CUMMINS INDIA 2QFY11: Profit nearly doubles; Buy :: Motilal Oswal

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CUMMINS INDIA 2QFY11: Profit nearly doubles; Growth momentum to sustain through FY12; Buy

-          Cummins India (KKC IN, Mkt Cap US$3.2b, CMP Rs741, Buy) reported standalone performance better than estimates. 2QFY11 revenues stood at Rs10.9b (up 76% YoY), EBITDA at Rs2.17b (up 91% YoY) and PAT at Rs1.68b (up 91% YoY). 2QFY11 EBITDA margin improved 170bp YoY to 20%.

-          1HFY11 revenues stood at Rs20b, up 60%, and PAT at Rs3.1b, up 74%. EBITDA margin at 20.6% improved 220bp YoY.

Domestic sales picking up on the back of power shortage and industrial growth

-          After sluggish demand in FY09 and first half of FY10, domestic engine market has shown impressive recovery in past 6-8 months. With growing power shortage, diesel engine demand for power-generation application will continue to be strong. We expect domestic sales to grow at a CAGR of 26% through FY12.

Exports expected to provide strong growth in remaining part of the year

-          Cummins India is expected to show strong jump in exports in FY11 (Rs9.5b against Rs4.8b in FY10), driven by recovery in certain key markets.

-          We project exports to further grow to Rs15b by FY12, driven by recovery in global engines sales and increased outsourcing by parent.

Cash levels up despite aggressive capex

-          Cash and investments at end Sep-2010 stood at Rs8.7b against Rs7.9b in Mar-2010 and Rs7.3b in Sep-2009.

-          The company has been able to increase cash levels despite aggressive capacity expansion program.

Valuation and view

-          At CMP of Rs740, the stock trades at P/E of 24x FY11E EPS of Rs30.8 (up 37%) and 17.8x FY12E EPS of Rs42 (up 36%).

-          We are likely to revise our earnings upwards post the conference call.

-          Cummins is among the best performing stocks in the capital goods sector. We believe that despite its recent run-up, Cummins offers good investment opportunity with a long-term horizon. Strong 37% earnings CAGR, near-term earnings upsides due to likelihood of faster revenue growth, and growing exports opportunity should keep valuations at a premium to broader market.

-          We recommend Buy on the stock with the target price of Rs840, based on 20x FY12E earnings.