KPIT Cummins – Sticks to Revenue Guidance

KPIT Cummins Infosystems held conference call to discuss the third quarter results for FY09 and future prospects. Mr Ravi Pandit, Chairman & Group CEO addressed the call.

Highlights of the call

• The management is seeing clients asking for volume discounts. Though pricing is stable there is pressure. There are 2-3 clients who have seen dip in pricing of 5-7% against future volumes. There has been pricing improvement in one client.

• The general outlook for the business remains uncertain.

• Considering the global turmoil, the management expects to be in the range of 95% of the lower US dollar revenues. Earlier, the Company’s outlook for the fiscal year ending March 31, 2009 is as follows: Consolidated Income from operations is to be in the range of Rs 740 – 760 crore implying growth of 23.2–26.6% and in US dollar terms at US$ 185–190 million implying growth rate of 27.4 – 30.8%. Net Profit is expected to be Rs 65-67 crore implying growth of 26.8 – 30.7%.

• On sequential basis, for the third quarter, KPIT Cummins reported 5% dip in the consolidated topline at Rs 184.52 crore, 9.5% dip in US dollar terms with the operating margins up 90bps at 15.5% and the consolidated bottomline was up 1% at Rs 16.87 crore. Revenue loss on account of hedging was Rs 21.96 crore.

• The revenues were down by 4.22% in constant currency basis, mainly due to lower number of working days and shift from onsite to offshore for 2 Auto clients at the end of December 2008.

• The average realization for the quarter was Rs 43.56/US$ against Rs 41.61/US$ in sequential quarter.

• Software development expenses were up 270bps at 62.5%, S&M expenses were up 90bps at 9.4% and G&A expenses were down 450bps at 12.6% as a percentage of sales. G&A expenses were down due to lower provisioning of doubtful debts, renegotiation of vendor contracts leading to dip in costs of 8-15% and business process improvements.

• The forex loss included in G&A expenses stood at Rs 4.30 crore against Rs 4.29 crore in the sequential quarter.

• The Other Comprehensive Income (MTM losses) in Balance Sheet increased by Rs 42.05 crore and the OCI balance at the end of quarter was Rs 103 crore.

• The management has lowered its full year recruitment guidance and would now recruit about 100-110 employees on net basis. The Company added 109 employees in development at 4462 employees, reduced 3 in support at 358 employees and marketing staff stood at 47 employees. The total headcount was 4867 employees.

• For the quarter, onsite utilizations improved to 94.45% from 93.88% and offshore utilizations dipped to 70.28% from 71.38% in the sequential quarter.

• US continued to be a dominant geography with 55.93% (53.88% sequential quarter) down 1.6% sequentially. Europe contributed 34.54% (36.46% sequential quarter) of total revenues down 10.2%. Rest of the World, including Japan and Asia Pacific, accounted for the balance 9.53% of revenues down 6.5%.

• Manufacturing vertical accounted for 87.24% of the total revenues for the quarter, as compared to 88.87% in the sequential quarter down 7%. BFSI vertical accounted for 5.61% of revenues up 4.8%. Others, which include Independent Software Vendors etc, catering primarily to Manufacturing and BFSI verticals, accounted for the balance 7.15% of revenues for the quarter up 12% sequentially.

• In Revenue as per LOB, sequentially, manufacturing decreased 2.5% contributing 52.68%, Auto Electronics dipped 9% contributing 28.06%, Semi Conductor Solutions Group decreased 13.9% contributing 6.68%, Diversified Financial Services was up 5.8% contributing 5.72% and Global Business Solutions dipped 8.2% contributing 6.86%.

• The cash & cash equivalents was down at Rs 72.61 crore against Rs 119.27 crore in the sequential quarter on the back of higher receivables and capex. The receivable days increased to 75 from 74 at the end of sequential quarter. The company advanced Rs 2 crore to KPIT Employees Welfare Trust. Capex done and payment of long term debt was Rs 16.80 crore.

• Debt on books increased at Rs 120.77 crore against Rs 89.15 crore in the sequential quarter. Working capital loans have increased to Rs 54.23 crore against Rs 23.30 crore in the sequential quarter. The Long-term debt is US$ 17 million.

• Capex for 9MFY09 was Rs 34 crore and Capex for FY09 would be Rs 40-45 crore. Capex for per quarter would be about US$ 2 million.

• The revenues from Cummins dipped 4.1% and its contribution increased at 40.93% from 40.43% in the sequential quarter. Top 2-10 client de-grew 9.1% contributing 25.72% down from 26.8% in the sequential quarter. Non-Cummins customers dipped 6% with contribution up at 59.07%.

• 2 of the 3 derivative contracts were completely knocked out in the beginning of October 2008. The MTM on the third contract at the end of the quarter was Rs 21.29 crore. This has not been taken to the P&L account during the quarter. Other than the contracts mentioned above, the company held forward contracts and options of US$ 27.52 million maturing in Q4FY09. at average rate on the forward contracts of Rs. 41.75/US$. In the sequential quarter, the vanilla hedges were US$ 44.05 million at average rate of Rs 40.50/US$.

• The offshore-onsite mix improved to 55.09:44.91 against 55.99:44.01 in the sequential quarter. The share of fixed price contracts dipped 262bps at 14.16%.

• The total no of active clients increased to 126 from 123 in the end of sequential quarter. KPIT added 3 new clients in the quarter: 2 in Industrials and 1 in Hi-Tech. The number of million dollar customers was at 30 similar in the sequential quarter and Star customers stood at 26 similar in the sequential quarter.