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The confirmation follows the company's announcement on 30 October 2009, that it is entering into an agreement to acquire Sparta Consulting, a California-based SAP solutions firm. The agreement is for a milestone-based consideration of USD38m (EUR25.6m) to be paid over the next three years. The acquisition will be funded entirely through KPIT Cummins' internal accruals.
The ratings continue to reflect KPIT Cummins' stable business risk profile, sound financial risk profile, and strong liquidity position, supported by healthy industry prospects. These rating strengths are partially offset by its average scale of operations, and its exposure to client and geographical concentration risks.
CRISIL believes that the company's business risk profile will remain stable on the back of an enhanced service mix, reducing dependence on the Cummins group, and improving operating efficiency. The Sparta acquisition will result in some pressure on KPIT Cummins' operating margin, but the company's strategy of moving up the value chain and focus on improving operating efficiency are expected to ease the pressure on its operating margin. The outlook also takes into account the company's conservative capital structure.
The agency could revise the outlook to "positive" if KPIT Cummins reports substantial growth in revenue, while maintaining its operating margin and financial risk profile. Conversely, it could revise the outlook to "negative" if the company makes large debt-funded acquisitions, resulting in a higher-than-expected gearing.
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