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Cummins India (CUMM.BO)
Maintain Sell – Too Early to Bottom-Fish
PAT down 23% YoY — PAT at Rs1.28bn was 23% below CIRA at Rs1.68bn. Domestic
sales declined 5% YoY, while exports were up 15% YoY. EBITDA margins at 14.5%
were down 358bps YoY on the back of (1) inflation in raw materials and (2) poor
product mix with the upper end experiencing a bigger slowdown vs the lower end of the
range.
Sales guidance cut as expected — Export growth guidance maintained at 5-10% but
domestic growth guidance has been cut to 5-10% from 10-15% earlier. Competitor
KOEL has also revised down sales growth guidance for FY12E twice this year from 15-
20% (Post FY11 results) to 10% (Post 1Q12 results) to 0% (Post 2Q12 results).
Margin expectations lowered — PBT margins could contract 100bps over next two
quarters from ~ 17% end 2Q12: (1) inflation seems to be leveling but pig iron continues
to climb and (2) mix could be poor, similar to what it was in 2Q12, over the next two
quarters. The impact of price increases in earlier part of the year is already baked into
numbers now and hence cannot provide upside to margins.
FY12E-14 EPS cut by 17-20%— This is to factor in 5-8% lower sales. For FY12E we
factor in domestic growth of 5% (vs guidance of 5-10%) and export growth of 10% (vs
guidance of 5-10%). 57-138bps lower margin. We assume EBITDA margins will
contract from 14.5% in 2Q12 to 14.1% in 3Q12 to 13.6% in 4Q12. We also factor in
99bps and 66bps improvement in FY13E and FY14E.
Too early to bottom fish - Maintain Sell — Though we believe CIL is a quality
company with sustained +ve CFO and dividend yield of 3%+, we believe it might be a
little to early to bottom-fish this name, as we believe there are significant downside
risks to consensus expectations (our EPS estimates are 14-22% below consensus for
FY12E-14E). We revise down target price to Rs334 (Rs387 earlier) to factor in (1) 17-
20% EPS cut and (2) roll forward of target P/E multiple of 15x to Mar13E from Dec12E.
Cummins India
Company description
Cummins India Limited (CIL) is a 51% subsidiary of Cummins Inc., USA, the world's
largest independent diesel engine designer and manufacturer above 200 HP. Set up
in 1962, CIL is India's leading manufacturer of diesel engines with a range from 205
HP to 2365 HP and value packages serving the power generation, industrial and
automotive markets. CIL also caters to the growing market for gas and dual fuel
engines.
Investment strategy
We rate Cummins India as Sell given: (1) High inflation, interest rates hikes, diesel
price hikes and Government policy inaction has led to a significant slowdown in
infrastructure capex and industrial activity in the country. (2) Management has cut
their growth guidance for FY12E twice already. Further, the economic outlook for
the US and Europe has deteriorated post 1Q. (3) Competitor KOEL has also cut its
sales growth guidance for FY12E twice. Domestic genset suppliers suggest 1Q/2Q
FY12 was weak for sales and new inquiries have come down.
Valuation
Our target price of Rs334 on CIL is based on a target P/E multiple of 15x Mar-
2013E, set in line with the average 15-year P/E of 15x (the stock has traded in a
band of 7x to 26x over the same period). We believe our target P/E multiple is well
supported by EPS CAGR of 8% over FY11-14E with average RoEs of ~ 29%.
Risks
Key upside risks that could prevent the stock from attaining our target price include:
(1) Significant rebound in infrastructure and industrial capex; (2) Higher than
expected sourcing by Cummins Inc. from CIL; (3) Significant rebound in the global
economy; (4) Significant fall in diesel, pig iron and copper price and INR
depreciation; and (5) Open offer by Cummins, similar to what happened in Siemens
and Crompton.
Key downside risks to our target price include: (1) Price competition from
unorganized segments; (2) Low-cost imports from China; (3) High diesel prices; (4)
Alternative backup power sources like UPS and inverters; and (5) INR appreciation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cummins India (CUMM.BO)
Maintain Sell – Too Early to Bottom-Fish
PAT down 23% YoY — PAT at Rs1.28bn was 23% below CIRA at Rs1.68bn. Domestic
sales declined 5% YoY, while exports were up 15% YoY. EBITDA margins at 14.5%
were down 358bps YoY on the back of (1) inflation in raw materials and (2) poor
product mix with the upper end experiencing a bigger slowdown vs the lower end of the
range.
Sales guidance cut as expected — Export growth guidance maintained at 5-10% but
domestic growth guidance has been cut to 5-10% from 10-15% earlier. Competitor
KOEL has also revised down sales growth guidance for FY12E twice this year from 15-
20% (Post FY11 results) to 10% (Post 1Q12 results) to 0% (Post 2Q12 results).
Margin expectations lowered — PBT margins could contract 100bps over next two
quarters from ~ 17% end 2Q12: (1) inflation seems to be leveling but pig iron continues
to climb and (2) mix could be poor, similar to what it was in 2Q12, over the next two
quarters. The impact of price increases in earlier part of the year is already baked into
numbers now and hence cannot provide upside to margins.
FY12E-14 EPS cut by 17-20%— This is to factor in 5-8% lower sales. For FY12E we
factor in domestic growth of 5% (vs guidance of 5-10%) and export growth of 10% (vs
guidance of 5-10%). 57-138bps lower margin. We assume EBITDA margins will
contract from 14.5% in 2Q12 to 14.1% in 3Q12 to 13.6% in 4Q12. We also factor in
99bps and 66bps improvement in FY13E and FY14E.
Too early to bottom fish - Maintain Sell — Though we believe CIL is a quality
company with sustained +ve CFO and dividend yield of 3%+, we believe it might be a
little to early to bottom-fish this name, as we believe there are significant downside
risks to consensus expectations (our EPS estimates are 14-22% below consensus for
FY12E-14E). We revise down target price to Rs334 (Rs387 earlier) to factor in (1) 17-
20% EPS cut and (2) roll forward of target P/E multiple of 15x to Mar13E from Dec12E.
Cummins India
Company description
Cummins India Limited (CIL) is a 51% subsidiary of Cummins Inc., USA, the world's
largest independent diesel engine designer and manufacturer above 200 HP. Set up
in 1962, CIL is India's leading manufacturer of diesel engines with a range from 205
HP to 2365 HP and value packages serving the power generation, industrial and
automotive markets. CIL also caters to the growing market for gas and dual fuel
engines.
Investment strategy
We rate Cummins India as Sell given: (1) High inflation, interest rates hikes, diesel
price hikes and Government policy inaction has led to a significant slowdown in
infrastructure capex and industrial activity in the country. (2) Management has cut
their growth guidance for FY12E twice already. Further, the economic outlook for
the US and Europe has deteriorated post 1Q. (3) Competitor KOEL has also cut its
sales growth guidance for FY12E twice. Domestic genset suppliers suggest 1Q/2Q
FY12 was weak for sales and new inquiries have come down.
Valuation
Our target price of Rs334 on CIL is based on a target P/E multiple of 15x Mar-
2013E, set in line with the average 15-year P/E of 15x (the stock has traded in a
band of 7x to 26x over the same period). We believe our target P/E multiple is well
supported by EPS CAGR of 8% over FY11-14E with average RoEs of ~ 29%.
Risks
Key upside risks that could prevent the stock from attaining our target price include:
(1) Significant rebound in infrastructure and industrial capex; (2) Higher than
expected sourcing by Cummins Inc. from CIL; (3) Significant rebound in the global
economy; (4) Significant fall in diesel, pig iron and copper price and INR
depreciation; and (5) Open offer by Cummins, similar to what happened in Siemens
and Crompton.
Key downside risks to our target price include: (1) Price competition from
unorganized segments; (2) Low-cost imports from China; (3) High diesel prices; (4)
Alternative backup power sources like UPS and inverters; and (5) INR appreciation.
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