Cummins India (CMP Rs776, Buy) : Motilal Oswal

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Cummins India (KKC IN; Mkt Cap USD3.5b, CMP Rs776, Buy)

2QFY11 standalone performance far better than estimates: In 2QFY11 Cummins posted standalone revenue of Rs10.9b (up 74% YoY), significantly better than our estimates of Rs9.2b. EBITDA margin of 20% was up 180bp YoY, marginally lower than our estimate of 21%. Adjusted PAT was Rs1.68b, up 91% YoY, beating our estimates of Rs1.4b. Strong all-round growth, in domestic markets and exports boosted growth.

Domestic sales picking up due to power shortage, industrial growth: 2QFY11 domestic sales were up 47% YoY at Rs8.2b (up 40% YoY in 1HFY11). With growing power shortage, diesel engine demand for power-generation application (50% of domestic sales) will continue to be strong. Industrial engines also posted strong growth of over 50% YoY in 2QFY11 and auto-engines and services grew by 10% and 15%, respectively. We expect domestic sales to post 29% CAGR over FY10-12.

Exports expected to grow strongly: From a base of Rs4.8b, Cummins India is expected to increase exports significantly in FY11 (Rs10.7b), driven by a recovery in key markets. In 2QFY11 export earnings were Rs2.76b, accounting for 25% of sales, and grew nearly four times from 2QFY10 (Rs720m). We project exports to grow to Rs15b by FY12, driven by recovery in global engine sales and increased outsourcing by the parent from Cummins India.

EBITDA margins up 180bp YoY: Cummins' EBITDA margin improved by 180bp, to 20%, in 2QFY11. Raw material/sales increased 104bp YoY during the quarter. A steep rise in steel prices is the key risk to margins. EBITDA margin in 1QFY11 was 21%. Strong volume growth and cost-cutting initiatives are expected to help mitigate downside risk to margins.

Valuation and view: We have revised upwards earnings estimates by 9% and 7% in FY11 and FY12 respectively. Our current estimates are Rs33.5 and Rs45 for FY11 and FY12, respectively. Maintain Buy with a revised target price of Rs900 (20x FY12E EPS of Rs45).