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Cummins India
Analyst meeting – Mixed bag
Bullish outlook, but disappointing new export policy
Cummins India reassured investors in the recent analyst meeting with guidance of
over 15% revenue growth in CY12. The company also mentioned that Cummins
Inc Group in India aims to grow at 25% CAGR and achieve US$7bn sales by
2016. In our opinion, however, it disappointed with the disclosure that Cummins
Inc will manufacture new 60litre engine independently and Cummins India will not
get to export these.
Demand has bounced back but has no near term upside
We are positively surprised by the pace of recovery in the sales of heavy engines
and genset. The company reported 10% m-o-m growth in genset sales for the last
three months from the low of Nov 2011. While the recovery has been quite swift,
the company may not raise production of 30/50ltr engine from 18/day now in the
next six months, as it expects demand to remain at current level.
New emission norm and Bio-fuel boosts FY14/15 outlook
Cummins India could benefit from (1) tightening of emission norm for genset in
2013 that could lead to 20-30% price hike, and (2) stronger demand for its new
bio-fuel genset having business potential of over US$200mn. However, it is too
early to factor in the benefit as the emission norm change may get delayed. Also
its peers don't see prices rising by more than 5-8%.
Margin peaks off & capex surge to hurt
Currently Cummins India is trading at the higher end of its valuation with FY13E
PE being 19x. Recent bounce back in the stock reflects the recovery in business.
Likely decline in margin owing to absence of FX gain that had boosted Q3FY12
by 100bp could hurt stock. Also 4 fold jump in capex to Rs1.6bn in 2012-15 will
hurt ROE and likely de-rate the stock.
Price objective basis & risk
Cummins India (CUIDF)
Our PO of Rs365 for CIL is based on PE of 16x our FY13E EPS of
Rs22.85/share. The stock has generally traded at PEG of 1x and, considering an
EPS CAGR of 16% during FY12-14e, we have set our target PE at 16x. The
downside risk is a sharp rise in steel prices and lower demand, owing to weakerthan-
estimated economic growth, also excise duties and the price of inputs, such
as diesel. Key upside risks are stronger export growth and the successful launch
of new products that would help boost marketshare.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cummins India
Analyst meeting – Mixed bag
Bullish outlook, but disappointing new export policy
Cummins India reassured investors in the recent analyst meeting with guidance of
over 15% revenue growth in CY12. The company also mentioned that Cummins
Inc Group in India aims to grow at 25% CAGR and achieve US$7bn sales by
2016. In our opinion, however, it disappointed with the disclosure that Cummins
Inc will manufacture new 60litre engine independently and Cummins India will not
get to export these.
Demand has bounced back but has no near term upside
We are positively surprised by the pace of recovery in the sales of heavy engines
and genset. The company reported 10% m-o-m growth in genset sales for the last
three months from the low of Nov 2011. While the recovery has been quite swift,
the company may not raise production of 30/50ltr engine from 18/day now in the
next six months, as it expects demand to remain at current level.
New emission norm and Bio-fuel boosts FY14/15 outlook
Cummins India could benefit from (1) tightening of emission norm for genset in
2013 that could lead to 20-30% price hike, and (2) stronger demand for its new
bio-fuel genset having business potential of over US$200mn. However, it is too
early to factor in the benefit as the emission norm change may get delayed. Also
its peers don't see prices rising by more than 5-8%.
Margin peaks off & capex surge to hurt
Currently Cummins India is trading at the higher end of its valuation with FY13E
PE being 19x. Recent bounce back in the stock reflects the recovery in business.
Likely decline in margin owing to absence of FX gain that had boosted Q3FY12
by 100bp could hurt stock. Also 4 fold jump in capex to Rs1.6bn in 2012-15 will
hurt ROE and likely de-rate the stock.
Price objective basis & risk
Cummins India (CUIDF)
Our PO of Rs365 for CIL is based on PE of 16x our FY13E EPS of
Rs22.85/share. The stock has generally traded at PEG of 1x and, considering an
EPS CAGR of 16% during FY12-14e, we have set our target PE at 16x. The
downside risk is a sharp rise in steel prices and lower demand, owing to weakerthan-
estimated economic growth, also excise duties and the price of inputs, such
as diesel. Key upside risks are stronger export growth and the successful launch
of new products that would help boost marketshare.
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