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CUMMINS INDIA LIMITED
PRICE: RS.615 RECOMMENDATION: BUY
TARGET PRICE: RS.710 FY12 P/E: 18.7X
q CIL reported Q1FY12 nos below our estimates; revenues grew on back of
engine business.
q EBITDA margins moderated YoY on account of higher input prices and
employee cost. Higher than estimated tax expense led to lower YoY PAT
(normalized).
q In the quarter, company reported exceptional profits on account of divestment
of the subsidiary.
q Increasing trend in the prices of raw material and interest rates in the
economy has led to the hold up in the infrastructure spending. This has
been reflected in the Q1FY12 result of the Cummins India and the peer
group.
q However, we opine that company is likely to maintain its dominant position
in the domestic market in future. Recovery in capex cycle and infrastructure
spending would have positive impact on company's earnings.
Continued momentum in the exports demand would also aid to free cash
flow generation over next few years.
q We reduce our FY12 earnings estimates for the company; maintain 'BUY'
recommendation on company's stock with a DCF based one year price
target of Rs 710 (Rs 815 earlier).
Result Highlights
n Revenues grew by 12.7% YoY to Rs 10.4 bn in Q1FY12 mainly driven by the
engine business. EBITDA declined by 6% YoY to Rs 1.85 bn for the quarter.
n Engine business grew by 12.5% YoY with revenues at Rs 9.4 bn in the quarter.
We opine that the increasing interest rates have been having the negative effect
on the industrial capex. Revival in the infrastructure spending by the government
and the private sector is likely to have positive impact on the company's operations
in future.
n In Q1Fy12, domestic business grew by 8% YoY due to over 25% decline in the
Industrial segment. Also, water-well business that accounts for a majority of industrial
segment sale, declined by over 50% YoY. Our industry interaction implies
that the water-well industry is going through the cyclical slowdown.
n Management has reduced its growth guidance for FY12 and now believes to
grow in the range of 12-15% in FY12E. Infrastructure spending outlook has declines
significantly for FY12.
n Exports business grew by nearly 26% in Q1FY12. Lower base of exports in
Q1FY11 aided to the growth in exports revenue for the quarter under review.
n Company has maintained EBITDA margin on sequential basis at 17.8%. Operating
margins declined by 350 bps YoY mainly due to increase in input prices and
employee expense.
n We highlight that despite continuous increasing trend in the input prices, company
has been able to prevent severe erosion in the operating margins. Company
has taken price hike in key product categories in FY11.
n Management has indicated that the company is favourably poised in terms of
brand perception in the market. Therefore, it can take another price hike in key
product categories, in case commodity prices continue to go up.
n In Q1FY12, employee cost has increased by 31.7% YoY. We believe that the
company is increasing its labour force in view of the successive commissioning of
new capacity at Phaltan.
n Company has reported 27.5% increase in capital employed in the engine business.
We highlight that the company has commissioned its state of the art rebuild
HPP engines in March 2011. Also, its PDC (Parts distribution center) is in
the final stages of completion and is expected to commence operations in
3QFY12.
n Company has been constantly deploying capacity in sub KV (125KV-600KV) segment
where competition is mainly established by local manufacturers. We expect
it to maintain 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 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 Aside from that, CIL is also investing in a reconditioning operation, that of engines,
generators as well as components, engine components.
Financials
n In our projections, we build 13.3% Yoy growth in revenues for FY12E aided by
12% and 9% growth in power system and industrial division respectively. Similarly
we expect 18.6% growth in revenues in FY13.
n In our forecasts, we expect domestic revenue to grow by 13% Yoy on back of
power systems, automotive and distribution segments during FY12.
n We believe that the exports revenue is likely to grow by12-14% in FY12E. We
highlight that in FY11 growth in exports revenue was facilitated by1) meaningful
recovery i in European region 2) lower base of FY10.
n We opine that the operating margins will remain under pressure in FY12E. However,
company is better placed vis-à-vis peer group in terms of technology and
brand perception in the marketplace.
n In our projections, we build EBITDA margins at 18.8% and 18.4% for FY12E and
FY13E respectively. We highlight that the company has guided for the Capex of
close to Rs 1.6 bn in FY12E and Rs 3.5 bn in FY13.
n We expect that the company is like to grow at 20% CAGR between FY11-15E
on back of significant capacity addition plans and promising long term outlook of
Indian infrastructure space.
n We arrive at price target of Rs 710 (Rs 815 earlier) on company's stock.
Valuations
n At current price of Rs 615, stock is trading at a P/E of 18.7x and EV/EBITDA of
13.1x on FY12E earnings.
n In our DCF, we build beta of 0.85, terminal growth of 4% (given company's
aggressive expansion plans), risk free rate of 8.25% and market premium of
6.5%. We arrive at a one year target price of Rs 710 on company's stock.
n We maintain our 'BUY' recommendation on the stock with a one year DCF
based price target of Rs 710 (Rs 815 earlier).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CUMMINS INDIA LIMITED
PRICE: RS.615 RECOMMENDATION: BUY
TARGET PRICE: RS.710 FY12 P/E: 18.7X
q CIL reported Q1FY12 nos below our estimates; revenues grew on back of
engine business.
q EBITDA margins moderated YoY on account of higher input prices and
employee cost. Higher than estimated tax expense led to lower YoY PAT
(normalized).
q In the quarter, company reported exceptional profits on account of divestment
of the subsidiary.
q Increasing trend in the prices of raw material and interest rates in the
economy has led to the hold up in the infrastructure spending. This has
been reflected in the Q1FY12 result of the Cummins India and the peer
group.
q However, we opine that company is likely to maintain its dominant position
in the domestic market in future. Recovery in capex cycle and infrastructure
spending would have positive impact on company's earnings.
Continued momentum in the exports demand would also aid to free cash
flow generation over next few years.
q We reduce our FY12 earnings estimates for the company; maintain 'BUY'
recommendation on company's stock with a DCF based one year price
target of Rs 710 (Rs 815 earlier).
Result Highlights
n Revenues grew by 12.7% YoY to Rs 10.4 bn in Q1FY12 mainly driven by the
engine business. EBITDA declined by 6% YoY to Rs 1.85 bn for the quarter.
n Engine business grew by 12.5% YoY with revenues at Rs 9.4 bn in the quarter.
We opine that the increasing interest rates have been having the negative effect
on the industrial capex. Revival in the infrastructure spending by the government
and the private sector is likely to have positive impact on the company's operations
in future.
n In Q1Fy12, domestic business grew by 8% YoY due to over 25% decline in the
Industrial segment. Also, water-well business that accounts for a majority of industrial
segment sale, declined by over 50% YoY. Our industry interaction implies
that the water-well industry is going through the cyclical slowdown.
n Management has reduced its growth guidance for FY12 and now believes to
grow in the range of 12-15% in FY12E. Infrastructure spending outlook has declines
significantly for FY12.
n Exports business grew by nearly 26% in Q1FY12. Lower base of exports in
Q1FY11 aided to the growth in exports revenue for the quarter under review.
n Company has maintained EBITDA margin on sequential basis at 17.8%. Operating
margins declined by 350 bps YoY mainly due to increase in input prices and
employee expense.
n We highlight that despite continuous increasing trend in the input prices, company
has been able to prevent severe erosion in the operating margins. Company
has taken price hike in key product categories in FY11.
n Management has indicated that the company is favourably poised in terms of
brand perception in the market. Therefore, it can take another price hike in key
product categories, in case commodity prices continue to go up.
n In Q1FY12, employee cost has increased by 31.7% YoY. We believe that the
company is increasing its labour force in view of the successive commissioning of
new capacity at Phaltan.
n Company has reported 27.5% increase in capital employed in the engine business.
We highlight that the company has commissioned its state of the art rebuild
HPP engines in March 2011. Also, its PDC (Parts distribution center) is in
the final stages of completion and is expected to commence operations in
3QFY12.
n Company has been constantly deploying capacity in sub KV (125KV-600KV) segment
where competition is mainly established by local manufacturers. We expect
it to maintain 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 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 Aside from that, CIL is also investing in a reconditioning operation, that of engines,
generators as well as components, engine components.
Financials
n In our projections, we build 13.3% Yoy growth in revenues for FY12E aided by
12% and 9% growth in power system and industrial division respectively. Similarly
we expect 18.6% growth in revenues in FY13.
n In our forecasts, we expect domestic revenue to grow by 13% Yoy on back of
power systems, automotive and distribution segments during FY12.
n We believe that the exports revenue is likely to grow by12-14% in FY12E. We
highlight that in FY11 growth in exports revenue was facilitated by1) meaningful
recovery i in European region 2) lower base of FY10.
n We opine that the operating margins will remain under pressure in FY12E. However,
company is better placed vis-à-vis peer group in terms of technology and
brand perception in the marketplace.
n In our projections, we build EBITDA margins at 18.8% and 18.4% for FY12E and
FY13E respectively. We highlight that the company has guided for the Capex of
close to Rs 1.6 bn in FY12E and Rs 3.5 bn in FY13.
n We expect that the company is like to grow at 20% CAGR between FY11-15E
on back of significant capacity addition plans and promising long term outlook of
Indian infrastructure space.
n We arrive at price target of Rs 710 (Rs 815 earlier) on company's stock.
Valuations
n At current price of Rs 615, stock is trading at a P/E of 18.7x and EV/EBITDA of
13.1x on FY12E earnings.
n In our DCF, we build beta of 0.85, terminal growth of 4% (given company's
aggressive expansion plans), risk free rate of 8.25% and market premium of
6.5%. We arrive at a one year target price of Rs 710 on company's stock.
n We maintain our 'BUY' recommendation on the stock with a one year DCF
based price target of Rs 710 (Rs 815 earlier).
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