Many Roads to Rome

There are many routes for Indian IT companies to develop sustainable business models away from domestic IT firms' obsession with the banking, financial services and insurance (BFSI) verticals and its traditional focus on application development and maintenance (ADM) services.

Why you should buy KPIT Cummins?
A different path: KPIT has consciously steered itself towards verticals like automotive, manufacturing, energy and utilities to drive revenues. Today, the automotive, transportation and manufacturing verticals bring in 71 per cent of its revenues. And KPIT's strategy seems to be paying off. Revenues grew 5.5 per cent (q-o-q, Q2FY13) – at par with the best in the industry. Volume growth came in strong at 4 per cent.

Billion-dollar game: KPIT's current run-rate stands at Rs 1,500 crore (FY12). It has set a target of $1 billion by 2017 (Rs 5,422 crore). It needs to grow revenues by 29 per cent annually till 2017 to achieve that target. That is slightly higher than KPIT's current growth rate of 26 per cent (last five years).

Also, its half-yearly revenues this financial are already higher by 72 per cent compared to the corresponding period of the previous year. According to Dipen Shah of Kotak Securities, KPIT will achieve FY13 revenue run-rate of around 50 per cent over the previous year – twice the sector growth rate estimated for FY13.

The acquisition bridge: In the past 10 years, it has acquired 10 companies. Inorganic revenue growth in FY12 and FY11 stood above 40 per cent (y-o-y).

Excellent management pedigree: As an outsider, you can gain an idea about the acquirer or how an acquisition will turn out if key personnel flee or stick around. KPIT comes out with flying colours on this aspect as many of the key personnel of companies acquired by KPIT continue to work with the company even post-acquisition.

Stake sale and issue of fresh share: KPIT plans to raise Rs 162 crore by way of equity issue in Q3. This inflow of fresh equity will strengthen the company's balance sheet. According to Shah of Kotak, equity dilution at around 7.3 per cent will impact FY14 earnings by 4 per cent. As a result of the fresh infusion, KPIT should have net cash of Rs 120 crores by end FY13.

Revolo revolution: KPIT in association with Bharat Forge is developing Revolo – a technology that will convert existing diesel and petrol engines to hybrids. Testing has shown fuel efficiency improve by 35 per cent and emissions lower by 30 per cent. Could be launched by end FY13/FY14. The opportunity is huge but markets are not factoring in this yet.

KPIT trades at 11 times is ttm earnings. Buy with a five-year horizon.