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Standalone performance below expectations: For 3QFY11, Cummins reported standalone revenue of Rs10b (up
20% YoY, down 9% QoQ), significantly lower than our estimate of Rs11b. EBITDA margin was down 480bp YoY at
18.1%, lower than our estimate of 20.5%. PAT declined 6.5% YoY to Rs1.38b, lower than our estimate of Rs1.67b.
Lower domestic sales pulled down overall revenue growth during the quarter, despite strong growth in exports.
Domestic sales down 6% YoY and 12% QoQ: During the quarter, domestic sales stood at Rs7b, down 6% YoY and
12% QoQ. Sales were partly impacted by maintenance shutdown. For 9MFY11, domestic sales were Rs22b, up
20% YoY. With growing power shortage, diesel engine demand for power-generation applications (50% of domestic
sales) will continue to be strong. We see domestic demand growing at 31% in FY11, 20% in FY12 and 19% in FY13.
Strong growth in exports; up 236% YoY: From a base of Rs4.8b, we expect Cummins India to show strong jump in
exports in FY11 (Rs10.7b). During 3QFY11, exports stood at Rs2.8b, accounting for 29% of sales, and grew 236%
YoY from a low base in 3QFY10 (Rs820m). We expect exports to further grow to Rs15b by FY12, driven by recovery
in global engine sales and increased outsourcing by parent. 70-80% of exports is contributed by sales of high
horsepower engines (with rating of >500 KVA). The company is also setting up an export-oriented unit of small
gensets (<200 KVA), with an eventual capacity of 40,000 units per annum. The plant will partially start production
from 2HFY12 and provide significant upside to exports.
EBITDA margin shrinks 480bp YoY from high base of 23% in 3QFY10: Margin decline should be seen in light of
very high base effect of 3QFY10. There was a labor strike at Cummins plant during 2QFY10, which led to loss of
production for almost two months. Accelerated production and dispatches in 3QFY10 boosted revenue and margin in
3QFY10 (EBITDA margin of 22.9%). Steep rise in steel prices is a key risk to margins. Strong volume growth and
various cost-cutting initiatives should help mitigate downside risk to margins.
Valuation and view: We are lowering our revenue estimates by 2% for FY11 and by 4% for FY12 in light of lower
domestic sales. Accordingly, we cut our EPS estimates by 7% for FY11 and by 12% for FY12. We expect Cummins
to record revenue CAGR of 22% and PAT CAGR of 25% over FY11-13, with constant EBITDA margin of 20%. Maintain
Buy, with a revised target price of Rs800 (20x FY12E EPS).
3QFY11 results below expectations; sales disappoint; expected to pick in
4QFY11
Cummins India's standalone performance was below our expectations. For 3QFY11,
Cummins reported standalone revenue of Rs10b (up 20% YoY, down 9% QoQ),
significantly lower than our estimate of Rs11b. EBITDA margin was down 480bp
YoY at 18.1%, lower than our estimate of 20.5%. PAT declined 6.5% YoY to Rs1.38b,
lower than our estimate of Rs1.67b.
Though exports grew 200% YoY to Rs2.8b, domestic sales declined 6% YoY to Rs7b.
Lower domestic sales pulled down overall revenue growth. Sales were partly also
impacted by maintenance shutdown.
Margin decline should be seen in light of very high base effect of 3QFY10. There was
a labor strike at Cummins plant during 2QFY10, which led to loss of production for
almost two months. Accelerated production and dispatches in 3QFY10 boosted revenue
and margin in 3QFY10 (EBITDA margin of 22.9%).
We are lowering our revenue estimates by 2% for FY11 and by 4% for FY12 in light
of lower domestic sales. Accordingly, we cut our EPS estimates by 7% for FY11 and
by 12% for FY12. We expect Cummins to record revenue CAGR of 22% and PAT
CAGR of 25% over FY11-13, with constant EBITDA margin of 20%. Maintain Buy,
with a revised target price of Rs800 (20x FY12E EPS).
Strong growth in exports; up 236% YoY
During 3QFY11, exports stood at Rs2.8b, accounting for 29% of sales, and grew 236%
YoY from a low base in 3QFY10 (Rs820m). For 9MFY11, exports were Rs7.7b, up 210%
YoY. Growth in exports is driven by partial recovery in US, Latin American and Asian
markets. We expect exports to grow at CAGR of 175% over FY10-12, growing to Rs10.7b
in FY11 and Rs15b in FY12, from a low base of Rs4.9b in FY10.
70-80% of exports is contributed by sales of high horsepower engines (with rating of >500
KVA). The company is also setting up an export-oriented unit of small gensets (<200
KVA), with an eventual capacity of 40,000 units per annum. The plant will partially start
production from 2HFY12 and provide significant upside to exports. India remains a key
sourcing hub for the parent and will continue to benefit from the growing trend of
outsourcing.
Aggressive capacity expansion over the next 3-4 years
The Cummins Group is investing Rs5b over the next three years at its new mega site near
Pune. The new facility will house all future expansion projects of the Group. The facility
will start production in FY12. Capacities will be added gradually over the next 3-4 years.
The company is setting up an export-oriented unit of small gensets (<200 KVA), with an
eventual capacity of 40,000 units per annum. The plant will partially start production from
FY12.
Valuation and view
We are lowering our revenue estimates by 2% for FY11 and by 4% for FY12 in light of
lower domestic sales. Accordingly, we cut our EPS estimates by 7% for FY11 to Rs31.3
and by 12% for FY12 to Rs40. We expect Cummins to record revenue CAGR of 22%
and PAT CAGR of 25% over FY11-13, with constant EBITDA margin of 20%.
The stock trades at 20.7x FY11E and 16.2x FY12E EPS. Cummins is among the best
performing stocks in the capital goods sector. We believe that despite the run-up, Cummins
offers a good investment opportunity with a long-term investment objective. Valuations
are attractive, given a strong 25% earnings CAGR expected over FY11-13. Maintain
Buy, with a revised target price of Rs800 (20x FY12E EPS).
Company description
Cummins India Limited (formerly known as Kirloskar
Cummins Limited) is a 51% subsidiary of Cummins Inc,
USA, the world's largest independent diesel engine designer
and manufacturer.
Key investment arguments
With growing power shortage in the country, demand
for DG sets is expected to grow at a strong pace in
next few years. Cummins India, with a market share
of over 40%, stands to gain from the opportunity.
With new gas discovery, 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.
Cummins Inc sees India as a key outsourcing destination
for its global markets. Most of Cummins India's exports
are for power generation applications. We expect its
exports to treble by FY12 from Rs5b in FY10.
We expect Cummins India to post revenue and earnings
CAGR of 22% and 25% over FY11-13. Earnings will
be supported by steady EBITDA margin of 20%.
Key investment risks
Rising prices of steel and other steel products can
hamper margin improvement.
Recent developments
Cummins India will spend US$300m on its new megasite
at Phaltan near Pune. In FY11, the company will
commission four facilities, including a parts distribution
center and re-conditioning factory at the mega-site, on
which it began work about two years ago.
Cummins will also spend about Rs1.5b on a unit to make
generators with capacities of 200kVA (kilovolt-ampere)
and less, entirely for exports. The plant will have a
capacity of 40,000 units a year by 2013. The investment
will be made in three phases, the first of which will be
complete by April 2011, with a capacity to produce
10,000-15,000 units.
Valuation and view
Cummins is among the best performing stocks in the
capital goods sector. We believe that despite the runup,
Cummins offers a good investment opportunity with
a long-term investment objective. Valuations are
attractive, given a strong 25% earnings CAGR expected
over FY11-13.
The stock trades at 20.7x FY11E and 16.2x FY12E
EPS. Maintain Buy, with a revised target price of Rs800
(20x FY12E EPS).
Sector view
We remain positive on the sector
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Standalone performance below expectations: For 3QFY11, Cummins reported standalone revenue of Rs10b (up
20% YoY, down 9% QoQ), significantly lower than our estimate of Rs11b. EBITDA margin was down 480bp YoY at
18.1%, lower than our estimate of 20.5%. PAT declined 6.5% YoY to Rs1.38b, lower than our estimate of Rs1.67b.
Lower domestic sales pulled down overall revenue growth during the quarter, despite strong growth in exports.
Domestic sales down 6% YoY and 12% QoQ: During the quarter, domestic sales stood at Rs7b, down 6% YoY and
12% QoQ. Sales were partly impacted by maintenance shutdown. For 9MFY11, domestic sales were Rs22b, up
20% YoY. With growing power shortage, diesel engine demand for power-generation applications (50% of domestic
sales) will continue to be strong. We see domestic demand growing at 31% in FY11, 20% in FY12 and 19% in FY13.
Strong growth in exports; up 236% YoY: From a base of Rs4.8b, we expect Cummins India to show strong jump in
exports in FY11 (Rs10.7b). During 3QFY11, exports stood at Rs2.8b, accounting for 29% of sales, and grew 236%
YoY from a low base in 3QFY10 (Rs820m). We expect exports to further grow to Rs15b by FY12, driven by recovery
in global engine sales and increased outsourcing by parent. 70-80% of exports is contributed by sales of high
horsepower engines (with rating of >500 KVA). The company is also setting up an export-oriented unit of small
gensets (<200 KVA), with an eventual capacity of 40,000 units per annum. The plant will partially start production
from 2HFY12 and provide significant upside to exports.
EBITDA margin shrinks 480bp YoY from high base of 23% in 3QFY10: Margin decline should be seen in light of
very high base effect of 3QFY10. There was a labor strike at Cummins plant during 2QFY10, which led to loss of
production for almost two months. Accelerated production and dispatches in 3QFY10 boosted revenue and margin in
3QFY10 (EBITDA margin of 22.9%). Steep rise in steel prices is a key risk to margins. Strong volume growth and
various cost-cutting initiatives should help mitigate downside risk to margins.
Valuation and view: We are lowering our revenue estimates by 2% for FY11 and by 4% for FY12 in light of lower
domestic sales. Accordingly, we cut our EPS estimates by 7% for FY11 and by 12% for FY12. We expect Cummins
to record revenue CAGR of 22% and PAT CAGR of 25% over FY11-13, with constant EBITDA margin of 20%. Maintain
Buy, with a revised target price of Rs800 (20x FY12E EPS).
3QFY11 results below expectations; sales disappoint; expected to pick in
4QFY11
Cummins India's standalone performance was below our expectations. For 3QFY11,
Cummins reported standalone revenue of Rs10b (up 20% YoY, down 9% QoQ),
significantly lower than our estimate of Rs11b. EBITDA margin was down 480bp
YoY at 18.1%, lower than our estimate of 20.5%. PAT declined 6.5% YoY to Rs1.38b,
lower than our estimate of Rs1.67b.
Though exports grew 200% YoY to Rs2.8b, domestic sales declined 6% YoY to Rs7b.
Lower domestic sales pulled down overall revenue growth. Sales were partly also
impacted by maintenance shutdown.
Margin decline should be seen in light of very high base effect of 3QFY10. There was
a labor strike at Cummins plant during 2QFY10, which led to loss of production for
almost two months. Accelerated production and dispatches in 3QFY10 boosted revenue
and margin in 3QFY10 (EBITDA margin of 22.9%).
We are lowering our revenue estimates by 2% for FY11 and by 4% for FY12 in light
of lower domestic sales. Accordingly, we cut our EPS estimates by 7% for FY11 and
by 12% for FY12. We expect Cummins to record revenue CAGR of 22% and PAT
CAGR of 25% over FY11-13, with constant EBITDA margin of 20%. Maintain Buy,
with a revised target price of Rs800 (20x FY12E EPS).
Strong growth in exports; up 236% YoY
During 3QFY11, exports stood at Rs2.8b, accounting for 29% of sales, and grew 236%
YoY from a low base in 3QFY10 (Rs820m). For 9MFY11, exports were Rs7.7b, up 210%
YoY. Growth in exports is driven by partial recovery in US, Latin American and Asian
markets. We expect exports to grow at CAGR of 175% over FY10-12, growing to Rs10.7b
in FY11 and Rs15b in FY12, from a low base of Rs4.9b in FY10.
70-80% of exports is contributed by sales of high horsepower engines (with rating of >500
KVA). The company is also setting up an export-oriented unit of small gensets (<200
KVA), with an eventual capacity of 40,000 units per annum. The plant will partially start
production from 2HFY12 and provide significant upside to exports. India remains a key
sourcing hub for the parent and will continue to benefit from the growing trend of
outsourcing.
Aggressive capacity expansion over the next 3-4 years
The Cummins Group is investing Rs5b over the next three years at its new mega site near
Pune. The new facility will house all future expansion projects of the Group. The facility
will start production in FY12. Capacities will be added gradually over the next 3-4 years.
The company is setting up an export-oriented unit of small gensets (<200 KVA), with an
eventual capacity of 40,000 units per annum. The plant will partially start production from
FY12.
Valuation and view
We are lowering our revenue estimates by 2% for FY11 and by 4% for FY12 in light of
lower domestic sales. Accordingly, we cut our EPS estimates by 7% for FY11 to Rs31.3
and by 12% for FY12 to Rs40. We expect Cummins to record revenue CAGR of 22%
and PAT CAGR of 25% over FY11-13, with constant EBITDA margin of 20%.
The stock trades at 20.7x FY11E and 16.2x FY12E EPS. Cummins is among the best
performing stocks in the capital goods sector. We believe that despite the run-up, Cummins
offers a good investment opportunity with a long-term investment objective. Valuations
are attractive, given a strong 25% earnings CAGR expected over FY11-13. Maintain
Buy, with a revised target price of Rs800 (20x FY12E EPS).
Company description
Cummins India Limited (formerly known as Kirloskar
Cummins Limited) is a 51% subsidiary of Cummins Inc,
USA, the world's largest independent diesel engine designer
and manufacturer.
Key investment arguments
With growing power shortage in the country, demand
for DG sets is expected to grow at a strong pace in
next few years. Cummins India, with a market share
of over 40%, stands to gain from the opportunity.
With new gas discovery, 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.
Cummins Inc sees India as a key outsourcing destination
for its global markets. Most of Cummins India's exports
are for power generation applications. We expect its
exports to treble by FY12 from Rs5b in FY10.
We expect Cummins India to post revenue and earnings
CAGR of 22% and 25% over FY11-13. Earnings will
be supported by steady EBITDA margin of 20%.
Key investment risks
Rising prices of steel and other steel products can
hamper margin improvement.
Recent developments
Cummins India will spend US$300m on its new megasite
at Phaltan near Pune. In FY11, the company will
commission four facilities, including a parts distribution
center and re-conditioning factory at the mega-site, on
which it began work about two years ago.
Cummins will also spend about Rs1.5b on a unit to make
generators with capacities of 200kVA (kilovolt-ampere)
and less, entirely for exports. The plant will have a
capacity of 40,000 units a year by 2013. The investment
will be made in three phases, the first of which will be
complete by April 2011, with a capacity to produce
10,000-15,000 units.
Valuation and view
Cummins is among the best performing stocks in the
capital goods sector. We believe that despite the runup,
Cummins offers a good investment opportunity with
a long-term investment objective. Valuations are
attractive, given a strong 25% earnings CAGR expected
over FY11-13.
The stock trades at 20.7x FY11E and 16.2x FY12E
EPS. Maintain Buy, with a revised target price of Rs800
(20x FY12E EPS).
Sector view
We remain positive on the sector
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