Cummins India Ltd. (CUMM.NS): Remain UW Given Earnings Risk and Rich Valuation :Morgan Stanley Research
Cummins has underperformed Sensex by 25% YTD. Yet given the current macroclimate, we believe, the underperformance will continue. We like strong parentage and balance sheet, but cite muted domestic and global macro leading to weak revenue / earnings trend and rich valuation as reasons. UW.
Current macroclimate poses earnings risk: Muted domestic capex including muted commercial real estate construction and export demand risk (parent Cummins Inc expects 3% decline in C13 power segment revenue), poses earnings risk. While we expect flat revenues in F14e and 16% growth in F15e (factors cost led price rise in domestic power genset business), we see growth risk given CIL's business' exposure to macro.
F1Q14 earnings were weaker than expected: CIL reported 17% YoY revenue decline, which coupled with 230bps margin contraction led to 28% YoY EBITDA decline. Earnings decline was lower at 8% YoY, aided by sharp rise in other income.Management reduced F14e revenue guidance from 8-9% to flat (their base case). While it expects to maintain margins at F1Q14 levels, we see downside risk, if growth disappoints.
We cut our F14e and F15e EBITDA by 14% and 17% on the back of lower revenue growth and margins. Our EPS cut is lower at 8% and 11% in F14e and F15e given higher other income estimate. Our price target cut is higher as we move to probability weighted (15% to bear case now) vs. base case earlier, given earnings risk in current macroclimate. Our revised target of Rs358 implies 10% downside. Key risks: Better than expected revenue growth in domestic / export business and better margins.
Current macroclimate poses earnings risk: Muted domestic capex including muted commercial real estate construction and export demand risk (parent Cummins Inc expects 3% decline in C13 power segment revenue), poses earnings risk. While we expect flat revenues in F14e and 16% growth in F15e (factors cost led price rise in domestic power genset business), we see growth risk given CIL's business' exposure to macro.
F1Q14 earnings were weaker than expected: CIL reported 17% YoY revenue decline, which coupled with 230bps margin contraction led to 28% YoY EBITDA decline. Earnings decline was lower at 8% YoY, aided by sharp rise in other income.Management reduced F14e revenue guidance from 8-9% to flat (their base case). While it expects to maintain margins at F1Q14 levels, we see downside risk, if growth disappoints.
We cut our F14e and F15e EBITDA by 14% and 17% on the back of lower revenue growth and margins. Our EPS cut is lower at 8% and 11% in F14e and F15e given higher other income estimate. Our price target cut is higher as we move to probability weighted (15% to bear case now) vs. base case earlier, given earnings risk in current macroclimate. Our revised target of Rs358 implies 10% downside. Key risks: Better than expected revenue growth in domestic / export business and better margins.
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