Cummins - Margins continue to surprise; upgrade to BUY :Religare

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Cummins India Ltd
Margins continue to surprise; upgrade to BUY
Cummins India’s (KKC) Q2FY11 results were significantly ahead of estimates in
terms of revenues as well as profitability. Revenue growth was driven by both
domestic sales and exports, which grew 49% and 282% YoY respectively.
EBITDA margins, at 19.9%, continued to beat expectations, as robust demand
and a superior product profile led to a 183bps YoY margin expansion. On the
back of robust demand and a sustained improvement in profitability profile, we
upgrade our earnings estimates for FY11/FY12/FY13 by 4.6%/8.6%/10.5% to
Rs 31.1/Rs 39.0/Rs 47.7. We roll over to September ’11 and raise our target
price to Rs 950 (22% upside), simultaneously upgrading the stock to BUY.

Domestic demand extremely strong: According to the management, domestic
demand conditions are remarkably positive, driven by the power generation and
construction machinery businesses. The power generation segment grew by
~50% YoY, while the industrial/services/auto segments grew by 50%/15%/10%
respectively in H1FY10.

Impressive headline numbers: In Q2FY11, revenues grew 73.8% YoY, driven by
the growth in exports and domestic operations. The EBITDA margin, at 19.9%,
expanded 183bps YoY on lower staff costs and other expenses (as a percentage
of sales) even as raw material expenses increased 76.7% YoY in the quarter. PAT,
at Rs 1.7bn, was up 91.4% YoY in the quarter.

Supply chain improvement – the next lever: The management reiterated that
after having successfully undertaken initiatives related to productivity and cost
improvement over the last few years, KKC will increasingly focus on productivity
enhancement and capacity expansion across the supply chain.

Focus on capacity expansion: On the capacity expansion front, KKC has
undertaken the following projects at its mega site at Phaltan (Maharashtra): 1) set
up of heavy-duty engines for exports, 2) deployed 200kVA generators for exports,
3) set up capacity for rebuilding and refurbishing engines, and 4) built a state-ofthe-
art spare parts distribution centre. The outlay for the above projects would be
to the tune of Rs 1bn in FY11E and Rs 1.5bn in FY12E.

Investment view: While the stock has significantly outperformed the Sensex over
the last six months, we believe the sustained improvement in profitability and
growth profile is likely to support a re-rating over the medium to long term. We
upgrade KKC to BUY with a revised target price of Rs 950 (from Rs 750 earlier).