Edelweiss, Cummins India - growth outlook maintained; visit note; Buy

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We recently met the management of Cummins India (CIL). Following are the key takeaways from our interaction:

n  Mega site capex on track

The company expects the low KVA generators (<200 KVA) plant to be commissioned in the next 18 months with an annual capacity of 40,000 generators; current capacity stands at 14,000. Almost 100% of the incremental generators capacity will cater to the company’s export revenues. The high HP engines reconditioning and rebuild facility has begun operations with current dispatch of around two engines per day.

n  Power generation market shifting from primary to standby market

While the company has been garnering more than 90% of revenue from the primary market (>500 hrs/annum) and the balance 10% from the standby market, management expects a strong shift towards the latter going ahead, which will lead to a shift in the revenue mix as well.

n  Industrial business group (IBG) to post healthy growth

Management expects a growth of 15% CAGR over the next 3-4 years in the industrial business (currently 25% of the total revenues) led by strong traction in mining, construction etc. Mining & construction accounts for major portion of industrial revenues of the company.

n  Outlook and valuations: Positive; maintain ‘BUY’

Sustainable product leadership advantage gives CIL huge pricing power which coupled with multiple growth avenues like gas engines, improved outsourcing, and stricter emission norms augur well for its long-term growth potential. We perceive the mega-site expansion as a pro active step towards strengthening the India product portfolio to meet both domestic as well as increased export demand. The stock currently trades at a P/E of 22x & 17 x for FY11E & FY 12E respectively. We reiterate our positive outlook on the company and maintain our ‘BUY/Sector Outperformer’ recommendation/rating on the stock.