Cummins :Positive meeting takeaways from a competitor Demand uptick visible in powergen segment driven by realty; industrial already picking up: Nomura Research

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Action: Initial signs of demand pick-up in powergen and industrials; Buy

On the cusp of a cyclical recovery, Cummins India (KKC) is well positioned to

benefit from rising demand for gensets and engines for infrastructure/mining

spend. Additionally, its low-horse-power exports to emerging markets have

picked up pace and are growing at ~100% y-y rate. While overall FY15F

revenue growth is likely to remain soft, our recent interaction with a key

competitor suggests that initial signs of demand recovery are now

visible in the powergen segment. Moreover, as per KKC’s own commentary

in the recent results concall, the industrial segment is also picking up on the

back of demand uptick witnessed in rail, mining and defence segments.

However, we expect some softening in revenue and margins for KKC in the

near term on the back of the price cut that it has taken to arrest market share

loss in its powergen segment after the Central Pollution Control Board (CPCB)

norm implementation. With the down-cycle likely behind us, a favourable base

in most domestic segments and a growing exports segment, KKC appears to

be nicely poised for a 21% EPS CAGR over FY14-17F, on our estimates. We

cut our EPS estimates by 2-5% over FY15-17F but retain Buy rating on the

fundamentally strong long-term story ahead.

Catalysts: Macro environment and margin surprise

Macro improvements and margin surprises are key positive triggers.

Valuation: Trading at ~23x FY17F P/E; maintain Buy

We think KKC can sustain current multiples on the strong medium-term

growth outlook (~21% EPS CAGR over FY14-17F), which could have further

upsides as recovery could be much faster on the back of an expected upcycle

and a large number of stuck projects coming up for execution. We thus

believe the valuation range for a quality company like KKC could sustain in the

range of 20-30x one-year forward P/E. We continue to value KKC at the mid-
point of this range, ie, 25x FY17F EPS of INR38.6 (vs. Sep-16F earlier), to

arrive at our new TP of INR966/share. Maintain Buy.