Cummins India:the stock will command higher valuations:: Motilal Oswal

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Cummins India (CIL), the largest engine manufacturer in India, is likely to post accelerated
growth over the next two years, led by improving demand in the domestic market and
strong rebound in exports on the back of increased outsourcing by its parent. Better
product mix, healthy pricing environment, stable commodity prices, and continuous
costcutting initiatives will keep margins strong
Domestic business to grow at 26% CAGR over FY10-12:
After sluggish demand in FY09 and 1HFY10, the domestic engine market has shown
impressive recovery. With growing power shortage, diesel engine demand for
powergeneration applications will continue to be strong. We expect robust demand pull
from the industry segment as well, particularly from construction and mining.
Exports to grow 3x by FY12; parent raises guidance:
CIL is among Cummins Inc's leading manufacturing bases, and meets its global requirement
for several key products and components. Buoyed by strong recovery inAmerican and
Asian markets, its exports have grown sharply since 4QFY10. We expect exports to reach
Rs15b by FY12. Cummins Inc has also raised its sales guidance for CY10 to US$13b, which
augurs well for CIL.
Superior product mix, cost-cutting boost margins; more surprises likely:
The company has maintained strong margin momentum, posting 21.3% (up 290bp YoY) in
1QFY11. We believe that better product mix, healthy pricing environment, stable commodity
prices and continuous cost-cutting initiatives will keep margins strong, going forward.
Valuation & View:
CIL has exhibited strong 26% earnings CAGR over the last four years, despite uncertain
business environment globally. We expect the company to post a robust 37% earnings
CAGR over FY10-12. We believe that the stock will command higher valuations due to longterm
growth potential and possible upside to earnings expectations.