1 july 2013 kpit cummins infosystems limited · industry: it services index: s&p bse 500/ cnx...

Voting Advisory

July 2013 KPIT Cummins Infosystems Limited 1|P a g e

1 July 2013 KPIT Cummins Infosystems Limited Company Profile BSE: 532400|NSE: KPIT ISIN: INE836A01035 Industry: IT Services Index: S&P BSE 500/ CNX 500 Face Value: Rs. 2.0 Mkt Price: Rs. 118.75 Fiscal Year End: March

Promoter Kishor Patil, Ravi Pandit and others

Financials (standalone) Particulars FY13 (Rs. bn)

Total Income 7.2

Net Worth 8.9

Equity Capital 0.4

Market Cap. 22.9

Overview

52 week H/L(Rs.) 142.0-92.4

Current P/E(x) [s] 21.4

Current P/B(x) [s] 2.6

Current P/E(x) [c] 10.9

Current P/B(x) [c] 2.2

Source: IiAS Research, Market sources [s] Standalone; [c] Consolidated

Previous advisory AGM 27 July 2012 EGM 7 December 2012

Write to us Institutional Investor Advisory Services 15th Floor, West Wing, PJ Tower Dalal Street, Mumbai -400 001 Email: [email protected] www.iias.in

Annual General Meeting (AGM) Meeting Date : 12 July 2013, 10.30 am12 July 2013, 10.30 am

Proxy deadline : 10 July 2013, 10.30 am

Notice date : 5 June 2013

Meeting venue : KPIT Auditorium, SDB-II, 35 & 36, Rajiv Gandhi Infotech Park, Phase – I, MIDC, Hinjawadi, Pune – 411 057

Company overview KPIT Cummins Infosystems Limited (‘KPIT Cummins’ or ‘the company’) is a Pune-based technology solutions partner for global manufacturing corporations with special focus on the automotive, energy and utilities, industrial equipment and semiconductor industries. It offers transformational enterprise consulting, enterprise resource planning (ERP) implementation and follow-on support and maintenance for its customers. The company has a wide geographic footprint with operations in India, US, UK, Germany, France, Poland, Japan, South Africa and Korea.

Agenda Items

# Type* Description of resolution IiAS

Recommendation Indicators See Legend

1 O To adopt FY13 financial statements See Analysis

2 O To declare dividend on equity shares FOR

3 O To reappoint Anant Talaulicar as director FOR

4 O To reappoint Amit Kalyani as director FOR

5 O To appoint B S R & Co. as statutory auditors and fix their remuneration

FOR

6 O To appoint Sanjay Kukreja as director FOR

7 O To appoint B V R Subbu as director FOR

8 S To change the name of company to ‘KPIT Technologies Limited’.

FOR

9 S To alter the articles of association FOR G M R S T V

10 S To approve issue of outstanding shares under the new ESOPs scheme 2013

FOR

*O/S: Ordinary/Special Executive Summary (click on respective link for detailed analysis)

Accounts For FY13, KPIT Cummins’s total income, on a consolidated basis, grew by 49% to Rs 22.5 bn (Rs 15.1 bn in FY12). EBIDTA was Rs 3.4 mn (Rs 2.4 mn in FY12). PBT and PAT of the company grew by 47% to Rs 2.8 bn (Rs 1.9 bn in FY12) and by 30% to Rs 2.0 bn (Rs 1.4 bn in FY12) respectively. On a standalone basis, income grew by 16% to Rs 7.2 bn (Rs 6.2 bn in FY12) and PAT was Rs 1.0 bn (Rs 0.7 bn in FY12).

Board Appointments

KPIT Cummins’s board comprises 11 directors, of which, two are executive and the remaining nine are non-executive directors. Promoter S B Pandit, is the non-executive chairman of the company. Of the nine non-executive directors, KPIT Cummins classifies five as independent directors. Of these five independent directors, Sanjay Kukreja and Amit Kalayani are nominee directors of Van Dyck and Bharat Forge Ltd. respectively. IiAS classifies nominee directors as non-independent. We recommend voting FOR the reappointment of Anant Talaulicar and Amit Kalyani and appointment of Sanjay Kukreja and B V R Subbu.

Alteration in Articles of Association (AoA)

KPIT Cummins has allotted 12.96 mn equity shares of the Company to Van Dyck, CX Partners Fund 1 Limited and AAJV Investment Trust in order to raise additional capital to fund the business operations of the company. Under the agreement, the company has accorded these investors with special rights which need to be incorporated in the AoA. Further the company seeks shareholders’ approval for (i) name change and (ii) removal of certain provisions due to expiration of agreement with LB I Group Inc. and International Finance Corporation.

Auditor Deloitte Haskins & Sells have been the statutory auditors of the company for the past 10 years. The company believes in periodic rotation of auditors. KPIT Cummins now seeks shareholders’ approval to appoint B S R & Co. as its statutory auditors. We recommend voting FOR the resolution.

24.3%

30.8% 11.8%

33.1%

Promoter DII FII Others

http://www.iias.in/downloads/IIASreports/IIAS%20Voting%20Recommendations%20on%20KPIT%20Cummins%20AGM%2027%20July%202012_20120810160627.pdf

http://www.iias.in/downloads/IIASreports/KPIT%20Cummins%20EGM%207Dec12-IIAS%20Recommendations_20121219114041.pdf

http://www.iias.in/

Voting Advisory


Financial Performance (consolidated) Geography-wise Revenue (consolidated)

Particulars (Rs. bn)

FY11 FY12 FY13

Total income 9.9 15.1 22.5

EBIDTA 1.5 2.4 3.4

EBIDTA margin (%) 15.6 15.7 15.1

PBT 1.1 1.9 2.8

PBT margin (%) 11.1 12.6 12.4

PAT 0.9 1.4 2.0

PAT margin (%) 9.1 9.3 8.9

EPS (Rs.) 5.3 8.2 10.9

ROANW (%) 18.2 21.4 21.8

ROACE (%) 14.2 14.8 15.3

Debt/EBIDTA (x) 0.7 0.9 0.9

Source: Company filings

Product-wise Revenue (consolidated)

Outer ring represents FY13 data: Total op. income Rs 22.4 bn Inner ring represents FY12 data: Total op. income Rs 15.0 bn

Top 10 Public Shareholding > 1% holding Sr. No.

Name of shareholder Shares

held (million) Holding

as %age of total

1 Warhol Ltd. 17.0 8.81

2 ICICI Prudential Life Insurance Company Ltd. 8.8 4.58

3 Van Dyck 7.8 4.03

4 CX Securities Ltd. 5.4 2.81

5 Citigroup Global Markets Mauritius Private Ltd 5.3 2.74

6 Cummins Inc 5.2 2.67

7 Cummins India Ltd. 5.2 2.67

8 CX Partners Fund Ltd. 5.1 2.64

9 Acacia Partners LP 5.0 2.61

10 SBI Magnum Tax Gain Scheme – 1993 4.1 2.13

Total 68.9 35.69

Change in Shareholding Pattern (%)

Year Promoter FII DII Others

Mar-13 24.3 30.8 11.8 33.1

Dec-12 24.3 30.3 10.8 34.6

Sep-12 26.2 26.7 13.6 33.4

Jun-12 26.3 23.3 16.3 34.1

Mar-12 26.4 16.5 21.2 35.9

Mar-11 27.1 17.5 20.8 34.6

Mar-10 30.6 15.6 7.9 45.9

Mar-09 27.4 17.2 4.1 51.3

Mar-08 24.6 18.0 8.3 49.1

Source: BSE

Price Performance

3 Yrs: 20 June 2010 to 20 June 2013 5 Yrs: 20 June 2008 to 20 June 2013 Source: BSE

26%

40%

31%

3% 24%

45%

28%

3%

Automative Solution

Integrated Enterprise Solution

SAP

Others

3 Yrs 5 Yrs

79%

279%

-1%

23% 1%

26%

3 YR 5 YR

KPIT Cummins S&P BSE 500 CNX 500

70%

18%

12%

76%

13%

11%

USA

UK & Europe

Rest of the world

Voting Advisory


Category: Accounts

Financial Performance:

Business Risk Indicators Parameter FY11 FY12 FY13

Cash Flow from Operations/EBIDTA 0.3 0.6 0.5

Misc. expenses as % of total expenses 3.7 2.5 2.3

Contingent liabilities as % of net worth 1.1 15.2 14.3

Secured loans as % of net block 79.7 97.4 183.0

Percentage of pledged shares 4.6 4.5 4.0

Source: CMIE Research

Leverage Profile

Related Party Transactions (RPT) Annual transactions (Rs. bn) FY12 FY13 Comment

Investment 1.4 1.8 Equity investment of Rs 840 mn in KPIT Infosystems Inc., US (100% owned) accounts for 47% of the total investment in FY13

Income from related entities 4.5 4.8 ~65% from KPIT Infosystems Inc., USA (100% owned) Repayment of Loan - 0.1 From KPIT Infosystems Inc., USA (100% owned) Outstanding balance (Rs. bn) FY12 FY13 Parameter Assessment

Investment 3.0 4.6 Outstanding RPT exposure 61% of networth

Receivable 1.6 1.7 Exposure to promoter entities Negligible as % of

networth

Loan given 0.3 0.2 Transactions with promoter controlled entities Negligible as % of total

income

Liquidity Position

Parameter Rs. bn

Marketable securities

2.0

Operating cash 1.2

Cash balance 0.7

Audit Integrity Parameter Result Head of audit committee Independent Independent directors in audit committee*

67%*

Tenure of auditor (Yrs) New appointment

Tenure of audit partner (Yrs) New appointment * Including Ms. Manisha Girotra

Performance relative to Industry Average

Parameter KPIT[1] Peers[2] RONW (%) 13.7 23.4 Debt/Equity(x) 0.3 0.2 Interest cover (x) 17.9 27.3 PAT margin (%) 14.2 18.2 Current Ratio(x) 1.0 1.7

[1] standalone [2] FY12 data, Source: CMIE

Accounting Policies Accounting Policy Method adopted 3-yr pattern and impact on P&L

Depreciation Straight Line Method No change in the policy

ESOPS Intrinsic Value Method No change in the policy

0.00

20.00

40.00

2

4

FY11 FY12 FY13

Borrowings (Rs.bn) Debt/EBIDTA

Debt/Networth Interest coverage

Resolution 1: To adopt FY13 financial statements

For the year ended March 2013, the total income, on a consolidated basis, grew by 49% to Rs 22.5 bn (Rs 15.1 bn in FY12). On a standalone basis the income grew by 16% to Rs 7.2 bn (Rs 6.2 bn in FY12). Consolidated revenue from integrated enterprise solution (IES) increased by ~67% to Rs 10 bn (Rs 6 bn in FY12). The company’s revenue from services in USA increased by ~63% to Rs 17 bn (Rs 10.4 bn in FY12).

EBIDTA margins have remained stable just above 15% in last three years. PBT and PAT of the company increased by 47% to Rs 2.8 bn (Rs 1.9 bn in FY12) and by 30% to Rs 2.0 bn (Rs 1.4 bn in FY12) respectively.

During FY13, the company increased its stake in subsidiary, SYSTIME Global Solutions Pvt. Ltd. – an enterprise software solution provider to 76.0% (from 57.5% in FY12) with a total investment of Rs 1.5 bn in its equity shares. In addition, KPIT Cummins issued 12.96 mn shares to institutional investors Van Dyck, CX Partners Fund 1 Limited and AAJV Investment Trust for a total consideration of Rs 1.6 bn (- refer IiAS Recommendation EGM 7 December 2012). The company has invested this cash in debt mutual funds pending its deployment in operational activities.

Ratio

s

Rs. bn


Voting Advisory


Category: Dividend

IiAS Evaluation Parameters for Dividend Payout

Parameters Analysis Risk Level

Details

Has the payout ratio decreased in the last three years? No - Refer Table 1

Is the growth in dividend higher than the growth in profits? Yes - Refer Table 1 Has the company generated enough cash to pay the proposed dividend? Yes - Refer Table 1

Does the company have a stated dividend policy? No -

IiAS Recommendation FOR

Discussion

KPIT Cummins has proposed a dividend of Rs 0.90 (Rs 0.70 in FY12) per equity share of face value Rs 2.0 for the year ended 31 March 2013. The total dividend proposed to be paid (including dividend tax) is Rs 201.7 mn. Between FY11 and FY13, KNPL Cummins’s net profit and total dividend payout increased at a CAGR of 12.7% and 15.3% respectively.

Table 1: Key Data

Particulars (Rs. mn) FY11 FY12 FY13

Cash flow from operations 316.5 959.2 1163.9 Profit after tax [1] 694.9 746.7 1030.5

Profit growth y-o-y (%) (11.4%) 7.5% 38.0%

Final proposed dividend on equity shares (a) 62.0 124.5 173.5

Dividend tax (b) 9.9 20.2 28.2

Total dividend (a+b) 71.9 144.7 201.7 Dividend growth y-o-y (%) 12.2% 101.3% 39.4%

Payout Ratio (%) (a+b)/[1] 10.3% 19.4% 19.6% Source: Company filings and IiAS research

IiAS recommends voting FOR the resolution.

Resolution 2: To declare dividend of Rs. 0.90 per equity share of face value Rs 2.0 (i.e. 45%). IiAS Recommendation: FOR

Voting Advisory


Category: Board Composition

IiAS Evaluation Parameters for Board Appointments

Parameter Analysis Risk Level Details

Is the chairman of the board an independent director? No Low Refer Table 2

Is there a separation in the roles between the Chairman and CEO/MD? Yes - Refer Table 2

Proportion of independent directors on the board 27%[1] Moderate Refer Table 2

Proportion of non-executive directors on the board 82% Low Refer Table 2

Proportion of women directors on board 18% - Refer Table 2

Does the company have a policy on the retirement age of directors? No Low

Does the company have a policy on the tenure of independent directors? No Moderate

Do all the board committees have at least one independent director? No[2] -

Is there any whistleblower policy for the independent directors? No -

Proportion of promoter representatives on board 45% - Refer Table 2

Overall Moderate

[1] 45% as per company classification [2] KPIT Cummins’s Stakeholders’ Relationship committee and Share Transfer committee does not have any independent director as its member. In case of Stakeholders’ Relationship committee, Sudheer Tilloo, independent director, resigned from the board w.e.f. 27 July 2012, since then the committee has no independent director as its member.

Table 2: Board composition

Sl. No

Name of director

Occupation Age

(yrs.) Tenure

(yrs.)

Attendance at board

meetings

Other Directorships

Compensation (Rs.mn)

Executive

1 Kishor Patil CEO & MD 50 23 87.5% 1 8.8

2 Sachin Tikekar Whole-time Director 44 1 87.5% 0 8.7

Non-Executive Non-independent

3 S B (Ravi) Pandit Chairman & Group CEO 63 23 100% 4 17.4[6]

4 Anant Talaulicar[2],[7] CMD, Cummins India 51 >9 0% 6 -

5 Ms. Elizabeth Carey[7]

Senior Tech. Lead, Cummins. Inc.

57 4 25% 0 -

6 Amit Kalyani[1] Executive Director - Bharat Forge

38 7 25% 12 1.8

7 Sanjay Kukreja[4]/[5] MD, Nuvo ChyrsCapital Investment Advisors Pvt. Ltd.

35 <1 100% 2 -

8 B V R Subbu[5] Former President, Hyundai India

58 <1 N.A. 2 -

Non-Executive Independent

9 A S Vincentelli Professor, U.C. Berkeley 65 1 50% 0 2.5

10 Ms. Lila Poonawalla Former MD, Alfa Laval India 67 5 100% 1 2.5

11 R A Mashelkar Former Director General, CSIR* 70 5 50% 6 2.1

Source: Company filings, IiAS research and CMIE data * CSIR - Council of Scientific and Industrial Research

Resolution 3: To reappoint Anant Talaulicar as director

Resolution 4: To reappoint Amit Kalyani as director

Resolution 6: To appoint Sanjay Kukreja as director

Resolution 7: To appoint B V R Subbu as director

IiAS Recommendation: FOR




Seeking re-appointment Seeking appointment

Voting Advisory


The above table may differ from the actual given in annual report 2012-13on account of resignation(s) and new appointment(s) on board. N.A. – Not Applicable [1] Amit Kalyani, executive director at Bharat Forge, has been classified as independent by the company. However, KPIT Cummins has a 50:50 joint venture with Bharat Forge, and we do not classify Amit Kalyani as independent. [2] Dwayne Allen has been appointed as the alternate director to Anant Talaulicar. [3] Ms. Manisha Girotra was appointed as the additional director of the company w.e.f. 2 August 2012. She does not intend to seek appointment as director. [4] Sanjay Kukreja, nominee director on the board for Van Dyck (Strategic investor), has been classified as independent by the company. However, IiAS consider such nominee director as non-independent. [5] Sanjay Kukreja and B V R Subbu were appointed as additional directors’ w.e.f 28 January 2013 and 29 April 2013 respectively. [6] Remuneration paid to S.B. Pandit is considered as professional services rendered to the company [7] Anant Tilaulicar and Elizabeth Carey are nominees of Cummins India and Cummins Inc. respectively. Bruce Carver, director, and Mark Gerstle, alternate director, resigned from the board w.e.f. 29 April 2013.

Table 3: Proposed Appointments/Reappointments – IiAS Checklist

IiAS Director Checklist Anant Talaulicar Amit Kalyani Sanjay Kukreja B V R Subbu

Executive/Non-executive Non-executive Non-executive Non-executive Non-executive

Category of Appointment Non-Independent Independent Independent Non-Independent

IiAS Director Classification Non-Independent Non-Independent Non-Independent Non-Independent

Independence N.A. X X N.A

Tenure -

Attendance X X N.A.

Other Affiliations X

Shares Held NIL 40,000 32,400 NIL

Qualification

IiAS Recommendation FOR FOR FOR FOR

N.A.: Not applicable

Voting Advisory


Director Profiles Anant Talaulicar

Qualification MS from University of Michigan, Ann Arbor

MBA from Tulane University, USA

Work experience Has worked with Cummins, USA, for 17 years in domains including Finance,

Manufacturing, product Management, Strategy etc.

Other directorships

1. Cummins India Ltd. (L) 2. Valvoline Cummins Ltd. 3. Cummins Research & Technology Ltd. 4. Cummins Technologies Ltd. 5. Cummins Generator Technologies India Ltd. 6. Tata Cummins Ltd. 7. Remex Finance Pvt. Ltd. 8. Trihans Trading Pvt. Ltd.

Amit Kalyani

Qualification Bachelors in Mechanical Engineering from Bucknell University, USA

Work experience

Former Vice President & Chief Technology Officer at Bharat Forge Limited – The flagship company of Kalyani Group

Involved with company’s strategic planning, business development, manufacturing, marketing etc.

Committee memberships Chairman, HR & Compensation Committee

Other directorships

1. Bharat Forge Ltd. (L) 2. Kalyani Forge Ltd. (L) 3. Kalyani Investment Co. Ltd. (L) 4. BF Utilities Ltd. (L) 5. Nandi Economic Cirridor Enterprise Ltd. 6. Nandi Infrastructure Corridor Enterprise Ltd. 7. BF-NTPC Energy Systems Ltd. 8. BF Investments Ltd. (L) 9. Kalyani Alstom Power ltd. 10. BF Infrastructure Ltd. 11. Hikal Ltd. 12. Impact Automotive Solutions Ltd. 13. Epicentre Technologies Pvt. Ltd. 14. Khed Economic Infrastructure Pvt. Ltd. 15. Kalyani Mining Ventures Pvt. Ltd. 16. Khed Textile Park Pvt. Ltd. 17. BF Elbit Advanced Systems Pvt. Ltd.

Sanjay Kukreja

Qualification MBA, Indian Institute of Management -Bangalore BA Economics, Delhi University

Work experience Manages manufacturing and business service sectors at ChrysCapital

Other directorship

1. Nuvo ChyrsCapital Investment Advisors Pvt. Ltd. 2. Titagarh Wagons Ltd. (L) 3. Magical Methods Schools Solutions Pvt. Ltd. 4. JMT Auto Ltd. (L)

B V R Subbu

Qualification PG Degree in Economics from Jawaharlal Nehru University PG Diploma Indian Institute of Foreign Trade

Work experience Former President – Hyundai India Involved with Tata Motors in its Commercial and Multi Utility Vehicles Business.

Other directorship 1. Larsen & Toubro Ltd. (L)

2. Eurofinance Training & Publishing Pvt. Ltd.

3. Altius Automotive Technologies Pvt.Ltd.

Voting Advisory


4. Altius Trucks Sales & Services Pvt. Ltd.

5. NMC Automotive Infrastructure Pvt. Ltd.

6. Altius Autoworld Pvt. Ltd.

(L): Listed companies Source: Company filings and IiAS research

Discussion

The board of KPIT Cummins comprises 11 directors. Of these, two are executives and nine are non-executives. Promoter S B Pandit is non-executive chairman of the company. Of the nine non-executive directors, the company classifies five directors as independent - A S Vincentelli, Ms. Lila Poonawalla, R A Mashelkar, Sanjay Kukreja and Amit Kalyani.

The company is currently not in compliance with the provisions of Clause 49 of the Listing Agreement. As per Clause 49, if the chairman is a promoter, then atleast 50% of the board should be independent. Considering Ms. Manisha Girotra does not wish to seek appointment as director due to her professional pre-occupation, only 45% of the board is independent (Refer Box 1). As per IiAS Classification, only 27% of the board is independent. Sanjay Kukreja is the nominee director of Van Dyck (Strategic investor) and Amit Kalyani is an executive director in Bharat Forge (a 50:50 joint venture with KPIT Cummins). As they are nominee directors, IiAS does not classify them as independent – we believe the company should appoint additional independent directors to be in compliance with clause 49.

Box 1: IiAS policy snapshot – minimum number of independent directors

Amit Kalyani, a nominee director for Bharat Forge Ltd., is on the board of 12 public limited companies, of which six are listed companies. IiAS believes that in order to carry out their fiduciary responsibility with the necessary due diligence, a director should not be on the board of more than ten public companies of which maximum seven can be listed companies. If the director is appointed in an executive capacity in any of the companies, the number of directorships should be restricted to four listed companies.

Box 2: IiAS policy snapshot – maximum number of other directorships for non-executive directors.

Clause 49 of the listing agreement states that for a company with an executive chairman; at least 50% of the board should comprise independent directors. In the case of a company with a non-executive chairman, at least one-third of the board should be independent. However, if non-executive chairman is a promoter, 50% of the directors have to be independent. Clause 149 (3), Companies Bill, 2012 - Every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.

The MCA Corporate Governance Guidelines, 2009 stipulate that maximum number of public companies in which an individual may serve as an independent director should be restricted to seven.

Clause 165 of the pending Companies Bill, 2012 restricts the total number of directorships (include alternate directorships) for any director on the board to 20. Of this, a maximum of 10 can be public limited companies.

IIAS believes that in order to carry out their fiduciary responsibility with the necessary due diligence, a director should not be on the board of more than seven listed companies. If the director is appointed in an executive capacity in any of the companies, the number of directorships should be restricted to four listed companies. The director can be on the board of any number of public and private companies, so long as it the total number of directorships does not exceed 10.

Director category in company Executive position in other company(s)? Maximum Number of directorships

Non-executive No 7 listed companies and not more than 10 in total

Yes 4 listed and not more than 10 in total

Executive - 4 listed and not more than 10 in total

Voting Advisory


Investors should note that company’s directors have very low attendance for FY13.

Attendance at board meetings

Name FY11 FY12 FY13

Anant Talaulicar (Nominee director – Cummins India) 9% 0% 0%

Elizabeth Carey (Nominee director – Cummins Inc.) 27% 57% 25%

Amit Kalyani (Nominee director – Bharat Forge Ltd.) 45% 29% 25%

A S Vincentelli* (Independent director) - - 50%

R A Mashelkar (Independent director) 64% 57% 50%

*Director since 30 April 2012

IiAS does not typically vote against appointments of representatives of the promoter group/nominee directors. IiAS recommends that the company should consider appointing alternate directors to attend the board meetings in their absence, but are constrained to note that the attendance of Anant Talaulicar and his alternate director were less than the 75% threshold. The company seeks shareholders’ approval to reappoint Anant Tilaulicar and Amit Kalyani and appoint Sanjay Kukreja and BVR Subbu as directors. Given that Anant Tilaulicar, Amit Kalyani and Sanjay Kukreja are nominee directors, IiAS expects them to attend atleast 75% of the board meeting in future. We recommend voting FOR the reappointment and appointment of Anant Tilaulicar, Amit Kalyani, Sanjay Kukreja and BVR Subbu.

Category: Auditors

Discussion

Deloitte Haskins & Sells audited the FY13 financials of the company with Khurshed Pastakia as audit partner. Deloitte Haskins & Sells have been the company’s statutory auditors for the past 10 financial years. During FY13, the auditors were paid a remuneration of Rs 12.6 mn (Rs 11.0 mn and 9.7 mn in FY11 and FY10 respectively).

IiAS believes that to maintain independence, auditors should be rotated every 10 years and the signing partner every five years (Refer Box 3).

In compliance with Companies Bill 2012, KPIT Cummins proposes to appoint B S R & Co. as statutory auditors in place of Deloitte Haskins & Sells and to authorize the board to fix their remuneration.

Resolution 5: To appoint B S R & Co. as statutory auditors and fix their remuneration in place of Deloitte Haskins & Sells IiAS Recommendation: FOR

Voting Advisory


Table 4: Auditor’s remuneration Particulars (Rs. in mn) FY11 FY12 FY13

Statutory audit 5.2 6.7 6.2

Taxation matters 1.9 0.6 2.6

Total audit fees 7.1 7.3 8.8

Non-audit fees

Certifications/other services 2.6 3.7 3.8

Total non-audit fees 2.6 3.7 3.8

Total fees[1] 9.7 11.0 12.6

Non-audit to total fees (%) 26.8 33.6 30.2 [1]Excludes out of pocket expense

Box 3: Guidelines on auditor appointment

According to clause 139 of the new Companies Bill 2012, an auditor will be permitted to hold office for a five year term and can then be reappointed for another five year term. After two consecutive five-year terms, there needs to be a cooling-off period of five years before subsequent reappointments. When the new Companies Bill is passed into law, audit firms would be allowed to hold office for ten consecutive years. According to IiAS policy, to maintain the independence of auditors – tenure of audit partner should not exceed five years and audit firm should be rotated every 10 years. A cooling period of five years should elapse before the re-appointment of the same audit firm or the audit partner.

IiAS recommends voting FOR the resolution.

Category: Change in Name of the Company

Discussion As per the company, KPIT Cummins has evolved as a technology service provider to automotive, manufacturing, energy & utilities sectors. In order for the company to reflect the company’s technology focus, the board proposes to change the name of the company as ‘KPIT Technologies Limited’ from ‘KPIT Cummins Infosystems Ltd.’. KPIT Cummins Infosystems Ltd. was formed in 2002 with the merger of KPIT Infosystems and Cummins Infotech (subsidiary of Cummins Inc. and Cummins India Limited). In 2012, to focus only on its core businesses, Cummins sold a part of their holding and now holds ~5.5% of KPIT Cummins’ equity. Therefore, ‘Cummins’ no longer forms a part of the company’s name. However Cummins’ participation on the KPIT Board continues. The company seeks shareholders’ approval for the name change and to alter the Memorandum of Association of the company wherein the word ‘KPIT Cummins Infosystems Ltd will be substituted by ‘KPIT Technologies Ltd.’ We recommend voting FOR the resolution.

Resolution 8: To change the name of the company from “KPIT Cummins Infosystems Ltd.” to “KPIT Technologies Ltd.”


2.6 3.7 3.8

7.1 7.3 8.8

0%

20%

40%

60%

80%

100%

2011 2012 2013

Non-Audit fees (Rs. mn) Audit fees (Rs. mn)

Threshold

Voting Advisory


Category: Alteration in Articles of Association

Discussion

KPIT Cummins, in order to raise additional capital to fund its business operations, signed an agreement wherein it issued and allotted 12.96 mn equity shares of the company to Van Dyck, CX Partners Fund 1 Ltd. and AAJV Investment Trust (- refer IiAS Voting Recommendation EGM 7 December 2012). As per the agreement, the company has provided the investors with certain rights to protect their interests. These need to be incorporated in the articles of association (‘articles’) of the company. Further, as per the current articles, LB I Group Inc. and International Finance Corporation were provided certain provisions for the protection of their interests. As these agreements have expired and such rights no longer hold, the articles need to be amended accordingly. In addition, the articles need to be altered to reflect the change in name of the company to ‘KPIT Technologies Limited.’ Hence, the company proposes to alter the articles of association of the company by adopting a new set of articles in place of the existing articles. A. New clauses inserted (As per the notice):

Clause Description Type of Clause/

Right

Clause 66.4 & 66.5

Van Dyck, CX Partners Fund 1 Limited and its affiliates shall not transfer their Shares to any KPIT competitor. Any bona fide transfer on the stock exchanges is exempted from this restriction

Restrictive

Clause 67

The promoters have undertaken to maintain a minimum shareholding of 27,000,000 shares for a period of two years, subject to an exception that they may sell up to 2% of the total shares in the Company in any twelve month period

Restrictive

Clause 68 & 69

After the lock-in period of two years, if the promoters transfer any of their shareholding (beyond 2% in any twelve month period), Van Dyck & CX Partners Fund 1 Limited and their affiliates have the tag-along right to sell their shares along with the promoters on pro rata basis

Transaction related

Clause 73

If the Company makes a fresh issue of shares to any person other than a strategic investor, Van Dyck & CX Partners Fund 1 Limited and their affiliates have to be given a right to subscribe to such issue so as to enable them maintain their shareholding percentage at the same level as the pre-issue level

Transaction related

Clause 75

In case the Company offers rights to any investor (other than a strategic investor) which are more favourable than the rights provided to Van Dyck, CX Partners Fund 1 Limited and its affiliates, such favourable rights shall also be provided to Van Dyck, CX Partners Fund 1 Limited and its affiliates

Transaction/ Control related

Clause 76

In case the Company makes an offer for sale of equity securities through a public offering, Van Dyck, CX Partners Fund 1 Limited and its affiliates shall be given a right to participate pro rata in such offer for sale

Transaction related

Resolution 9: To alter the articles of association of the company IiAS Recommendation: FOR


Voting Advisory


Clause 116

Van Dyck shall have a right to nominate one nonexecutive director on the board of the Company who shall not be liable to retire by rotation

Oversight related

Clause 117

CX Partners Fund 1 Limited shall have a right to nominate one invitee to attend the Board meetings of the Company

Oversight related

Clause 158

The rights given to CX Partners Fund 1 Limited and its affiliates shall be valid for 4 years subject to maintenance of minimum pre-agreed shareholding

Termination clause

Clause 159

The rights given to Van Dyck shall be valid for a maximum of 7 years subject to maintenance of minimum pre-agreed shareholding

Termination clause

B. Removal of Existing Clause As highlighted above, the clauses containing special rights and obligations for International Finance Corporation and LB I Group Inc. are to be deleted these investment agreements have expired. We observe that the changes made in the articles of association are largely transaction related rights with the new investors and due to the termination of the erstwhile investment agreements with the company. While IiAS recommends voting FOR the resolution, shareholders should seek clarification on:

1. The minimum shareholding level Van Dyck, CX Partners Fund 1 Limited and its affiliates propose to maintain in order to avail these special rights

2. If clause 68 & 69 is triggered (i.e. if promoters choose to transfer their shareholding over the 2% threshold in any twelve month period, Van Dyck & CX Partners Fund 1 Limited and their affiliates have the tag-along right to sell their shares along with the promoters on pro rata basis), whether these investors still be entitled to rights such as board nominations.

Voting Advisory


Category: Issuance of outstanding ESOS

Resolution 10: To approve issue of outstanding shares under the new ESOPs scheme 2013


Discussion

On 17 January 2013, SEBI amended its guidelines on Employee Stock Option Scheme (ESOS) and Employee Stock Purchase Scheme (ESPS), 1999, wherein it has prohibited the issue of ESOPs through secondary market purchase of shares. Hence, the company seeks shareholders’ approval to issue shares outstanding in the Employee’s welfare trust, under its existing schemes. Furthermore, the company has formulated ESOS 2013 scheme to grant such options. Under this scheme, the company proposes to grant options not exceeding 1% of the issued capital (excluding outstanding warrants and conversions) to any specific eligible employees. The aggregate number of options to be granted under one or more Employee Stock Option Schemes(s) shall not exceed 8.3 mn. Table 5: Main features of ESOS

Parameter Details of Stock options to be distributed

from Employee Welfare Trust

Maximum number of stock options 8.3 mn stock options convertible into equivalent

equity shares of Rs 2 each

Beginning of vesting period After 12 months from the grant date

Vesting period One year from and four years before the date of grant

Exercise price Closing price of day prior to which the compensation committee finalizes the options to be granted

Exercise period 3 years from date of vesting

Method of option valuation Intrinsic value

Source: Company filings, IiAS Research

Investors should note that there will be no further dilution on grant as these shares have already been purchased from the secondary market. The options would be granted to its employees based on evaluation parameters such as role/designation of the employee, length of service with the company, past performance record, future potential of the employee, as evaluated by compensation committee. The options would be granted at an exercise price equal to the latest available closing market price. The options, for any reason, if lapsed or cancelled would be re-granted. The company’s scheme will be extended to the employees of the subsidiary companies. Grant of option under this scheme will not be applicable to promoters or employees holding 10% of the company’s share capital post commencement of the scheme. As highlighted, the exercise price will be the closing price prior to the date the compensation committee finalizes the number of options to be granted to an eligible employee. We recommend voting FOR the resolution.

Voting Advisory


Legend IiAS publishes voting recommendations on shareholder resolutions. These recommendations are non-binding in nature. Investors may have their own voting parameters which may, in some aspects, differ from those of IiAS. On such occasions, investors should use these recommendations as a guiding tool. The data and regulations reviewed while arriving at a recommendation are disclosed to the investors. The objective is to offer investor clarity regarding the basis for our recommendations. Please note that voting recommendations do not constitute advice to buy, sell or hold securities.

Indicator Meaning Description Common Examples

Governance Issue

This symbol is used for resolutions which indicate poor corporate governance practices or non-compliance with the regulatory provisions. Consequently, they are usually accompanied with an AGAINST recommendation. IiAS may also include measures/best practices which the company can adopt to improve its governance record.

Managerial remuneration, Auditor appointments

Minority shareholder impact

This symbol is used for resolutions which negatively affect the minority shareholders of the company. IiAS usually recommends voting AGAINST such resolutions as they benefit the controlling or a class of shareholders at the expense of others.

Preferential warrants, Differential rights

Moderate -High Risk

This symbol is used for operating decisions taken by the company management and IiAS will usually recommend voting FOR such resolutions. However, they carry an element of risk which may subsequently have a negative impact on the financials. Investors are therefore advised to review the risk factors highlighted by IiAS in its analysis before voting.

Any resolution

Strategic

Indicates a strategic decision of the company, the long term impact of which cannot be accurately ascertained at the time of proposal. These may be accompanied with a FOR or AGAINST recommendation based on a preliminary review of data provided to investors. IiAS recommendations on such strategic decisions are dependent primarily on short-term indicators like market reaction, analyst opinions, valuation impact, etc. Investors may choose to support a resolution in expectation of higher returns.

Mergers, Amalgamations, Hive-offs, Entering new lines of business

Transparency Issue

Indicates lack of adequate information. Even though IiAS provides both FOR and AGAINST recommendations on such resolutions (based on available data), investors are advised to seek further clarifications from the company. Investors should take into account any additional information received from the company before voting.

Any resolution

Valuation

Refers to a valuation impact on the company’s financials. These resolutions are likely to impact the company’s margins and long term profitability. IiAS typically will recommend voting AGAINST such a resolution. Investors are advised to critically review the company’s proposal in such cases. However, theymay choose to support a resolution in expectation of higher returns.

Increase in borrowings. Related party transactions, Excessive dilution

G

M

S

V

T

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Voting Advisory


Disclaimer

This document has been prepared by Institutional Investor Advisory Services India Limited (IiAS). The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. IiAS shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for any Voting or investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of the individual resolutions which may affect their investment in the securities of companies referred to in this document (including the merits and risks involved). The discussions or views expressed may not be suitable for all investors. This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject IiAS to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. IiAS reserves the right to make modifications and alterations to this statement as may be required from time to time. However, IiAS is under no obligation to update or keep the information current. Nevertheless, IiAS is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither IiAS nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. . The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. The information provided in these reports remains, unless otherwise stated, the copyright of IiAS. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright of IiAS and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.

1 july 2013 kpit cummins infosystems limited · industry: it services index: s&p bse 500/ cnx...

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