Mid-tier software and engineering services vendor KPIT Cummins Infosystems (KPIT) can be a good bet for investors.

Increased traction across all its key verticals, rising contribution from high-margin services and healthy client additions are key positives for the company.

SYSTIME, the company that KPIT acquired (currently holds about 76 per cent stake), has also aided growth significantly. At Rs 117, the share trades at eight times its likely per share earnings for FY14. This is at a discount to peers such as Infotech Enterprises and presents an attractive entry point for investors with a two-year horizon. The company has been growing at a pace faster than the overall industry’s expansion rate. From an industry viewpoint, the results of IT majors indicate that concerns on slower outsourcing from clients in developed economies have largely abated with discretionary spends also reviving.

Key segments such as manufacturing, energy & utilities, and automotive (where KPIT operates) continue to grow for top-tier vendors suggesting there is still a large outsourcing pie to be tapped in these verticals. In a scenario where customers are rationalising the number of vendors they work with, strong mid-tier players such as KPIT have stood their ground and thrived.

In the first half of this fiscal, the company’s revenues rose 81.8 per cent over the same period in FY12 to Rs 1,105.4 crore, while net profit increased 72.7 per cent to Rs 100.3 crore.

Broad-based growth: KPIT’s key verticals of operation automotives, manufacturing and energy & utilities which account for over 86 per cent of its revenues continue to grow at or faster than the overall company’s revenue growth rate. Clearly, the expansion of the company has been broad-based across segments. The company’s high margin offerings such as integrated enterprise solutions and SAP services have continued grow at a healthy clip, which has helped KPIT improve its operating margins significantly over the past several quarters. In this regard, SYSTIME (A JD Edwards Solutions provider) has been helped it strengthen its Oracle practice and win large deals across newer geographies. Over the past several quarters, revenues and margins from SYSTIME have increased steadily.

Customer additions have been quite healthy for the company. The number of clients in the $1 million plus category has risen by as many as 18 over the past one year. Volumes have been improving and the company managed to obtain pricing increases too. The key point of concern is the increase in debtor days from 66 last year to 75 in December 2012.

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