Cummins (Buy, Target Rs.515)
· Cummins is a 51% subsidiary of Cummins Inc – USA and manufactures diesel engines and value packages for the power, industrial and automotive markets. Despite operating in the capital goods space which is witnessing the maximum headwinds, Cummins has held its fort pretty well and is growing on the back of exports and its domestic power-gen business despite the slackness in demand for industrial engines.
· Cummins took a 2.5% price increase this June and we believe it can sustain a 16.5% EBIDTA margins which would enable a 30% ROE for this debt free company. The new emission norms for engine producers likely by June next fiscal could increase engine prices and would profitably impact Cummins on the margins front.
· Cummins is spending close to Rs2.5bn this fiscal and is setting up a new facility at Phaltan and we believe that grid improvement in India is not likely soon as the issues are more structural in nature and Cummins by virtue of its 35% market share is better placed to leverage the power shortage in the country. BUY Cummins trading at 17x estimated one-year forward earnings with a price target of Rs515
TECHNICAL VIEW
· After a solid run, from 2009 lows to 2010, the stock has been consolidating since the last two years. Within this period of consolidation the stock has already corrected by more than 50% from its all time highs.
· Currently the weekly charts are indicating a probable formation of an inverse S-H-S, which is a bullish formation. The Fibonacci extension theory and the neckline resistance both indicating that there is a intermediate resistance at 480. However, once that gets broken convincingly, the stock can swiftly head for a break of its all time highs, which is around 550 levels. Daily charts are indicating consolidation above 200 DMA, and hence the stock is due for a breakout in the short term as well.
Thanks and Regards
LKP Advisory
No comments:
Post a Comment