
Mindtree 20%
Persistent 19%
Tech Mahindra 16%
Mphasis Not comparable
Rolta Not comparable
Average SG&A% 18%
Tier-1 SG&A as % of sales
TCS Not comparable
Infosys 12%
Wipro 12%
HCLT 14%
Average SG&A% 13%
5
-
Page 6 of 14
The SG&A gap of 5pp will continue to remain or widen in the
worst case as the
revenue per client for most Tier-II IT companies ranges between
$0.7m to
$2.0m. This is significantly lower when compared with $10m for
Infosys and
TCS. To drive incremental growth, sales and marketing efforts
have to be
increased which indicates lower leverage from SG&A as a
margin lever.
Figure 10 Revenue per client of Tier-II IT
Source: Espirito Santo Investment Bank Research, Company
Data
Mid-caps have been highly acquisitive: Almost all the nine
companies within
our basket of mid-caps have been very acquisitive and have made
significant
acquisitions relative to their revenue profile over the last
decade. These
acquisitions were made to increase scale, build capabilities and
gain access to
newer geographies. Four of the companies below have made at
least one
acquisition representing c.50% of their revenues or more during
the decade.
Four have made acquisitions >15% of their revenues.
Figure 11 Midcaps risk takers with large acquisitions
Source: Espirito Santo Investment Bank Research, Company
Data
Hence mid-caps bring with them significantly higher risk
profiles vs. Tier-1s.
Moreover growth rates of Tier-1s over a 10 year period have been
similar
despite no aggressive acquisitions, HCL Tech being the only
exception having
acquired Axon (>15% of HCL Tech's revenues then).
Persistent Systems the only non-acquisitive high performer:
Amongst the Tier-II IT companies mentioned above there have been
few companies that
have grown faster than Tier-I IT, but this has largely been
driven by
acquisitions, except for Persistent Systems, which has grown at
40% CAGR
organically over the last decade. While Persistent acquired
Infospectrum,
which had a revenue run rate of $6m at the time of takeover
(3.5% of revenues
at the time of acquisition), the revenue run rate of $6m never
materialised in
full as the largest client of Infospectrum moved to HCL Tech
post the
acquisition. Even if we remove the acquired revenues of
Infospectrum, the
revenue CAGR of Persistent still remains over 39%.
Figure 12 Acquisitions by Tier-II IT companies (Only companies
that have grown at higher than 10 year CAGR recorded by Tier-I IT
considered)
Source: Espirito Santo Investment Bank
Company Revenue ($ m) Number of clients Revenue per client ($
m)
KPIT 313 172 1.8
Hexaware 311 210 1.5
Polaris FT 429 267 1.6
Persistent 209 291 0.7
Mindtree 400 258 1.5
Mphasis 1,119 275 4.1
Tech Mahindra 1,146 131 8.7
Company Acquisitions No. of acquisitionsSignificant >15% of
revenues
Hexaware Focus frame 1 1
Infotech enterprises Vargis, Tele Atlas, Geospatial integrated
Solns, Time to market inc, TTM India, Integrated device technology,
Daxcon, Wellsco 7 2
KPIT Cummins Infotech, Panex, Solv Central, Pivolis, CG Smith,
Harita TVS, Sparta, In2Soft, CPG, Systime, 10 3
Mindtree Linc software, Aztecsoft, Kyocera, 7Strata 4 1
Mphasis Onida Infotech, Msource, Kshema Technologies Ltd,
Princeton consulting, Eldorado computing, AIG captive, Fortify,
Wyde 8 1
Polaris iBackoffice.com, Orbitech, Seec Inc, Laser soft,
IdenTrust, Indigo Tx 5 1
Rolta Orion, Broech Corp, WhittmanHart consulting, Piocon Tech,
One GIS, ACLS systems 6 1
Tech Mahindra Axes technologies, iPolicy Networks, Jataayu
Software, Servista, Satyam, Hutchison Global Services, Comviva 7
2
Persistent Infospectrum 1 0
Companies 10YR revenue CAGR How the growth has come
Mindtree 42% Acquired Aztecsoft and Kyocera Wireless
Persistent 40% The only Tier-II IT company that has grown 40%
CAGR that too organically.
KPIT 39% Acquired Systime, CPG, In2Soft, Sparta Cosnulting,
Harita TVS, CG Smith, Pivolis, Solv Central, Panex Consulting and
Cummins Infotech
Mphasis 33% Benefitted immensely due to acquistion of EDS by
HP
Infotech 29% Acquired Daxcon Engineering and Wellsco and many
smaller companies
6
-
Page 7 of 14
Breaking midcaps into bucket for high performers
We break the midcap bucket based on revenue growth expectations
for FY13
the key criteria being above, or below or within the NASSCOM
growth estimate range of 11-14% for the industry.
High growth bucket: We include Persistent Systems, KPIT
Cummins,
Hexaware, Polaris and Infotech Enterprises as we (consensus
for
Infotech Enterprises) expect them to beat the NASSCOM estimates
of
11-14% growth in FY13.
Moderate to low growth bucket: MindTree, Tech Mahindra, Rolta
and
MphasiS as we expect them to meet or miss the NASSCOM
estimates
of 11-14% growth in FY13.
Figure 13 Tier-1 IT growth trends Figure 14 High growth bucket
Figure 15 Moderate - low growth bucket
Source: Espirito Santo Investment Bank Source: Espirito Santo
Investment Bank Source: Espirito Santo Investment Bank
the discount hasQW narrowedDespite higher growth than Tier-I IT
over 3, 5 and 10 year periods in the
expected high growth bucket, the valuation discount has not
really narrowed,
as the margin gap has remained the same.
Figure 16 Widening valuation discount (High growth Tier 2 v/s
Tier 1) Figure 17 on increasing margin gap (High growth Tier 2 v/s
Tier 1)
Source: Espirito Santo Investment Bank Source: Espirito Santo
Investment Bank
This has happened as investors continue to remain concerned on
these
FRPSDQLHVDELOLW\ WRRUJDQLFDOO\ VFDOHup and manage margins.
Additionally, consensus expectations of margins for FY14 indicate
that the margin gap will
only widen as shown in figure 4. The valuation discount has
historically
increased when the margin gap has increased.
Then why the noise around mid-cap IT stocks?
In the last year mid cap IT companies have given an absolute
return of 44%
and have outperformed the BSE-IT Index by 24% on an average.
This has
largely happened as select mid cap stocks have been in a
constant upgrade
cycle.
Companies 10YR CAGR % 5YR CAGR % 3YR CAGR % Next 2YR CAGR%
TCS 29% 16% 27% 13%
Infosys 28% 14% 21% 10%
Wipro 25% 13% 16% 9%
HCL Tech 29% 22% 24% 17%
Tier - I 28% 15% 22% 12%
OP with Tier-II 0% 3% 6% 0%
Companies 10YR CAGR % 5YR CAGR % 3YR CAGR % Next 2YR CAGR%
KPIT 39% 21% 43% 23%
Hexaware 22% 5% 20% 15%
Infotech 29% 18% 27% 13%
Polaris FT 19% 12% 23% 15%
Persistent 40% 19% 28% 15%
Average 30% 15% 28% 16%
OP with Tier-I 2% 0% 6% 4%
Companies 10YR CAGR % 5YR CAGR % 3YR CAGR % Next 2YR CAGR%
MindTree 42% 21% 21% 11%
Mphasis 33% 17% 13% 6%
Tech Mahindra 28% 5% 8% 10%
Rolta 23% 8% 5% 4%
Average 31% 13% 12% 8%
OP with Tier-I 3% -2% -10% -5%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
0
5
10
15
20
25
30
35
P/E (Tier-I IT) P/E (Tier-II IT) Val discount
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
0%
5%
10%
15%
20%
25%
30%
EBITDA (Tier-I) EBITDA (Tier-II) GAP (RHS)
7
-
Page 8 of 14
Figure 18 Calender year wise absolute return from stocks Figure
19 Absolute and relative performance of Tier-II IT in last 1
year
Source: Espirito Santo Investment Bank, Bloomberg Source: KPIT
Cummins, on which we are initiating coverage,
However, tier-II IT has hardly gained any share
NASSCOM data on worldwide IT spending and aggregate of revenues
of Tier-I
and Tier-II IT suggest that the market share gains in Tier-II IT
have been tepid
in last 7 years. In fact there have been no market share gains
by Tier-II IT in the
last 4 years.
Table 1 Market share gains of Tier-I and Tier-II IT
Source: Espirito Santo Investment Bank, NASSCOM
And it will need many more large deals
While we agree that the number of deal announcements by Tier-II
IT
companies has increased, there is a general sense on the street
that the deal
sizes have also increased in the Tier-II IT space which should
help them to post
high growth. While on absolute terms the deal sizes may look
big, it has to be
seen on the current base over which it is going to add to
revenues. Here we
find that on a percentage of revenue basis it has reduced, i.e.
to post similar
growth these companies will have to win more deals given the
current base.
Figure 20 Hexaware deals in CY02, 11 &12 Figure 21 MindTree
deals in CY02, 11 &12
Source: Espirito Santo Investment Bank, Company Data Source:
Espirito Santo Investment Bank, Compnay Data
But some tier-II stocks have remained strong
In our view, the street in largely divided about the growth
expectations of
different companies and has divided them into two groups. The
first group
consists of companies such as TCS, Cognizant, HCLT, Hexaware,
KPIT
Cummins, MindTree and Infotech Enterprises. TPI data in Q4CY11
also fuelled
expectations of high growth from Tier-II IT firms when it
mentioned that
number of contracts in the smallest band, $25 to $99M in TCV,
have taken off
as shown in figure below.
Companies CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11
CY12YTD
Infosys Ltd. 17% 17% 50% 44% 50% -21% -37% 133% 32% -20% -6%
Tata Consultancy Services Ltd. 35% 27% 43% -11% -56% 214% 55% 0%
11%
Wipro Ltd. 2% 7% 29% 24% 30% -13% -56% 191% 20% -19% -5%
HCL Technologies Ltd. -32% 64% 12% 57% 20% 2% -65% 222% 23% -15%
44%
Tech Mahindra Ltd. 202% -32% -78% 300% -29% -18% 59%
MphasiS Ltd. 130% 89% -35% 16% 95% -7% -51% 349% -6% -49%
31%
Infotech Enterprises Ltd. 6% -8% -2% 182% 82% -3% -67% 193% 13%
-37% 77%
Hexaware Technologies Ltd. 64% 255% 45% 9% 52% -57% -76% 349%
23% 29% 66%
Persistent Systems Ltd. 5% -24% 28%
Polaris Financial Technology Ltd -11% 37% -30% -23% 31% -27%
-66% 330% -5% -29% 9%
KPIT Cummins Infosystems Ltd. 275% 88% 101% 16% 85% -4% -80%
368% 14% 1% 75%
MindTree Ltd. -19% -53% 194% -20% -29% 73%
Rolta India Ltd. -19% 22% -28% 153% 24% 182% -68% 68% -21% -64%
32%
$mn % % % % % %
Stocks Mkt Cap 1 M 3 M 6 M 1 Year 3 Year 5 Year
Infosys Ltd. 29,685 6% 5% -9% 11% 14% 47%
Tata Consultancy Services Ltd. 50,747 -2% 5% 9% 31% 116%
158%
Wipro Ltd. 18,675 4% -5% -11% 12% 9% 43%
HCL Technologies Ltd. 7,868 2% 20% 17% 46% 64% 104%
Tier- I Average 2% 6% 2% 25% 51% 88%
Tech Mahindra Ltd. 2,383 7% 36% 27% 49% 5% -26%
MphasiS Ltd. 1,681 6% 13% -5% 20% -38% 44%
Infotech Enterprises Ltd. 432 8% 28% 30% 67% 54% 43%
Hexaware Technologies Ltd. 748 2% 1% 11% 70% 238% 105%
Persistent Systems Ltd. 330 9% 8% 27% 37%
Polaris Financial Technology Ltd 269 8% 11% -20% 6% -11% 19%
KPIT Cummins Infosystems Ltd. 451 -2% 10% 56% 68% 236% 113%
MindTree Ltd. 560 -1% 14% 43% 96% 17% 32%
Rolta India Ltd. 238 9% -1% -22% -21% -58% -74%
Tier- II Average 5% 13% 16% 44% 55% 32%
BSE-IT 3% 6% -1% 19% 35% 28%
Tier- I Average outperformance to BSE-IT 0% 0% 2% 6% 16% 59%
Tier- II Average outperformance to BSE-IT 2% 7% 17% 24% 20%
4%
Forecast FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Worldwide Spend 583 629 641 672 701 718 722 761
Market Share of Indian IT 3% 4% 5% 6% 7% 7% 8% 9%
Market share Gain - bp 71 119 114 69 20 125 91
Indian IT Exports 18 24 32 41 48 50 59 69
Tier-I as a % of Indian IT 38% 37% 40% 43% 42% 43% 46% 48%
Market share Gain - bp (29) 271 289 (88) 84 349 170
Tier-I Revenues 7 9 13 18 20 22 28 33
Tier-II as a % of Indian IT 5% 5% 6% 7% 7% 7% 7% 7%
Market share Gain - bp (16) 109 75 (9) (23) 20 (41)
Tier-II Revenues 971 1,257 2,035 2,933 3,364 3,432 4,187
4,614
($ m) 2002 2011 2012
TCV 32 100 100
Duration (yrs) 5 5 4
ACV 6 20 25
Revenue 51 308 370
% of revenue 13% 6% 7%
($ m) 2008 2011
TCV 30 35
Duration (yrs) 5 5
ACV 6 7
Revenue 184 331
% of revenue 3% 2%
8
-
Page 9 of 14
Figure 22 TPI data in Q4CY11 showing increase in number of
smaller contracts
Source: TPI
But things have changed since then and the data from TPI in the
last two
quarters (i.e. H1CY12) suggests that there is no material
improvement in deal
counts or deal value. Moreover most Tier 2s have seen growth
largely from
their existing top 10 clients.
Figure 23 Nos of contracts (TCV $25-$99m) Figure 24 Nos of
contracts (TCV $100m+) Figure 25 Value of contracts awarded
($bn)
Source: TPI Source: TPI Source: TPI
Commentary has started to moderate
While most of the Tier-II companies started CY12 with a strong
outlook on
growth, as the year has progressed commentary has moderated,
most
recently with MindTree and Infotech Enterprises scaling back
expectations
from EHDWLQJ1$66&20V 11-14% growth earlier in the year to
now meeting it.
Despite these negatives we have 4 buy ideas
So how do we pick mid-caps for medium to long-term investment?
We
recommend a barbell strategy: focus either on companies that are
highly
competitive or dominant in a niche segment, meaning higher entry
barriers
and ability to build competitive advantage, or focus on
companies with real
scale. Avoid companies caught in the middle, with neither scale
nor
dominance of any niche. Our preferred plays in each category
are:
Play on scale: There are few firms in this category as it
requires adequate
scale to be competitive in capability terms with the goliaths.
Tech Mahindra is
our top pick in this category.
Niche play: We like Persistent Systems due to its strong organic
growth
capability and increased size of deals which vindicates how
trust is growing
with its clients. We remain positive on Polaris Financial
Technology as it
continues to grow higher margin product revenues, whilst also
improving its
margin focus in the services segment.
,WLVQW\HWJHWWLQJWKHFUHGLWLWGHVHUYHVfor improved disclosure levels
and further improvement in this, especially on
products side, is feasible.
0
100
200
300
400
500
600
700
CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11
$25-$99m $100-$999m $1bn+
231 291 286 404
277
250
327 308
366
0
100
200
300
400
500
600
700
800
900
CY08 CY09 CY10 CY11 CY12
H1 H2
116 115 124 111 96
111 130 99 113
0
50
100
150
200
250
300
CY08 CY09 CY10 CY11 CY12
H1 H2
40.7 49.0 42.5 51.1 45.1 41.4
45.4 42.9 52.9 43.8
57.2
0
20
40
60
80
100
120
CY07 CY08 CY09 CY10 CY11 CY12
H1 H2
9
-
Page 10 of 14
Niche and scalable: The only addition to our list is KPIT
Cummins given its
track record in integrating and managing acquisitions, which we
would rate as
impeccable, and its success in building scale in the right
service offerings.
Figure 26 Key Picks
Source: Espirito Santo Investment Bank Research
Company Key argument
KPIT Cummins Revenue CAGR of 42% in last 10 years
Organic revenue CAGR of 24% since 2006, only next to
Persistent
Last decade margins have averaged at 16% and have consiously
invested the incremental margins into building scale and new
service offerings thereby leading to consistent high growth
Impressive track record of beating guidance which is a rarity
amongst mid cap companies
Persistent Systems Only mid cap IT company to have grown from
$10m to $210m in last 10 years organically. CAGR of 40% in last 10
years
Average deal sizes are increasing which was unheard of in OPD
business and is a key differentiator and only indicates the level
of
trust and confidence created in minds of the clients
Last decade margins have averaged at 26% which is best in
Tier-II pack and has the lowest margin differntial to Tier- I
IT
Impressive operating and free cash flow profile
Tech Mahindra Successfully derisked the business away from BT.
Seeing significant traction in large deal flow.
Have recently signed two large deals which will drive organic
growth
Successfully pulled of the biggest IT acquistion in the India
history and is leveraging it to scale to newer verticals
Polaris FT Have scaled up banking software products business
from nil to $100m in last 6 years
Currently spends 21% of product revenues on R&D which over
time should reduce to industry average of 10%. Still make 25%
margin on products
Have signed two large deals in the services segment which is
expected to drive growth in H2FY13
Focussed on improving margins in the near term by broadning the
employee pyramid and moving resource to offshore locations
10
-
Page 11 of 14
Corporate Governance Framework
Figure 27 Corporate Governance Framework
Source: Espirito Santo Investment Bank Research, Company
Data
Larger Companies
Overall
Rating
Infosys GREEN GREEN GREEN GREEN GREEN,QIRV\V consistency and
conservatism with its accounting policies are wellknown.
Disclosures are also best in the industry. Amongst the 30
metrics
that we have, Infosys scores Green in 28 of those
Tata Consultancy Services GREEN GREEN GREEN GREEN GREENTCS has
also been consistent and conservative with its accounting
policies
and disclosures. Amongst the 30 metrics that we have, Infosys
scores Green
in 27 of those.
Wipro GREEN GREEN GREEN GREEN GREENLike its peers, :LSURV
accounting policies and practices have also beenconsistent. Amongst
the 30 metrics that we have, Infosys scores Green in 28
of those.
HCL Tech GREEN GREEN GREEN GREEN GREENHCL Tech performs well on
almost all of our accounting and auditing
checks. The promoter background has largely remained clean and
the stake
VDOHE\WKHKROGLQJFRPSDQ\ZDVIRUWKHSURPRWHUVSKLODQWKURSLFSXUSRVHV
Tech M ahindra GREEN GREEN GREEN AM BER AM BER
The amortisation of one-time refund of upfront cost savings as
revenues
and an option with AT&T to acquire an 8% stake in Tech
Mahindra at 1/5 of
market price (without any lock-in period) should have been
disclosed in
both Tech Mahindra's and Mahindra and Mahindra's annual reports.
We
give an AMBER light.
Smaller Companies
Overall
Rating
Polaris Financial Technology GREEN RED GREEN AM BER AM BER
Polaris performs fairly well on most of our accounting checks.
However, a
lack of proper disclosure of product revenues and margins on a
consistent
and quarterly basis, plus disclosure of licenses, implementation
and AMC on
a consistent basis, are a few of the parameters where we believe
Polaris
needs to improve. We give a green light on accounting and
auditing and
promoter background and insider trading. While most of the
metrics in
board and management have a Green or Amber rating, a relatively
high
proportion of loans to related parties turns our overall rating
of board,
management and related parties to Red and therefore our overall
rating on
corporate governance changes to AMBER.
Hexaware Technology GREEN RED GREEN AM BER AM BER
Hexaware performs reasonably well on most of our accounting
checks.
However, the forex fiasco in Q42007 and reconstruction
agreement
between Apple Finance (promoted by Atul Nishar) and Aptech,
wherein
shareholders of Apple Finance were allotted shares of the
company at no
cost, are among the key reasons for the Amber rating. Relatively
high
remuneration to directors on an absolute basis and relative to
peers and
high YoY growth in remuneration paid to directors gives a Red
light on
board, management and related parties.
KPIT Cummins GREEN GREEN GREEN GREEN GREENKPIT has had a
successful track record of giving guidance and outperfoming
on that. Accounting and auditing checks too reveal no
discrepency and
promoter back ground has been pretty clear.
Persistent Systems GREEN GREEN GREEN GREEN GREEN
Persistent scores well on almost all of our accounting and
auditing checks.
The promoter background is also clean and in its short time as a
listed
company, we know of no untoward event that might prejudice
minority
shareholders. We give a GREEN light.
M indTree GREEN AM BER GREEN AM BER AM BER
MindTree has missed guidance on more than one occasion and
guidance
giving procedure was aggressive which was later withdrawn due to
lack of
visibility on business. Its unsuccessful venture on developing
white label
handsets only to be later discontinued had cost minority
shareholders
dearly.
M phasiS GREEN AM BER GREEN AM BER AM BER
Accounting policies are not an issue with MphasiS, but
governance policies
are especially after Q4FY11 TXDUWHUV results. Whilst we give a
RED light toattitude towards minority investors due to HP's
attitude, MphasiS scores
Amber on other minority shareholders parameters like guidance to
market
and disclosure of key news to minority shareholders and so the
overall rating
thus remains AMBER.
Comments Company Accounting & auditing Board, mgmt and
related partiesPromoter background &
insider tradingAttitude towards minority
investors
Comments Company Accounting & auditing Board, mgmt and
related partiesPromoter background &
insider tradingAttitude towards minority
investors
11
-
Page 12 of 14
Valuation Methodology
DCF is our preferred method for valuation as:
Growth and margins can be relatively easily forecasted and
Companies generate free cash and declare c.20% of earnings
as
dividends.
While select Tier-II IT companies have risen 50-70% YTD, our
picks are
dependent on sustainability of long term earnings and
sustainable FCF and
ROE generation.
Figure 28 Cash flow from operations as % of EBITDA Figure 29
Free cash flow as % of PAT
Source: Espirito Santo Investment Bank Research, Company Data
Source: Espirito Santo Investment Bank Research, Company Data
Risks to Fair Value
Please visit our website at www.EspiritoSantoIB-Research.com for
up to date recommendation charts.
Average
Consolidated FY06 FY07 FY08 FY09 FY10 FY11 FY12 7 years
Infosys 82% 87% 88% 88% 90% 66% 76% 108%
TCS 68% 67% 66% 76% 86% 63% 51% 89%
Wipro 81% 88% 60% 73% 90% 70% 67% 99%
HCL Tech 82% 90% 89% 58% 94% 72% 71% 104%
Average Tier-I 78% 83% 76% 74% 90% 68% 66% 76%
MphasiS 86% 58% 25% 95% 70% 91% 80% 111%
Tech Mahindra 32% -39% -5% 66% 79% 46% 68% 54%
Persistent Systems 80% 107% 108% 41% 109% 100% 70% 135%
Rolta 63% 83% 97% 75% 65% 96% 75% 122%
MindTree 50% 77% 76% 51% 95% 28% 74% 99%
KPIT Cummins -40% 114% 51% 67% 65% 36% 46% 74%
Polaris Software Lab 104% 34% 71% 104% 114% 47% -4% 103%
Hexaware Technologies 63% 89% 96% 56% 75% 13% 64% 100%
Average Tier-II 55% 65% 65% 69% 84% 57% 59% 65%
CFO as a % of EBITDA Average
Consolidated FY06 FY07 FY08 FY09 FY10 FY11 FY12 7 years
Infosys 59% 60% 60% 70% 81% 52% 79% 103%
TCS 63% 53% 53% 82% 92% 57% 52% 101%
Wipro 61% 58% 29% 53% 92% 64% 61% 94%
HCL Tech 56% 53% 80% 40% 93% 60% 71% 102%
Average Tier-I 60% 56% 55% 61% 90% 58% 66% 64%
MphasiS 58% 14% 8% 101% 73% 85% 179%
Tech Mahindra 45% -24% -5% 97% 128% 33% 32% 139%
Persistent Systems -126% 42% 58% 35% 102% 52% 10% 79%
Rolta -18% -16% -15% -131% -35% 73% 64% -35%
MindTree 33% 28% -120% 242% 87% -34% 78% 142%
KPIT Cummins -206% -31% 1% 100% 97% 8% 27% -2%
Polaris Software Lab 40% 22% 68% 167% 154% 13% -71% 178%
Hexaware Technologies 49% 47% 119% -59% 101% 2% 39% 134%
Average Tier-II -16% 10% 14% 69% 88% 29% 25% 32%
FCF as a % of PAT
12
-
FOR IMPORTANT DISCLOSURE INFORMATION, INCLUDING DISCLOSURES
RELATED TO THE U.S. DISTRIBUTOR OF THIS REPORT, PLEASE REFER TO THE
FINAL PAGES OF THIS REPORT - Please refer to the final pages of
this report for important disclosures, analyst certifications and
additional information. Espirito Santo Investment Bank does and
seeks to do business with companies covered in its research
reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of
this report. Investors should consider this report as only a single
factor in making their investment decision. This research report
has been prepared in whole or in part by research analysts based
outside the US who are not registered/qualified as research
analysts with FINRA (v1.0.5.0)
FUNDAMENTAL INSIGHT
India | Technology | Small & Mid Cap | 1-October-2012
KPIT CumminsNiche, scalable and shaped for growthKPIT Cummins is
the only Indian midcap IT services company with a
very wide services portfolio focussed on the automotive,
manufacturing, energy and utilities verticals. It has filed over
40
patents, which makes it a unique play within the midcap IT
space.
The performance through the last decade has also been impressive
40% revenue CAGR and 43% PAT CAGR. While KPIT has acquired
much of its services capabilities, it has been very successful
with all
the acquired companies, growing them at an average CAGR of
30%
since acquisition. As recently acquired entities scale up
margins, we
see this as a significant buffer to current margins should the
INR to
appreciate. We initiate with a fair value of Rs140 and a
BUY.
A fair balance of risk and reward
KPIT has delivered a stock return of 30% CAGR in the last 10
years. Can KPIT
continue to deliver such returns in the future? We think so.
A unique DNA: KPIT is the only mid-tier IT that has
successfully
mastered the art of acquisitions.
KPITVPDUJLQVRYHUWKHODVWGHFDGHhave averaged at 16% - a very
conscious strategy to reinvest
incremental margins in creating a strong front and back end to
remain
relevant with clients. It understands that strong organic growth
is a
pre-requisite to be able to successfully absorb acquired
entities
(organically grown at a CAGR of 28% since FY06), quite unlike
most
companies which acquire when there is a deceleration in
growth.
Significant room for sustained high growth: KPIT guided for
32-35%
USD revenue growth in FY13 and organic revenue growth of 21-24%.
It
has built scale across its services (Systime is among the top
12
partners for Oracle in JD Edwards; SAP a US$125m practice; auto
&
engineering c.US$100m). Post two large acquisitions in the last
three
years (Sparta, an SAP services company and Systime, an
Oracle
services company), KPIT has been able to target and win large
deals;
it won a total of US$210m in deals in FY12 (highest ever in a
year).
Not without risk management crucial: KPIT has successfully
acquired and integrated ten businesses to date. The scale up by
these
acquired entities has been impressive (ave. 30% CAGR post
acq.).
However 6\VWLPHVSD\EDFNE\)
-
Page 2 of 11
A unique DNA
The master acquirer: In our opinion, KPIT is the only mid-tier
IT company that
has successfully mastered the art of acquisitions, with over 10
successful
acquisitions in the past decade. All these acquisitions have
grown impressively
VLQFH WKHQ 7KUHH RI WKH DFTXLVLWLRQV ZHUH JUHDWHU WKDQ RI
.3,7Vrevenues. Most mid-tier companies have faltered with large
acquisitions,
however KPIT has consistently delivered in our view.
Figure 1 Acquisitions have scaled significantly
Source: Espirito Santo Investment Bank Research, Company
Data
The secret sauce: A successful acquisition led strategy requires
i) momentum
in the existing business to be able to comfortably absorb the
acquired entity,
ii) a clear vision of how the company needs to be shaped over
the longer term
and iii) a wider vision to carry existing entrepreneurs from
acquired entities.
Momentum in the existing business: .3,7V(%,'7$PDUJLQVRYHUWKHpast
decade have averaged at 16% despite most peers aspiring for
higher margins. We understand that this was a conscious effort
by
the management to reinvest excess margins in the core business
to
maintain high growth rates. This effort has led to consistently
high
organic growth rates allowing the company enough room and
bandwidth to acquire and integrate new entities.
Figure 2 +LJKRUJDQLFUHYHQXHJURZWK Figure 3
GULYHQE\UH-investments in the core business
Source: Espirito Santo Investment Bank Research, Company Data
Source: Espirito Santo Investment Bank Research, Company Data
Clear long-term vision: KPIT has over time successfully built
a
business focussed on the manufacturing, utilities and
automotive
verticals. With each acquisition it has sewed together a
business with
service lines that allow differentiating versus a strategy
of
commoditized offerings like ADM, IMS, BPO etc. The
management
had articulated a US$100m revenue target over a 3 year time
frame
when the compDQ\VUHYHQXHVZHUHRQO\86P
Wider vision to carry existing entrepreneurs from acquired
entities:
Acquisitions not only fill gaps of capability, scale and reach,
but also
add management depth if one is able to retain the promoters or
key
personnel of the acquired entities. The promoters of Sparta, who
are
now part of KPIT, built a US$300m business which was later sold
to
Fujitsu and have a vision to run a US$1bn SAP practice. KPIT
has
been able to retain most of the key talent. For instance the CFO
of
CG Smith is the legal and secretarial head of the company; and
the
promoter of Solvcentral is the practice director for BI in
SAP.
Acquisitions Year
Size when
acquired ($m) FY12 ($m) Rationale CAGR%
Cummins Infotech 2002 $1 $66
$QFKRU&XVWRPHU&XPPLQV9HUWLFDO)RFXV0DQXIDFWXULQJ 52%Panex
Consulting 2003 $7 $25 SAP Practice - Anchor Customer 15%
SolvCentral.com 2005 $4 $20 BI Practice - Anchor Customer
28%
Pivolis 2005 $2 $5 Direct Presence in France geography 19%
CG Smith Software 2006 $6 $45 Auto Electronics Domain; Auto OEM
& Tier I Customers 39%
Harita TVS 2008 $1 $8 MEDS Practice 68%
Sparta Consulting 2009 $25 $72 SAP Practice; US Geography
presence in SAP 42%
In2Soft 2010 $4 $6 Vehicle Diagnostic & Telematics, German
Frontline 22%
CPG 2010 $11 $15 Oracle Consulting 17%
SYSTIME 2011 $50 $53 Oracle Consulting, JD Edwards Specialist
6%
Organic growth calculation FY06 FY07 FY08 FY09 FY10 FY11 FY12
CAGR %
Reported revenues ($m) 72 103 142 164 155 222 309 27.5%
Acquisition revenue ($m)
- SolvCentral.com 4
- Pivolis 2
- CG Smith Software 6
- Harita TVS 1
- Sparta Consulting 12 13
- In2Soft 2 2
- CPG 6 6
- SYSTIME 13
Organic revenues ($m) 67 97 142 163 143 201 289 27.6%
Inorganic revenue growth (YoY%) 43% 38% 15% -6% 43% 40%
Organic revenue growth (YoY%) 45% 47% 15% -13% 41% 43%
0%
115%
30%
445%
FY03 FFY04 FY05 FFY06 FY07 FFY08 FY09 FFY10 FY11 FFY12
EBIDTA % Average EBIDTA% @ 16%
14
-
Page 3 of 11
Figure 6 Revolo key components
Source: Espirito Santo Investment Bank Research, Company
Data
Significant room for sustained high growth
KPIT operates in three lines of businesses i) Integrated
Enterprise Solutions
(Oracle practice), ii) auto and engineering and iii) SAP serving
the
manufacturing, automotive and utilities verticals. Each of these
segments has
JURZQDWD&4*5RIDQGUHVSHFWLYHO\.3,7VUHFHQWDFTXLVLWLRQV,Sparta
and Systime, have also scaled up significantly.
Figure 4 Lines of business have scaled Figure 5 So have recently
acquired entities
Source: Espirito Santo Investment Bank Research, Company Data
Source: Espirito Santo Investment Bank Research, Company Data
Investments in core business will drive growth: .3,7V
investments in the business in the past year and current year will
ensure consistent high growth
going forward. The company invested in creating specific
solutions to target
the SME & utilities markets in the US in the past year. The
focus has also been
on increasing the maintenance revenues in the Sparta business,
which were
c.5% of group revenue at the time of acquisition. It is already
c.20% and is
likely to improve further. This not only improves the recurring
business but
also helps aid margins. KPIT has also strengthened its
geographic presence in
China, Korea, India, Japan, Korea and Brazil. The company
appointed a
professional CEO in China and setup a subsidiary in The
Netherlands last year.
.3,7VNH\FXVWRPHUVDOVRKDYHODUJH(53UROORXWVWKDWZLOl drive growth
in the business. With over US$210m of deals bagged in the past year
the company is
well positioned to drive growth. Moreover post the recent
acquisitions the
average deal size for KPIT has risen.
Table 1 Key investments in personnel
Source: Espirito Santo Investment Bank Research, Company
Data
Option value from Revelo not factored in estimates
Revelo
LV.3,7VDIWHUPDUNHWVROXWLRQWKDWFRQYHUWVH[LVWLQJGLHVHODQGSHWUROengines
to hybrids. The solution promises to improve fuel efficiency by
35%
and reduce emissions by 30%. The company has entered into a
50:50 JV with
Bharat Forge to manufacture and market the solution. It is
currently
undergoing trails in 200 vehicles and is likely to be launched
in FY14. Revelo
costs between Rs65,000-70,000 at the lower end and Rs0.1-0.15m
at the
upper end. The JV is targeting annual revenues of Rs3-5b
annually from this
business. The JV plans to initially launch the solution in
Mumbai and Pune.
KPIT is also in discussion with OEMs for factory fitted
vehicles.
We currently do not factor in any value for Revelo as this is an
altogether new
venture. However the company has filed for patents for key
components and
there could be multiple monetization options.
$10
$15
$20
$25
$30
$35
$40
$45
$50
Ma
r-10
Ju
n-1
0
Se
p-1
0
De
c-1
0
Ma
r-11
Ju
n-1
1
Se
p-1
1
De
c-1
1
Ma
r-12
Ju
n-1
2
Integrated Enterprise Solutions Auto & Engg SAP
$25
$46
$72
$94
$50
$64
$-
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
FY10 FY11 FY12 FY13E
Sparta Systime
Appointment Individual Geograph Line of busine Remarks
Managing Director Mr. Guven Kivran Germany Automotive Founder of
In2Soft - acquired by KPIT earlier
Vice President Mr. Toshimi Yamanoi Tokyo Automotive
To strengthen offerings for automotive OEM's
in Japan
Global Head of MarketingMs.Melissa Womack Global Marketing
Earlier chief marketing officer at CPG, a
consulting company acquired by KPIT.
Mandate to increase brand presence in US,
Europe & Asia Pac and drive a unified
customer experience across acquired entities
15
-
Page 4 of 11
Not without risks management crucial
The complete payback for Systime would happen in FY16 only if
Systime can
grow at 20% annually for the next three years with EBIDTA
margins of 15%.
Systime reported revenue growth of 11% QoQ in Q1FY13 and has
already
scaled up margins from 5% to 11%. Our checks indicate that the
company is
already ahead of its business plan which gives us comfort.
Table 2 Systime payback period of 5 years for goodwill of
Rs1.7b
Source: Espirito Santo Investment Bank Research, Company
Data
Earn-outs for Sparta and the cost of acquisition of the
remaining stake in
Systime will see an outflow of US$48m over FY13 and FY14. The
company
plans to fund these incremental outflows through debt and this
will drive the
D/E ratio up from the current 0.3[ WR [ 0RUHRYHU .3,7V WDUJHW
RIachieving US$1bn in revenues by FY17 could lead to further
acquisitions going
forward, which would in turn increase debt on books.
KPIT will not shy from another acquisition but timing is
crucial: Our analysis
suggestVWKDWWKHPDQDJHPHQWVWUDFNUHFRUGDQGZLQUDWHVDUHexcellent.
The
PDQDJHPHQWVDELOLW\WRTXLFNO\VFDOHXSPDUJLQVIRUWKHDFTXLUHGHQWLWLHVDQGtime
the next acquisition when the business is ready to digest another
target
is crucial. KPIT has successfully done this in the past and has
a very clear
acquisition philosophy, thereby driving our faith in the
stock.
FY12 FY13E FY14E FY15E FY16E FY17E
Revenues ($m) 50 65 78 93 112 134
- growth % 29% 20% 20% 20% 20%
Revenues (INR m) 2425 3501 3954 4651 5581 6698
EBIDTA (INR m) 121 385 593 698 837 1005
EBIDTA% 5% 11% 15% 15% 15% 15%
Depreciation (INR m) 49 70 79 93 112 134
PBT (INR m) 73 315 514 605 726 871
Tax (INR m) 22 95 154 181 218 261
ETR% 30% 30% 30% 30% 30% 30%
PAT (INR m) 51 221 360 423 508 609
PAT % 2% 6% 9% 9% 9% 9%
Share of KPIT (INR m) 25 126 360 423 508 609
Add back depreciation (INR m) 50 166 439 516 620 743
16
-
Page 5 of 11
Company Background
Started 1990, KPIT focuses on the manufacturing, automotive and
utilities
verticals through its service offerings in SAP, Oracle and auto
& engineering.
KPIT operates largely out of Pune and is the largest third party
automotive
electronics vendor out of India.
KPIT has grown its revenues and PAT at a CAGR of 40% and 43%
respectively
over the past 10 years. The company is highly acquisitive and
has acquired 10
companies in the last 10 years.
KPIT derives 44% of its revenues from Integrated Enterprise
Solutions (a suite
of Oracle based services), 24% from auto and engineering and 32%
from SAP
based offerings. From a geographic perspective the company
derives 76% of
its revenues from USA, 15% from Europe and 9% from RoW. Cummins
is the
largest client contributing 21% to its revenues and is also a
shareholder.
Figure 7 Geographical breakup of revenues Figure 8 Revenues and
profitability trends
Source: Espirito Santo Investment Bank Research, Company Data
Source: Espirito Santo Investment Bank Research, Company Data
55% 60%68% 69%
36% 30%20% 19%
9% 10% 12% 12%
0%
25%
50%
75%
100%
FY09 FY10 FY11 FY12
North America Europe APAC
0%
10%
20%
30%
40%
50%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
FY06 FY08 FY10 FY12
Sales (Rs bn) GPM (RHS) NPM (RHS)
17
-
Page 6 of 11
Valuation Methodology
KPIT currently trades on a FY13E PER of 10.4 and a FY14E PER of
8.8. With an
EPS CAGR of 32% the current multiples are not demanding. Our key
rationale
is as follows:
a) Consistently delivered over the past decade
b) Good visibility on growth from top clients and new deal
pipelines
c) Acquired entities are delivering robust growth and are
seeing
improving margin profiles
We initiate coverage on the stock with a BUY and a FV of Rs140
implying a
13% upside to the current market price.
Figure 9 DCF Summary Figure 10 Sensitivity of WACC to terminal
growth
Source: Espirito Santo Investment Bank Research, Company Data
Source: Espirito Santo Investment Bank Research, Company Data
Figure 11 KPIT's FCFE Profile
Source: Espirito Santo Investment Bank Research, Company
Data
Figure 12 Relative Valuation Chart
Source: Espirito Santo Investment Bank Research, Company
Data
Category Value
COE 15.0%
Terminal Growth Rate 2.5%
PV of growth phase 7,234
PV of consolidation 5,916
PV of maturation 6,331
PV of terminal value 5,837
DCF of equity value 25,318
Net Cash
Total Equity Value 25,318
13.0% 14.0% 15.0% 16.0% 17.0%
0.5% 163 148 135 124 115
1.5% 167 151 137 126 116
2.5% 172 155 140 128 118
3.5% 178 159 143 130 119
4.5% 185 164 147 133 121 Te
rmin
al
Gro
wth Weighted Average Cost of Capital
0%
5%
10%
15%
20%
25%
30%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
FY13
FY15
FY17
FY19
FY21
FY23
FY25
FY27
In R
s. B
n
FCFE Average ROE (RHS) COE (RHS)
Market cap Net Debt EV Sales CAGR EBITDA CAGR EPS CAGR
Company Mn Mn Mn FY12-14 FY12-14 FY12-14 2013E 2014E 2013E 2014E
2013E 2014E
Infosys Ltd. 1,447,919 (205,910) 1,242,009 13% 12% 11% 2.9 2.5
9.4 7.8 15.1 13.2
Tata Consultancy Services Ltd. 2,532,644 (88,275) 2,444,369 17%
17% 15% 3.8 3.5 12.6 11.7 18.4 17.5
Wipro Ltd. 938,041 (60,665) 877,376 12% 8% 11% 2.0 1.8 10.2 8.8
14.7 13.1
HCL Technologies Ltd. 400,233 (3,085) 397,148 18% 12% 15% 1.6
1.4 8.6 8.0 13.4 12.3
Average 15% 12% 13% 2.6x 2.3x 10.2x 9.1x 15.4x 14.0x
Other Indian IT Companies
Tech Mahindra + Satyam 123,956 7,243 131,199 13% 19% 12% 0.9 0.8
4.7 4.8 11.2 9.9
Hexaware Technologies Ltd. 36,060 (4,377) 31,683 25% 32% 16% 1.8
1.6 7.2 6.9 10.0 9.9
Polaris Financial Technology Ltd 12,964 14,600 27,564 18% 13%
13% 0.5 0.5 8.4 7.4 4.9 4.6
Persistent Systems Ltd. 17,094 (3,283) 13,811 18% 25% 18% 1.4
1.2 4.6 4.2 9.4 8.6
MphasiS Ltd. 84,514 (17,598) 66,917 6% 9% 2% 1.6 1.5 6.3 5.7
10.6 9.9
MindTree Ltd. 26,922 (3,103) 23,819 20% 27% 28% 1.1 1.0 5.5 5.0
8.5 7.8
KPIT Cummins Infosystems Ltd. 22,022 459 22,481 29% 36% 32% 1.0
0.9 6.4 5.6 10.5 8.9
Average 18% 23% 17% 1.2 1.1 6.1 5.7 9.3 8.5
P/Sales EV/EBITDA (x) P/E
18
-
Page 7 of 11
Risks to Fair Value
Any large acquisition by KPIT in the near term could be
perceived
negatively as current goodwill is at 51% of its net worth.
Sharp deceleration in growth rates due to macro factors could
alter
the payback period of Systime and lower profitability for
the
company.
19
-
Page 8 of 11
Source: Espirito Santo Investment Bank Research estimates
Valuation Metrics 2009A 2010A 2011A 2012A 2013E 2014E
Recommendation: BUY P/E 34.1 26.2 23.7 15.4 10.4 8.8Fair Value:
INR 140 Reported P/E 34.1 26.2 23.7 15.4 10.4 8.8
EV / Sales 2.8 3.0 2.1 1.5 1.0 0.9Share Price: INR 123 EV /
EBITDA 12.0 13.5 13.7 10.4 6.2 5.3Upside / Downside 14% EV / EBIT
15.7 16.7 18.7 13.0 7.1 6.1
FCF Yield 5.6% 4.8% 0.9% 1.2% 9.2% 8.7%3 Month ADV ($m) 2
Dividend yield 0.5% 0.6% 0.6% 0.6% 0.6% 0.6%Free Float 73.7%52 Week
High / Low INR 142 - 68
Key ratios 2009A 2010A 2011A 2012A 2013E 2014EBloomberg: KPIT
INModel Published On: 01 October 2012 EBITDA margin 23.1% 22.1%
15.0% 14.5% 15.7% 16.0%
EBIT margin 17.6% 17.9% 11.0% 11.6% 13.6% 13.9%Capex / Revenue
6.2% 3.3% 4.2% 4.1% 2.2% 2.0%
Shares In Issue (mm) 182 Capex / Depreciation 1.13 0.77 1.03
1.37 1.07 0.93Market Cap ($mn) 408 Net Debt / EBITDA -0.3 -0.4 -1.1
0.1 -0.2 -0.3Net Debt ($mn) 3 EBITDA / Net Interest 40.3 58.9 58.9
27.9 23.7 18.2Enterprise Value ($mn) 411 ROE 39% 22% 16% 20% 24%
22%
P&L Summary 2009A 2010A 2011A 2012A 2013E 2014E
Revenue 7,932 7,316 10,120 15,000 22,379 25,106% change 35.9%
-7.8% 38.3% 48.2% 49.2% 12.2%
Espirito Santo Securities Analyst EBITDA 1,834 1,614 1,522 2,181
3,522 4,026Nitin Padmanabhan % change 150.2% -12.0% -5.7% 43.3%
61.5% 14.3%(91) 22 4315 6830 % margin 23.1% 22.1% 15.0% 14.5% 15.7%
16.0%[email protected] Depreciation &
Amortisation -436 -308 -411 -445 -468 -536
EBIT 1,397 1,306 1,111 1,736 3,053 3,490Soumitra Chatterjee %
change 192.1% -6.5% -15.0% 56.3% 75.9% 14.3%(91) 22 4315 6829 %
margin 17.6% 17.9% 11.0% 11.6% 13.6%
13.9%[email protected] Interest expense -45
-27 -26 -78 -149 -221
Operating Profit 1,352 1,279 1,085 1,658 2,905 3,269Forex
gains/(losses) 0 0 0 0 0 0
Shareholding Pattern Other Income -574 -253 18 128 98 181Pre Tax
Profit 778 1,026 1,103 1,786 3,003 3,451Income Tax Expense -120
-169 -155 -437 -785 -897Minority Interests and Exceptionals 0 0 0
104 -62 -11Net Income 659 857 948 1,454 2,156 2,543Execution Net
Income 659 857 948 1,454 2,156 2,543
Reported EPS 3.61 4.70 5.19 7.97 11.81 13.93EPS 3.61 4.70 5.19
7.97 11.81 13.93
DPS 0.60 0.70 0.70 0.70 0.70 0.70Payout Ratio 16.6% 14.9% 13.5%
8.8% 5.9% 5.0%
Shares In Issue (Less Treasury) 182 182 182 182 182 182
Cash Flow Summary 2009A 2010A 2011A 2012A 2013E 2014E
Revenue Breakdown EBITDA 1,834 1,614 1,522 2,181 3,522
4,026Taxes Paid -120 -169 -155 -437 -785 -897Interest Income -574
-253 18 128 98 181Change in Working Capital 113 -169 -574 -870 -66
-480Associate & Minority Dividends 0 0 0 0 0 0Forex and Others
-62 53 -168 2 -98 -181Operating cash flow 1,191 1,076 643 1,005
2,670 2,649Capital Expenditure -493 -238 -422 -609 -500 -500Free
Cash Flow 698 838 221 396 2,170 2,149Acquisitions & Disposals 0
-668 -463 0 -1,166 -1,378Dividends Paid To Shareholders -64 -55 -64
-72 -149 -149Equity Raised / Bought Back 0 27 1,203 65 0 0Other
Financing Cash Flow 86 -670 145 -1,149 1,079 1,399Net Cash Flow 720
-528 1,042 -760 1,934 2,020
Balance Sheet Summary 2009A 2010A 2011A 2012A 2013E
2014EOperating Profit Breakdown
Cash & Equivalents 1,671 1,799 2,556 2,055 3,983
6,004Tangible Fixed Assets 1,795 1,522 1,171 1,431 1,569
1,784Goodwill & Intangibles 0 950 1,708 4,044 5,163
6,493Investment in Equity Investee 0 0 0 0 0 0Other Assets 2,518
2,065 3,651 5,832 6,918 7,889Total Assets 5,984 6,336 9,087 13,363
17,634 22,169Interest Bearing Debt 1,185 1,108 931 2,222 3,352
4,910Other Liabilities 3,052 1,306 2,116 3,689 4,826 5,442Total
Liabilities 4,236 2,413 3,047 5,911 8,179 10,352Shareholders'
Equity 1,685 3,871 6,032 7,125 9,132 11,525Minority Interests 63 51
9 326 326 326Total Equity 1,748 3,922 6,041 7,451 9,458 11,851
Net Debt -487 -692 -1,626 167 -631 -1,094
KPIT Cummins
Promoter26%
FII23%DII
17%
Others34%
IES44%
SAP32%
Auto and Engeneeri
ng24%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
FY10A FY11A FY12A FY13E FY14E
EBITDA PAT
20
-
FOR IMPORTANT DISCLOSURE INFORMATION, INCLUDING DISCLOSURES
RELATED TO THE U.S. DISTRIBUTOR OF THIS REPORT, PLEASE REFER TO THE
FINAL PAGES OF THIS REPORT - Please refer to the final pages of
this report for important disclosures, analyst certifications and
additional information. Espirito Santo Investment Bank does and
seeks to do business with companies covered in its research
reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of
this report. Investors should consider this report as only a single
factor in making their investment decision. This research report
has been prepared in whole or in part by research analysts based
outside the US who are not registered/qualified as research
analysts with FINRA (v1.0.5.0)
FUNDAMENTAL INSIGHT
India | Technology | Small & Mid Cap | 1-October-2012
Polaris SoftwareGeared for growthPolaris Software has always
traded at massive discount to Tier-I and
Tier-II peers thanks to a lumpy products business and reliance
on
Citi for revenues. It launched the products business in 2008,
but due
to lack of new clients it took two years to build the retail
banking
segment. But with marquee clients in the retail banking (now 60%
of
product revenues), developing the wholesale banking should
get
easier. Also with disclosure improving in the product segment
the
large valuation discount should narrow. We have lowered our
fair
value from Rs240 to Rs197, though we retain our BUY rating.
Can the license revenues grow on a consistent basis?
Despite a strong brand name and parent, Oracle Financial
Software Services
(OFSS) is finding it difficult to grow its license revenues. In
this business, until
the license revenue grows, implHPHQWDWLRQ DQG $0& ZRQW JURZ
6R FanPolaris grow its license revenues on a consistent basis? We
believe it can.
Product margins are not as low as perceived: PolarisV product
margins are 2 ZKLFK LV EHORZ 2)66 SURGXFW PDUJLQV RI 3%. However,
this includes R&D expenses which are 21% of product
revenues. Grossing up, this gives EBITDA margins of 47%. In
FY05,
OFSS was spending c.13% of its product revenues on R&D
and
Temenos today spends 5.5-6% of its revenues on development and
an
additional 2.5-3% on research. Given that both are now
mature
products, O)66 R&D expenses should have reduced to 9% of
productrevenues meaning EBITDA margins of 51% ex-R&D, offering
margin
upside of 10% over 7-\HDUVLQ3RODULVSURGXFWVVHJPHQW
Services margins expected to expand to 12% in near term:
PolarisVservices margins are c. 10% which is much lower than peers,
largely
due to high costs of employees who are skewed towards laterals
with
high levels of experience. Polaris is targeting increasing
margins in the
services business to 12% in the near term by broadening the
pyramid
by hiring more freshers and increasing the offshore mix.
10% USD growth reasonable given deal wins and order flows:
With
two recent large deals in the services segment, we estimate
revenues
will grow 10% in USD. In the product segment, we think 10%
growth is
also reasonable, as Polaris has recently won 5 deals in which
the
implementation should start from Q2FY13 onwards. We expect
margins to remain flat as the margin improvement in the
product
business is offset by lower margins in services. We only
expect
margin improvement in services to start only from H2FY13.
Valuations: improving visibility gives valuation comfort
While the services segment operates at low double digit margins,
the product
segment has margins of 25% which will enable Polaris to address
structural
issues like: a) wage pressure which grew at 8-10% over the last
two years, b)
higher Visa charges and rejection rates. Polaris has
significantly improved
investor disclosure levels in Q1FY13 and we expect more efforts
to improve
disclosure on the products business. We expect Polaris to record
revenue and
EBITDA CAGR of 18% and 13% over FY12-14E. Given this growth we
find PERs
of 4.9x FY13E and 4.6x FY14E compelling. Reiterate BUY.
Accounting & corporate governance AMBER
Franchise Strength AMBER
Earnings Momentum GREEN
BUY 51% upsideFair Value Rs197.00
Bloomberg ticker POL IN
Share Price Rs130.15
Market Capitalisation Rs12,945.66m
Free Float 71%
IINR m Y/E 31-MMar 2011A 2012A 2013E 22014E
Revenue 15863 20527 25137 28353
EBITDA 2139 2906 3296 3730
EBIT 1802 2434 2771 3184
Pre Tax Profit 2386 2835 3357 3548
Net Income 2029 2207 2656 2807
EPS 20.3 22.1 26.6 28.1
DPS 4.5 5.0 5.0 5.0
Free Cash Flow 181 (1143) 1575 978
YY/E 31-MMar 2011A 2012A 2013E 2014E
P/E 6.4 5.9 4.9 4.6
EV / Sales 0.7 0.5 0.4 0.4
EV / EBITDA 5.0 3.7 3.2 2.8
EV / EBIT 5.9 4.4 3.8 3.3
FCF Yield -3% -12% 8% 5%
Dividend yield 3% 4% 4% 4%
Source: Espirito Santo Investment Bank Research, Company
Data, Bloomberg
60
80
100
120
140
Oct 2011 Jan 2012 Apr 2012 Jul 2012 Oct 2012
POL IN vs BSE500 Index
Share Price Performance
Analysts
Soumitra Chatterjee+91 22 4315 6829soumitra.chatterjee@execution
-noble.comExecution Noble Ltd
Nitin Padmanabhan+91 (0) 22 4315 6830nitin.padmanabhan@execution
-noble.comExecution Noble Ltd
21
-
Page 2 of 10
Product business has grown 38% CAGR in last 3 years
PolarisV product business has grown much faster than peers, due
to a smaller base and also positioning in the right geographies.
While Polaris previously
GLGQWJLYH VHSDUDWHdetails of license, implementation and AMC
revenues, it has now started to disclose these, in line with best
practice. As shown in the
table below, Polaris has grown its product revenues at a CAGR of
18% over
last 5 years and 38% in last 3 years as it gets almost 2/3rd of
its product
revenues from emerging economies which have an appetite for
software
banking products.
Figure 1 Last 3,5,10 yrs revenue CAGR Figure 2 Geographical
split of product revenues
Source: Espirito Santo Investment Bank Research, Company Data
Source: Espirito Santo Investment Bank Research, Company Data
Product margins are better than Temenos but lower than OFSS
PolarisV SURGXFWPDUJLQVDUHZKLFK LVEHORZ2)66SURGXFWPDUJLQVRI43%.
However, this includes R&D expenses which are 21% of product
revenues.
Grossing up, this gives EBITDA margins of 47%. While margins are
better than
Temenos, they are lower than OFSS, as Polaris started by selling
smaller
modules of banking product, where price often becomes a
competing factor,
but is slowly moving to core banking solutions which have higher
margins.
7HPHQRVPDUJLQVKDYHEHHQDGMXVWHGIRUGHYHORSPHQWFRVWVDVLWFDSLWDOL]es
development cost whereas Polaris and OFSS expense it.
Figure 3 Product segment margins
Source: Espirito Santo Investment Bank Research, Company
Data
Focus would be to improve margins in services business
While products have margins of c.25%, services margins are only
c.10%. While
this has happened due to high costs of laterals with more than
6-8 years of
experience, Polaris plans to address this by hiring freshers and
improving the
offshore mix, which should take margins in the services segment
to 12% in the
near term.
Last 10 years Last 5 years Last 3 years
Temenos 17% 9% 13%
License 17% 0% 8%
Maintenance 24% 27% 30%
Services 12% 6% 1%
OFSS 22% 8% 10%
License 6% -6% -8%
Maintenance 29% 8% 11%
Services 27% 20% 19%
Polaris FT NA 18% 38%
Temenos OFSS Polaris
Americas 10% 26% 13%
Europe 40% 36% 21%
ROW 51% 37% 66%
-60%
-40%
-20%
0%
20%
40%
60%
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Temenos OFSS Polaris FT
22
-
Page 3 of 10
Company Snapshot
Polaris Software Lab was incorporated in 1993. It was one of the
first vendors
that Citigroup chose to partner with, when it entered India.
Simultaneously,
Citigroup started its own company called Citibank Overseas
Software Ltd,
(COSL) to leverage its Indian operations. COSL was later renamed
Orbitech,
and was merged with Polaris in 2003. Polaris is thus an
amalgamation of these
two organizations. Through this merger, Polaris acquired 57 IPRs
of Orbitech
and rearchitected them into a J2EE-based SOA platform and
rebranded as
Intellect in 2005. In the last five years, PSL has grown its
revenues and
earnings at CAGRs of 14% and 57% respectively.
Figure 4 Geography wise revenue Breakup Figure 5 License,
Implementation and AMC Figure 6 Revenues, EBITDA and Net
margins
Source: Espirito Santo Investment Bank, Company Data Source:
Espirito Santo Investment Bank, Company Data Source: Espirito Santo
Investment Bank, Company Data
Change in forecasts
Our revenue estimates have gone up by 11% and 4% for FY13 and
FY14 due to
change in currency assumption from Rs49.5/$1 to Rs55/$1.
However, EBITDA
has not increased as we moderated our margin assumptions due to
lower
margins in services and a more moderate improvement in products
than
previously expected.
Table 1 Old versus New estimates
Source: Espirito Santo Investment Bank
ESIB vs. consensus
Our revenues estimates for FY13 and FY14 are 2% higher than
consensus as we
factor in higher growth in the products segment. However, EBITDA
is lower by
3% and 5% for FY13E and FY14E, as we think recurring R&D
expenses will keep
margin improvement under check.
Table 2 US versus Consensus
Source: Espirito Santo Investment Bank
88.7% 88.8% 91.0% 92.6% 94.8%
11.3% 11.2% 9.0% 7.4% 5.2%
0%
25%
50%
75%
100%
FY07 FY08 FY09 FY10 FY11
BFSI Other
License18%
Service46%
Maintenance28%
SI8%
0%
10%
20%
30%
0
4,000
8,000
12,000
16,000
FY06 FY08 FY10 FY12
Revenue EBITDA Net Profit
Sales Old New Change
FY13 22,650 25,137 11%
FY14 27,238 28,353 4%
EBITDA
FY13 3,252 3,296 1%
FY14 3,914 3,730 -5%
PAT
FY13 25 27 5%
FY14 29 28 -3%
Sales US Cons Change
CY12 25,137 24,535 2%
CY13 28,353 27,876 2%
EBITDA
CY12 3,296 3,410 -3%
CY13 3,730 3,916 -5%
PAT
CY12 27 24 12%
CY13 28 27 4%
23
-
Page 4 of 10
Figure 7 Percentage of broker's upgrading and price performance
Figure 8 Percentage of earnings upgrade and price performance
Source: Espirito Santo Investment Bank, Factset Estimates
Source: Espirito Santo Investment Bank, Factset Estimates
Figure 9 One year forward PE Band
Source: Espirito Santo Investment Bank Research, Company
Data
0
50
100
150
200
250
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Mar-
11
Ap
r-11
May
-11
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-11
Jan
-12
Fe
b-1
2
Mar-
12
Ap
r-12
May
-12
Jun
-12
Jul-
12
Au
g-1
2
Se
p-1
2
12M rolling net upgrade Price (RHS)
0
50
100
150
200
250
-1%
0%
1%
2%
3%
4%
5%
6%
Mar
-11
Ap
r-11
May
-11
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-11
Jan
-12
Fe
b-1
2
Mar
-12
Ap
r-12
May
-12
Jun
-12
Jul-
12
Au
g-1
2
Se
p-1
2
Rolling 12M forward EPS growth forecasts Price (RHS)
0.0
5.0
10.0
15.0
20.0
25.0
Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12
PE Std Dev(-2) Std Dev(-1)
Mean Std Dev(+1) Std Dev(+2)
24
-
Page 5 of 10
Valuation Methodology
Polaris is amongst the few Tier-II IT companies which should be
able to
improve margins due to a decent product portfolio. While the
services
segment operates at low double digit margins, the product
segment has
margins of 23% which will enable Polaris to address structural
issues like: a)
wage pressure which has been growing at 13-15% over the last
five years and
b) reducing concentration away from Citi which contributes to
>40% of
revenue. We expect Polaris to record revenue and EBITDA CAGR of
20% and
22% over FY11-14E. We have lowered our FV from Rs240 to Rs197
due to
increasing working capital requirement as Days Sales Outstanding
(DSOs)
have gone up from 93 days to 118 days since our initiation.
Though we factor
DSOs to revert to mean to 100-105 days but that would be over a
period of 4
to 6 quarters.
Figure 10 Polaris' estimated FCFE profile
Source: Espirito Santo Investment Bank
Figure 11 DCF Summary Figure 12 Sensitivity to terminal growth
and cost of capital
Source: Espirito Santo Investment Bank Source: Espirito Santo
Investment Bank
Figure 13 Relative Valuation Table
Source: Espirito Santo Investment Bank
0%
5%
10%
15%
20%
25%
30%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
FY
13
FY
15
FY
17
FY
19
FY
21
FY
23
FY
25
FY
27
In R
s. B
n
FCFE Average ROE (RHS) COE (RHS)
Category Value
COE 15.0%
Terminal Growth Rate 2.5%
PV of growth phase 3,494
PV of consolidation 5,597
PV of maturation 5,615
PV of terminal value 4,947
DCF of equity value 19,653
Net Cash
Total Equity Value 19,653
13.0% 14.0% 15.0% 16.0% 17.0%
0.5% 233 209 189 172 158
1.5% 239 214 193 175 160
2.5% 247 219 197 178 162
3.5% 256 226 202 182 165
4.5% 267 234 208 186 168 Te
rmin
al
Gro
wth Weighted Average Cost of Capital
Market cap Net Debt EV Sales CAGR EBITDA CAGR EPS CAGR
Company Mn Mn Mn FY12-14 FY12-14 FY12-14 2013E 2014E 2013E 2014E
2013E 2014E
Infosys Ltd. 1,447,919 (205,910) 1,242,009 13% 12% 11% 2.9 2.5
9.4 7.8 15.1 13.2
Tata Consultancy Services Ltd. 2,532,644 (88,275) 2,444,369 17%
17% 15% 3.8 3.5 12.6 11.7 18.4 17.5
Wipro Ltd. 938,041 (60,665) 877,376 12% 8% 11% 2.0 1.8 10.2 8.8
14.7 13.1
HCL Technologies Ltd. 400,233 (3,085) 397,148 18% 12% 15% 1.6
1.4 8.6 8.0 13.4 12.3
Average 15% 12% 13% 2.6x 2.3x 10.2x 9.1x 15.4x 14.0x
Other Indian IT Companies
Tech Mahindra + Satyam 123,956 7,243 131,199 13% 19% 12% 0.9 0.8
4.7 4.8 11.2 9.9
Hexaware Technologies Ltd. 36,060 (4,377) 31,683 25% 32% 16% 1.8
1.6 7.2 6.9 10.0 9.9
Polaris Financial Technology Ltd 12,964 14,600 27,564 18% 13%
13% 0.5 0.5 8.4 7.4 4.9 4.6
Persistent Systems Ltd. 17,094 (3,283) 13,811 18% 25% 18% 1.4
1.2 4.6 4.2 9.4 8.6
MphasiS Ltd. 84,514 (17,598) 66,917 6% 9% 2% 1.6 1.5 6.3 5.7
10.6 9.9
MindTree Ltd. 26,922 (3,103) 23,819 20% 27% 28% 1.1 1.0 5.5 5.0
8.5 7.8
KPIT Cummins Infosystems Ltd. 22,022 459 22,481 29% 36% 32% 1.0
0.9 6.4 5.6 10.5 8.9
Average 18% 23% 17% 1.2 1.1 6.1 5.7 9.3 8.5
P/Sales EV/EBITDA (x) P/E
25
-
Page 6 of 10
Risks to Fair Value
Our fair value of Rs197 is at risk if
1. 6HUYLFHVPDUJLQVGRQWLPSURYH: We build in 200bps improvement in
margins in services business over the next two years. If not for it
our
fair value would have been Rs165.
2. Slow ramp-up in product revenues: Any slower than expected
ramp-
up in product business puts our fair value at risk.
26
-
Page 7 of 10
Source: Company data and Espirito Santo Investment Bank Research
estimates
Valuation Metrics 2010A 2011A 2012A 2013E 2014E
Recommendation: BUY P/E 8.5 6.4 5.9 4.9 4.6Fair Value: INR 197
Reported P/E 8.5 6.4 5.9 4.9 4.6
EV / Sales 0.8 0.7 0.5 0.4 0.4Share Price: INR 130 EV / EBITDA
4.8 5.0 3.7 3.2 2.8Upside / Downside 51.0% EV / EBIT 5.7 5.9 4.4
3.8 3.3
FCF Yield 17.7% -3.1% -12.0% 7.7% 4.8%3 Month ADV ($m) 2
Dividend yield 1.3% 3.5% 3.8% 3.8% 3.8%Free Float 71.0%52 Week High
/ Low INR 175 - 102
Key ratios 2010A 2011A 2012A 2013E 2014EBloomberg: POL INModel
Published On: 01 October 2012 EBITDA margin 16.4% 13.5% 14.2% 13.1%
13.2%
EBIT margin 13.8% 11.4% 11.9% 11.0% 11.2%Capex / Revenue 2.5%
5.2% 5.9% 2.6% 2.8%
Shares In Issue (mm) 99 Capex / Depreciation 0.97 2.44 2.57 1.24
1.47Market Cap (Rs mn) 12,880 Net Debt / EBITDA -2.3 -2.4 -1.0 -0.9
-1.0Net Debt (Rs mn) -2,257 EBITDA / Net Interest 243.7 186.2 100.7
109.2 123.6Enterprise Value (Rs mn) 10,622 ROE 18% 20% 18% 20%
18%
P&L Summary 2010A 2011A 2012A 2013E 2014E
Revenue 13,538 15,863 20,527 25,137 28,353% change -1.8% 17.2%
29.4% 22.5% 12.8%
Espirito Santo Securities Analyst EBITDA 2,220 2,139 2,906 3,296
3,730Soumitra Chatterjee % change -4.9% -3.7% 35.9% 13.4% 13.2%(91)
22 4315 6829 % margin 16.4% 13.5% 14.2% 13.1%
13.2%[email protected] Depreciation &
Amortisation -350 -337 -472 -525 -546
EBIT 1,870 1,802 2,434 2,771 3,184Nitin Padmanabhan % change
2.2% -3.6% 35.1% 13.8% 14.9%(91) 22 4315 6830 % margin 13.8% 11.4%
11.9% 11.0% 11.2%[email protected] Associates 0
0 0 0 0
Operating Profit 1,870 1,802 2,434 2,771 3,184Interest Expenses
-9 -11 -29 -30 -30
Shareholding Pattern Other Income -73 595 429 617 395Pre Tax
Profit 1,788 2,386 2,835 3,357 3,548Income Tax Expense -255 -359
-630 -707 -747Minority Interests -4 2 3 6 6Net Income 1,529 2,029
2,207 2,656 2,807Execution Net Income 1,529 2,029 2,207 2,656
2,807
Reported EPS 15.34 20.28 22.11 26.61 28.12EPS 15.34 20.28 22.11
26.61 28.12
DPS 1.75 4.50 5.00 5.00 5.00Payout Ratio 11.4% 22.2% 22.6% 18.8%
17.8%
Shares In Issue (Less Treasury) 99 99 99 99 99
Cash Flow Summary 2010A 2011A 2012A 2013E 2014E
Revenue Breakdown EBITDA 2,220 2,139 2,906 3,296 3,730Taxes Paid
-255 -359 -630 -707 -747Interest Paid / Received -82 583 401 587
365Change in Working Capital 829 -971 -2,173 -384 -1,180Associate
& Minority Dividends 0 0 0 0 0Other Operating Cash Flow -170
-389 -432 -565 -389Operating cash flow 2,542 1,003 71 2,227
1,778Capital
