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CUMMINS INDIA LIMITED
RECOMMENDATION: BUY
TARGET PRICE: RS.837
FY12E P/E: 16.9X
q CIL reported revenues below our expectation; increasing input prices and
higher base led to the muted YoY profit growth.
q EBITDA margins moderated on account of sales mix skewed towards
lower HP engines and higher input prices vis-à-vis Q3FY10 and Q2FY11.
q We expect that company is likely to maintain dominant position in the
domestic market in future. Recovery in capex cycle and infrastructure
spending would have positive impact on company's earnings. Resurrection
in the exports demand would also aid to free cash flow generation
over next two years.
q We tweak our earning estimates downward for the company over FY11-
12E to factor in current slowdown; maintain our 'BUY' recommendation
on company's stock with a DCF based one year price target of Rs 837 (950
earlier).
Result Highlights
n Revenues grew by 18.4% YoY to Rs 9.9 bn in Q3FY11 mainly driven by engine
business. We highlight that in Q3FY10 company came off from extended strike in
one of its plants that resulted in the higher base from previous quarter.
n Quarter reported margin decline of 180 bps QoQ at 18.1% as sales were skewed
toward lower HP engines that attract lower margins. To a very large extent
higher commodity prices were mitigated by various cost rationalization measures
undertaken by the company.
n Power systems segment that comprises of major part of revenue pie remained
lack luster. However meaningful demand has been observed in the Industrial
segment.
n Engine business grew by 15.2% YoY at Rs 8.7 bn. We believe that increase in
infrastructure spending by the government would have a meaningful positive impact
on the company's operations.
n Current slowdown in government's spending on infrastructure projects has been
affecting the operations of the company and the peer group resulting in slowdown
in domestic growth. Company has been observing up tick in exports demand.
n Company has reported up tick in low HP segment after several quarters of
muted growth. We believe that company would develop a meaningful market
share in this segment as well. Company plans to grow in this segment and has
committed significant amount of capex in sub KV segment.
n Company maintained negligible financial charges; however reduced operating
margins in the engine business resulted in 11% de-growth in PAT reported at Rs
1.4 bn for the quarter.
n Company has been constantly deploying capacity in sub KV (125KV-600KV) segment
where competition is mainly established by local manufacturers. We expect
that the company would sustain the pricing premium over domestic peer group,
given its strong brand franchise.
n We expects that the company is likely to maintain its dominant market presence
in higher KV (600KV+) segment as well that accounts for nearly 60% of segment
sales composition. We expect that it has an inherent advantage by having a local
manufacturing capability over its multinational peer group.
Capacity expansion at Phaltan
n CIL is getting ready to establish another incremental capacity of 60,000 units of
5.9 litre. engines (mainly used in medium to heavy trucks) and this facility should
be in place by roughly October-December quarter of next year
n The company is also contemplating setting up a rebuild center for complete overhaul,
repairs, and upgrades for engines.
n Apart from that, CIL is also investing in a reconditioning operation, that of engines,
generators as well as components, engine components.
Earnings Outlook
n We tweak our earning estimates downward to factor sluggishness in the domestic
business. The table below (Table 1) highlights the changes we have now build
in our earnings forecast.
n We project a 25% growth in revenues in FY12E driven by all the segments. We
expect government earnings to recover through FY12E. We continue to expect
recovery in the export market.
n We believe that the company is likely to shed margins over FY12E and expect
EPS to grow at a CAGR of 27% over FY10-12E.
Change in target price
n Earning downgrade by 7.6% and 17% in FY11E and FY12E respectively.
n Pressure on margin persists and slowdown in business expected vis-à-vis our earlier
estimates.
Maintain 'BUY'
n Adequate upside of 27% to the current price of Rs 645.
Valuations
n In view of the earnings revision effected by us we arrive at a DCF based one
year price target of Rs 837.
n At current price of Rs 645, stock is trading at a P/E of 16.9x and EV/EBITDA of
11.6x on FY12E earnings.
n We maintain our 'BUY' recommendation on the stock with a one year price target
of Rs 837 (950 earlier).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CUMMINS INDIA LIMITED
RECOMMENDATION: BUY
TARGET PRICE: RS.837
FY12E P/E: 16.9X
q CIL reported revenues below our expectation; increasing input prices and
higher base led to the muted YoY profit growth.
q EBITDA margins moderated on account of sales mix skewed towards
lower HP engines and higher input prices vis-à-vis Q3FY10 and Q2FY11.
q We expect that company is likely to maintain dominant position in the
domestic market in future. Recovery in capex cycle and infrastructure
spending would have positive impact on company's earnings. Resurrection
in the exports demand would also aid to free cash flow generation
over next two years.
q We tweak our earning estimates downward for the company over FY11-
12E to factor in current slowdown; maintain our 'BUY' recommendation
on company's stock with a DCF based one year price target of Rs 837 (950
earlier).
Result Highlights
n Revenues grew by 18.4% YoY to Rs 9.9 bn in Q3FY11 mainly driven by engine
business. We highlight that in Q3FY10 company came off from extended strike in
one of its plants that resulted in the higher base from previous quarter.
n Quarter reported margin decline of 180 bps QoQ at 18.1% as sales were skewed
toward lower HP engines that attract lower margins. To a very large extent
higher commodity prices were mitigated by various cost rationalization measures
undertaken by the company.
n Power systems segment that comprises of major part of revenue pie remained
lack luster. However meaningful demand has been observed in the Industrial
segment.
n Engine business grew by 15.2% YoY at Rs 8.7 bn. We believe that increase in
infrastructure spending by the government would have a meaningful positive impact
on the company's operations.
n Current slowdown in government's spending on infrastructure projects has been
affecting the operations of the company and the peer group resulting in slowdown
in domestic growth. Company has been observing up tick in exports demand.
n Company has reported up tick in low HP segment after several quarters of
muted growth. We believe that company would develop a meaningful market
share in this segment as well. Company plans to grow in this segment and has
committed significant amount of capex in sub KV segment.
n Company maintained negligible financial charges; however reduced operating
margins in the engine business resulted in 11% de-growth in PAT reported at Rs
1.4 bn for the quarter.
n Company has been constantly deploying capacity in sub KV (125KV-600KV) segment
where competition is mainly established by local manufacturers. We expect
that the company would sustain the pricing premium over domestic peer group,
given its strong brand franchise.
n We expects that the company is likely to maintain its dominant market presence
in higher KV (600KV+) segment as well that accounts for nearly 60% of segment
sales composition. We expect that it has an inherent advantage by having a local
manufacturing capability over its multinational peer group.
Capacity expansion at Phaltan
n CIL is getting ready to establish another incremental capacity of 60,000 units of
5.9 litre. engines (mainly used in medium to heavy trucks) and this facility should
be in place by roughly October-December quarter of next year
n The company is also contemplating setting up a rebuild center for complete overhaul,
repairs, and upgrades for engines.
n Apart from that, CIL is also investing in a reconditioning operation, that of engines,
generators as well as components, engine components.
Earnings Outlook
n We tweak our earning estimates downward to factor sluggishness in the domestic
business. The table below (Table 1) highlights the changes we have now build
in our earnings forecast.
n We project a 25% growth in revenues in FY12E driven by all the segments. We
expect government earnings to recover through FY12E. We continue to expect
recovery in the export market.
n We believe that the company is likely to shed margins over FY12E and expect
EPS to grow at a CAGR of 27% over FY10-12E.
Change in target price
n Earning downgrade by 7.6% and 17% in FY11E and FY12E respectively.
n Pressure on margin persists and slowdown in business expected vis-à-vis our earlier
estimates.
Maintain 'BUY'
n Adequate upside of 27% to the current price of Rs 645.
Valuations
n In view of the earnings revision effected by us we arrive at a DCF based one
year price target of Rs 837.
n At current price of Rs 645, stock is trading at a P/E of 16.9x and EV/EBITDA of
11.6x on FY12E earnings.
n We maintain our 'BUY' recommendation on the stock with a one year price target
of Rs 837 (950 earlier).
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