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Cummins India ---------------------------------------------------- Downgrade to UNDERPERFORM
No place to hide
● 1Q results were below estimates, and from a cyclical viewpoint,
we are clearly perched at the top—we expect revenue growth to
materially slow in the coming quarters, given high interest rates,
limited uptick in industrial cycle and macro headwinds in the
US/Europe (key export markets, ~25% of sales). To reflect these
concerns, our EPS estimates are revised down by 17%/24%.
● In the post result conference call, management echoed similar
viewpoints: FY12 growth guidance moderated (India sales down
from 25% to ~10–15% and exports from ~15% to ~5–10%, 16%
margin expected). Management attributed this cut to the
slowdown in commercial realty, infra, telecom and water-well rig
market.
● Our view on the industrial and infra cycle in India remains
negative (see report No cycle without reforms dated 15 April
2011), but Cummins was rated Outperform due to exposure to
global growth; however, the risk to that is emerging now. We
hence downgrade our rating to UNDERPERFORM (from
Outperform, target price revised down to Rs506, from Rs760).
1Q results were disappointing
Beat in the reported PAT was largely due to income from the sale of
exhaust business (~Rs514 mn).
Key takeaways from management conference call
Management highlighted that the growth expectation from key endmarkets
has been toned down: (1) Commercial realty ~7% from
historical ~12%, (2) infra growth may halve from ~15% to ~7% and (3)
water-well rig market (~25% of industrial sales) is witnessing a cyclical
decline with sales falling by ~50%. On a sustainable basis, domestic
growth is seen in upper teens and exports in lower teens.
Margins were hit as the prices of pig iron (~50% of raw material costs)
and Cu (~10% of raw material costs) increased sharply and product
mix changed to lower KVA engines. No further price hikes will be
taken unless input costs rise significantly.
Comparable read from Kirloskar Oil Engines
Kirloskar management had also revised its FY12 growth targets down
to 10% from ~15–20% due to high inflation, interest rates and diesel
price hikes. Powergen market was seeing a slowdown, while
customers were not picking up deliveries (of higher KVA engines) in
the off-highway segment.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cummins India ---------------------------------------------------- Downgrade to UNDERPERFORM
No place to hide
● 1Q results were below estimates, and from a cyclical viewpoint,
we are clearly perched at the top—we expect revenue growth to
materially slow in the coming quarters, given high interest rates,
limited uptick in industrial cycle and macro headwinds in the
US/Europe (key export markets, ~25% of sales). To reflect these
concerns, our EPS estimates are revised down by 17%/24%.
● In the post result conference call, management echoed similar
viewpoints: FY12 growth guidance moderated (India sales down
from 25% to ~10–15% and exports from ~15% to ~5–10%, 16%
margin expected). Management attributed this cut to the
slowdown in commercial realty, infra, telecom and water-well rig
market.
● Our view on the industrial and infra cycle in India remains
negative (see report No cycle without reforms dated 15 April
2011), but Cummins was rated Outperform due to exposure to
global growth; however, the risk to that is emerging now. We
hence downgrade our rating to UNDERPERFORM (from
Outperform, target price revised down to Rs506, from Rs760).
1Q results were disappointing
Beat in the reported PAT was largely due to income from the sale of
exhaust business (~Rs514 mn).
Key takeaways from management conference call
Management highlighted that the growth expectation from key endmarkets
has been toned down: (1) Commercial realty ~7% from
historical ~12%, (2) infra growth may halve from ~15% to ~7% and (3)
water-well rig market (~25% of industrial sales) is witnessing a cyclical
decline with sales falling by ~50%. On a sustainable basis, domestic
growth is seen in upper teens and exports in lower teens.
Margins were hit as the prices of pig iron (~50% of raw material costs)
and Cu (~10% of raw material costs) increased sharply and product
mix changed to lower KVA engines. No further price hikes will be
taken unless input costs rise significantly.
Comparable read from Kirloskar Oil Engines
Kirloskar management had also revised its FY12 growth targets down
to 10% from ~15–20% due to high inflation, interest rates and diesel
price hikes. Powergen market was seeing a slowdown, while
customers were not picking up deliveries (of higher KVA engines) in
the off-highway segment.
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