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Cummins India (CIL) reported flattish revenues for the quarter on the
back of slowdown in power generation business even as higher costs
impacted EBIDTA margins which dipped 350 bps+ YoY. The management
has further toned down its growth guidance from 15% earlier to a lower
number of 5%‐10% with a 100 bps decline in PBT margins over 1HFY12
levels. We trim our earnings for FY12E and FY13E by 16 % and 20 %,
building in lower volumes in domestic market and lower margins.
Sharp drop in power generation market impacts profitability
Cummins reported a 5% YoY decline in domestic business whereas export grew 14%
YoY. In the domestic market, power generation declined 20% YoY while industrial
business fell 6% YoY with auto reporting a sharp growth of 50% YoY albeit on a lower
base. Change in revenue mix with increasing share of low KVA engines coupled with
rising input costs impacted CIL’s OPMs which declined severely by 350 bps YoY and 140
bps QoQ.
Management cuts revenue, margin guidance
The management has cut revenue guidance from 10%-15% for FY12E to 5%-10% on the
back of a slowdown in the domestic business, largely in HHP (high horse power) power
generation business. It also expects 2HFY12 PBT margin to be lower from 2QFY12 levels
due to continued cost pressures and adverse revenue mix. While a pickup in demand
and stabilization of inflationary pressures could provide some comfort to profitability,
the management expects near term margins to remain under pressure. However, with
respect to pricing (even amid a market growth slowdown), the management has shown
confidence to sustain pricing across product range despite intensifying competition.
Outlook and valuations: Near‐term slowdown; maintain ‘BUY’
While the near term outlook for Cummins remains weak, given the slowdown in
domestic business, we remain optimistic about its long term business prospects due to
the strong demand dynamics in diesel and gas engines market. We maintain our
BUY/S0 rating for Cummins with a revised TP of INR 407(+ 15% upside).
Concall highlights
• The management cut FY12E revenue guidance for the third time from 20% originally to
5%-10% now, owing to a sustained slowdown in power generation business.
• Domestic sales accounts for 70% of 2QFY12 revenues while export accounts for the
rest.
• Within power generation revenues - which declined by 20% YoY - telecom declined by
15% YoY, retail grew by 10% YoY and commercial real estate grew slower by 3-4 %.
• Cummins derives 60%-65% of overall revenues from the standby power segment while
base load revenue share is lower at 10%-15% of revenues. The balance comes from
distribution business.
• Less than 160 KVA segment contributes 35% of Cummins power generation revenues
while 20% from 160-380 KVA, 15% from 400-625 KVA and the balance from 750 KVA or
more.
• Cummins currently manufactures 25 engines (HHP) per day. This would go up by 10
engines per day over the next 1-2 years post the Phaltan capex.
• Revenue from Phaltan is likely to be around 10% of CIL’s overall revenues going ahead.
Company Description
KKC is a subsidiary of Cummins, US, which holds 51% stake in the company. It is a leading
manufacturer of medium-high HP range of diesel engines in India with manufacturing
facilities in Pune and Daman.
Investment Theme
KKC is a play on the multiple segments of power requirement, rising mobile penetration
across rural and suburban geographies, strong coal requirement (driving demand in mining),
and continued growth in automobile sales on the back of large potential in environmentfriendly
natural gas fuel-based engines. We expect KKC to benefit from growth in the above
segments. Furthermore, KKC will benefit from Phaltan expansion which should cater to
KKC’s growing business demands from FY12.
Key Risks
Any major slowdown in the domestic market (70% of the total revenues) would pose a
significant down side risk to our estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cummins India (CIL) reported flattish revenues for the quarter on the
back of slowdown in power generation business even as higher costs
impacted EBIDTA margins which dipped 350 bps+ YoY. The management
has further toned down its growth guidance from 15% earlier to a lower
number of 5%‐10% with a 100 bps decline in PBT margins over 1HFY12
levels. We trim our earnings for FY12E and FY13E by 16 % and 20 %,
building in lower volumes in domestic market and lower margins.
Sharp drop in power generation market impacts profitability
Cummins reported a 5% YoY decline in domestic business whereas export grew 14%
YoY. In the domestic market, power generation declined 20% YoY while industrial
business fell 6% YoY with auto reporting a sharp growth of 50% YoY albeit on a lower
base. Change in revenue mix with increasing share of low KVA engines coupled with
rising input costs impacted CIL’s OPMs which declined severely by 350 bps YoY and 140
bps QoQ.
Management cuts revenue, margin guidance
The management has cut revenue guidance from 10%-15% for FY12E to 5%-10% on the
back of a slowdown in the domestic business, largely in HHP (high horse power) power
generation business. It also expects 2HFY12 PBT margin to be lower from 2QFY12 levels
due to continued cost pressures and adverse revenue mix. While a pickup in demand
and stabilization of inflationary pressures could provide some comfort to profitability,
the management expects near term margins to remain under pressure. However, with
respect to pricing (even amid a market growth slowdown), the management has shown
confidence to sustain pricing across product range despite intensifying competition.
Outlook and valuations: Near‐term slowdown; maintain ‘BUY’
While the near term outlook for Cummins remains weak, given the slowdown in
domestic business, we remain optimistic about its long term business prospects due to
the strong demand dynamics in diesel and gas engines market. We maintain our
BUY/S0 rating for Cummins with a revised TP of INR 407(+ 15% upside).
Concall highlights
• The management cut FY12E revenue guidance for the third time from 20% originally to
5%-10% now, owing to a sustained slowdown in power generation business.
• Domestic sales accounts for 70% of 2QFY12 revenues while export accounts for the
rest.
• Within power generation revenues - which declined by 20% YoY - telecom declined by
15% YoY, retail grew by 10% YoY and commercial real estate grew slower by 3-4 %.
• Cummins derives 60%-65% of overall revenues from the standby power segment while
base load revenue share is lower at 10%-15% of revenues. The balance comes from
distribution business.
• Less than 160 KVA segment contributes 35% of Cummins power generation revenues
while 20% from 160-380 KVA, 15% from 400-625 KVA and the balance from 750 KVA or
more.
• Cummins currently manufactures 25 engines (HHP) per day. This would go up by 10
engines per day over the next 1-2 years post the Phaltan capex.
• Revenue from Phaltan is likely to be around 10% of CIL’s overall revenues going ahead.
Company Description
KKC is a subsidiary of Cummins, US, which holds 51% stake in the company. It is a leading
manufacturer of medium-high HP range of diesel engines in India with manufacturing
facilities in Pune and Daman.
Investment Theme
KKC is a play on the multiple segments of power requirement, rising mobile penetration
across rural and suburban geographies, strong coal requirement (driving demand in mining),
and continued growth in automobile sales on the back of large potential in environmentfriendly
natural gas fuel-based engines. We expect KKC to benefit from growth in the above
segments. Furthermore, KKC will benefit from Phaltan expansion which should cater to
KKC’s growing business demands from FY12.
Key Risks
Any major slowdown in the domestic market (70% of the total revenues) would pose a
significant down side risk to our estimates.
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