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Cummins India
Cautiously optimistic
„Company wary of macro but still could deliver 19% growth
We continue to expect 18%-19% profit growth for Cummins India (CIL) post our
interaction with management on 10th Mar 2011. Key takeaways are (1) domestic
demand continues to be satisfactory though outlook is uncertain owing to rising
interest rate, (2) exports holding up, but below what it expected 6 months back,
(3) capacity expansion on course and supply is no longer a constraint, (4) capex
going to be lower than what we understood in Q3FY10 concall. We maintain our
Buy with PO of Rs760 as we believe the stock can rerate to PE of 18x FY13e.
Genset demand unaffected by rising power supply
Cummins remains upbeat about the prospects for its genset sales in India (32% of
FY11e sales) despite likely rise in electricity supply. The company expects genset
demand to jump 2.5x in ten years driven by (1) rise in standby genset sales owing
to growing demand for uninterrupted power and offset decline in demand for
genset as prime power, which contributes 90% of sales now, (2) jump in demand
for gas run genset, and (3) increase in market share from a very low level in the
US$700mn low horsepower genset market.
Capacity expansion on track & cut in capex is just technical
CIL plans to have capex of Rs3.5bn in FY12, and Rs2-2.5bn per annum in FY13
and FY14. This is lower than the Jan 2011 guidance of Rs4-5bn capex per annum
for the next three years, which was a misunderstanding (the Rs4-5bn mentioned
in Jan related to all the companies owned by Cummins Inc, including CIL) .
Around Rs4bn, ie 50% of capex, is slated to be spent on building a new corporate
office cum R&D center. CIL has increased capacity of high horsepower engines
by 50% to 100 units per week and added facility to rebuild 2 old engines per day
in Jan 2011. Additional capex will be to build SEZ for low HP gensets & very high
horsepower engines by Dec 2012.
Price objective basis & risk
Cummins India (CUIDF)
Our PO of Rs760 for CIL is based on 20x our FY12E EPS of Rs36/share and
Rs40/sh as the value of investment in associate companies. The stock has traded
at over 15x historically during periods of 18%+ EPS growth. We expect EPS to
grow 18% in FY12e and 19% in FY13e. Cummins India has 50% stake in the
Rs7bn lubricant company Valvoline Cummins and 48% stake in Rs6bn Cummins
Generator technology which we have valued at Rs40/sh of Cummins India. The
downside risk is a sharp rise in steel prices and lower demand owing to weaker
than estimated economic growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cummins India
Cautiously optimistic
„Company wary of macro but still could deliver 19% growth
We continue to expect 18%-19% profit growth for Cummins India (CIL) post our
interaction with management on 10th Mar 2011. Key takeaways are (1) domestic
demand continues to be satisfactory though outlook is uncertain owing to rising
interest rate, (2) exports holding up, but below what it expected 6 months back,
(3) capacity expansion on course and supply is no longer a constraint, (4) capex
going to be lower than what we understood in Q3FY10 concall. We maintain our
Buy with PO of Rs760 as we believe the stock can rerate to PE of 18x FY13e.
Genset demand unaffected by rising power supply
Cummins remains upbeat about the prospects for its genset sales in India (32% of
FY11e sales) despite likely rise in electricity supply. The company expects genset
demand to jump 2.5x in ten years driven by (1) rise in standby genset sales owing
to growing demand for uninterrupted power and offset decline in demand for
genset as prime power, which contributes 90% of sales now, (2) jump in demand
for gas run genset, and (3) increase in market share from a very low level in the
US$700mn low horsepower genset market.
Capacity expansion on track & cut in capex is just technical
CIL plans to have capex of Rs3.5bn in FY12, and Rs2-2.5bn per annum in FY13
and FY14. This is lower than the Jan 2011 guidance of Rs4-5bn capex per annum
for the next three years, which was a misunderstanding (the Rs4-5bn mentioned
in Jan related to all the companies owned by Cummins Inc, including CIL) .
Around Rs4bn, ie 50% of capex, is slated to be spent on building a new corporate
office cum R&D center. CIL has increased capacity of high horsepower engines
by 50% to 100 units per week and added facility to rebuild 2 old engines per day
in Jan 2011. Additional capex will be to build SEZ for low HP gensets & very high
horsepower engines by Dec 2012.
Price objective basis & risk
Cummins India (CUIDF)
Our PO of Rs760 for CIL is based on 20x our FY12E EPS of Rs36/share and
Rs40/sh as the value of investment in associate companies. The stock has traded
at over 15x historically during periods of 18%+ EPS growth. We expect EPS to
grow 18% in FY12e and 19% in FY13e. Cummins India has 50% stake in the
Rs7bn lubricant company Valvoline Cummins and 48% stake in Rs6bn Cummins
Generator technology which we have valued at Rs40/sh of Cummins India. The
downside risk is a sharp rise in steel prices and lower demand owing to weaker
than estimated economic growth.
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