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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 cost
cutting initiatives will keep margins strong.
Recent Developments:
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.
Cummins India will spend US$300m on its mega-site at Phaltan near Pune. In FY11 the
company will commission four facilities, including a parts distribution centre and reconditioning
factory at the megasite, on which it began work about two years ago.
Key investment arguments:
With growing power shortage in India, demand for DG sets is expected to grow strongly
over the next few years. Cummins India, with a market share of over 40%, stands to gain
significantly from the opportunity.
With gas discoveries, the gas-based distributed power generation market is estimated at
about 200MW a year. The cost of power generation, based on gas is significantly lower
than that of diesel. Cummins has a strong lean-burn natural gas product line and stands to
benefit from the opportunity.
Valuation and view:
We expect Cummins India to post revenue and earnings CAGR of 38% and 42% over FY10-
12. Earnings will be driven by a 257bp margin improvement over FY10- 12 to reach 21%.
Our EPS estimates are Rs33.5 and Rs45 for FY11 and FY12, respectively. Maintain Buy with
a revised target price of Rs900.
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