Cummins- Sharply higher Q2 and robust domestic demand:: BofA ML

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Cummins India
Sharply higher Q2 and robust
domestic demand boosts PO
􀂄 Raising PO and retain 18% above consensus FY12e EPS
Cummins India has met our Q2FY11 expectation and has beaten consensus by
growing its profit by 91% y-o-y. We are increasingly confident of our 18% above
consensus EPS for FY12e. Cummins India is currently trading at 22.5x FY11e
and given the prospect of 54% EPS growth in FY11e and 30% growth in FY12e,
the stock could re-rate to 20x FY12e, hence we have raised PO to Rs900.
Q2FY11 sales up 74% and significantly higher than peers
Cummins India achieved 74% y-o-y growth in sales while host of peers in capital
goods including Kirloskar Oil Engine and Crompton Greaves reported around
10% sales growth. During Q2FY11 exports jumped nearly four fold and
contributed to 25% of sales, domestic genset sales grew 50% y-o-y, off-highway
engine grew 70% y-o-y, auto engine grew 40% y-o-y and services grew 15%.
Growth was partly boosted by lower base as worker strike had hurt Q2FY10.
Capacity expansion and stronger E&C to boost FY12e
We expect net profit to grow 54% in FY11e and 30% in FY12e. Easing of supply
constraint along with expansion of capacity by over 20% from FY12e and addition
of new services along with pick up in E&C likely to help drive 30% growth in
FY12e. We expect domestic revenue to rise 26% and exports to rise by 50% in
FY12e. We expect the company to maintain 20% EBITDA margin as operating
leverage could help offset the impact of rise in steel price.