Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We recommend Cummins India a “BUY”. Cummins India is country’s leading manufacturer of Diesel and
Gas Engines with strong foundation, unmatched technology & products, scale and time tested strategies.
The company doubled its revenue in the last five years to INR3945.44 crores and is poised to grow at a
CAGR of 14% for the next five years. Cummins India would make headway from the operations at
Megasite at Phaltan in coming years which would foster the margin back to the historic levels and
contribute around additional of INR1500crores to the revenues by 2015.
Substantial Revenue growth despite multiple headwinds: Despite of high interest rates and commodity
prices coupled with uncertain global environment, the company has been growing at a CAGR of 16.47%
for the last 5 years. It is poised to grow at a CAGR of 14% for the next 5 years with improved outlook on
export demand and substantive growth across all segments, particularly in segments like power
generation and industrial business which contribute around 45% and 20% to the total revenue
respectively.
New products to aid to future growth; Margins bottoming out: Cummins elasticity of adopting the new
technology and using the same efficiently will help the margins to bottom out. It will significantly benefit
from the enhanced products built‐in with new emission power generation norms and industrial engines
due to superior product development capabilities. Hence, with the improving demand scenario and
correction in commodity prices, there will be an upside in EBITDA margins, going forward.
Expansion at Phaltan Megasite to fuel Cummins future growth Engine: Cummins is well placed with its
expansion initiatives at Megasite, Phaltan. It constitutes almost 10 facilities in total, out of which 4 are
operational and remaing would be operational by 2016 and contribute additional INR1500 crores to the
overall revenue. The 2 operational facilities namely Upfit centre & MIDC SEZ would add up annual
capacity of 20,000MW & 51,000MW respectively.
Power Generation Business to act as power booster: The company expects the Power generation
business to grow at a CAGR of 12‐15%% over the next five years. The growth will be mainly driven by 1)
market growth 2) LHP export opportunity at MIDC SEZ 3) larger penetration in the domestic LHP market
(though might come at lower margins) and 4) tapping the bio mass opportunity. The company
anticipates some pre‐buying behavior to show up before the change in the emission norms in July 2013
which would contribute heavily to the revenues. Cummins is confident that it will be able to penetrate
the market much better post the norm change, given its technology leadership and readiness with the
product to meet the revised needs of the customers
Cummins‐Cash enriched and Steady Balance Sheet: The Company has enough cash to carry on its future
operation and expansions. It has strong balance sheet with healthy reserves and low debt.
Key Risks & Concerns
The risks due to interest rates being hiked to curb rising inflation, could dampen industrial activity. Rising commodity prices could also
put pressure on Company margins.
Key international players are making their foray into India. Private players are also entering so‐called Government domains like
mining and exploration. This will see the intensity of the competitive landscape rising to new levels.
The cyclical downturn in the water‐well market which began in Q1FY11 is likely to continue for the rest of the year.
Lack of immediate visible demand for CNG buses is likely to affect demand for CNG engines in near future.
Steady increases in commodity inflation, increases in interest rates and declines in domestic demand in certain segments.
Valuation
We followed consolidated approach to value Cummins India Limited based on Discounted Cash Flow (DCF) and Comparative valuation
methodologies. In comparative valuation, we pursued Price‐to‐Earnings (P/E) and Price‐to‐Book Value (EV/EBITDA) methods. In addition, to
arrive at a final valuation, we provided different weights to each of our valuation methods. A description of valuation through each of the
adopted technique and consolidated valuation is as follows:
Discounted Cash Flow (DCF)
We utilized Weighted Average Cost of Capital (WACC) of 10.23% to discount the future earnings of Cummins India. In addition, we applied a
terminal growth rate of 2.00% for the earnings beyond FY2016E. We arrived at the WACC with a Cost of Equity of 10.25%, post tax Cost of
Debt of 8.28%, and Debt‐to‐Equity of 0.01x. By adopting Capital Asset Pricing Model (CAPM), we arrive at Cost to Equity based on Market
Return of 11.13%, Risk Free Rate of 8.47% and Beta of 0.67x. Furthermore, the Cost of Debt represents expected interest cost after deducting
the tax impact. With this, our DCF valuation reflects a target price of `594.41 for the stock, which reflects an upside of 28.66% from the CMP
of `462.
Price‐to‐Earnings (P/E)
Based on a targeted P/E multiple of 19.83x on FY2014E EPS of `25.70 per share, we arrived at a target price of `509.48 per
share for the company, with the CMP of `462.00
EV/EBITDA
Based on the last 3 years average of EV/EBITDA i.e `12.49 and EBITDA of FY2013‐14 i.e `994.48, we arrived at a target price of
`451.06.
Consolidated Valuation
Considering future earnings growth visibility and current market scenario, we assigned 50% weight to the DCF approach followed by 25%
weight each to P/E and EV/EBITDA methodologies. With this, we arrived at a target price of `537.34 per share for Cummins India, 16.31%
upside from CMP of `462.00 per share.
Consolidated Valuation
Particulars Target Price Weight Share in Target Price
Value based on DCF approach 594.41 50% 297.21
Value based on P/E approach 509.48 25% 112.76
Value based on EV/EBITDA approach 451.06 25% 127.37
Consolidated Value 537.34
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We recommend Cummins India a “BUY”. Cummins India is country’s leading manufacturer of Diesel and
Gas Engines with strong foundation, unmatched technology & products, scale and time tested strategies.
The company doubled its revenue in the last five years to INR3945.44 crores and is poised to grow at a
CAGR of 14% for the next five years. Cummins India would make headway from the operations at
Megasite at Phaltan in coming years which would foster the margin back to the historic levels and
contribute around additional of INR1500crores to the revenues by 2015.
Substantial Revenue growth despite multiple headwinds: Despite of high interest rates and commodity
prices coupled with uncertain global environment, the company has been growing at a CAGR of 16.47%
for the last 5 years. It is poised to grow at a CAGR of 14% for the next 5 years with improved outlook on
export demand and substantive growth across all segments, particularly in segments like power
generation and industrial business which contribute around 45% and 20% to the total revenue
respectively.
New products to aid to future growth; Margins bottoming out: Cummins elasticity of adopting the new
technology and using the same efficiently will help the margins to bottom out. It will significantly benefit
from the enhanced products built‐in with new emission power generation norms and industrial engines
due to superior product development capabilities. Hence, with the improving demand scenario and
correction in commodity prices, there will be an upside in EBITDA margins, going forward.
Expansion at Phaltan Megasite to fuel Cummins future growth Engine: Cummins is well placed with its
expansion initiatives at Megasite, Phaltan. It constitutes almost 10 facilities in total, out of which 4 are
operational and remaing would be operational by 2016 and contribute additional INR1500 crores to the
overall revenue. The 2 operational facilities namely Upfit centre & MIDC SEZ would add up annual
capacity of 20,000MW & 51,000MW respectively.
Power Generation Business to act as power booster: The company expects the Power generation
business to grow at a CAGR of 12‐15%% over the next five years. The growth will be mainly driven by 1)
market growth 2) LHP export opportunity at MIDC SEZ 3) larger penetration in the domestic LHP market
(though might come at lower margins) and 4) tapping the bio mass opportunity. The company
anticipates some pre‐buying behavior to show up before the change in the emission norms in July 2013
which would contribute heavily to the revenues. Cummins is confident that it will be able to penetrate
the market much better post the norm change, given its technology leadership and readiness with the
product to meet the revised needs of the customers
Cummins‐Cash enriched and Steady Balance Sheet: The Company has enough cash to carry on its future
operation and expansions. It has strong balance sheet with healthy reserves and low debt.
Key Risks & Concerns
The risks due to interest rates being hiked to curb rising inflation, could dampen industrial activity. Rising commodity prices could also
put pressure on Company margins.
Key international players are making their foray into India. Private players are also entering so‐called Government domains like
mining and exploration. This will see the intensity of the competitive landscape rising to new levels.
The cyclical downturn in the water‐well market which began in Q1FY11 is likely to continue for the rest of the year.
Lack of immediate visible demand for CNG buses is likely to affect demand for CNG engines in near future.
Steady increases in commodity inflation, increases in interest rates and declines in domestic demand in certain segments.
Valuation
We followed consolidated approach to value Cummins India Limited based on Discounted Cash Flow (DCF) and Comparative valuation
methodologies. In comparative valuation, we pursued Price‐to‐Earnings (P/E) and Price‐to‐Book Value (EV/EBITDA) methods. In addition, to
arrive at a final valuation, we provided different weights to each of our valuation methods. A description of valuation through each of the
adopted technique and consolidated valuation is as follows:
Discounted Cash Flow (DCF)
We utilized Weighted Average Cost of Capital (WACC) of 10.23% to discount the future earnings of Cummins India. In addition, we applied a
terminal growth rate of 2.00% for the earnings beyond FY2016E. We arrived at the WACC with a Cost of Equity of 10.25%, post tax Cost of
Debt of 8.28%, and Debt‐to‐Equity of 0.01x. By adopting Capital Asset Pricing Model (CAPM), we arrive at Cost to Equity based on Market
Return of 11.13%, Risk Free Rate of 8.47% and Beta of 0.67x. Furthermore, the Cost of Debt represents expected interest cost after deducting
the tax impact. With this, our DCF valuation reflects a target price of `594.41 for the stock, which reflects an upside of 28.66% from the CMP
of `462.
Price‐to‐Earnings (P/E)
Based on a targeted P/E multiple of 19.83x on FY2014E EPS of `25.70 per share, we arrived at a target price of `509.48 per
share for the company, with the CMP of `462.00
EV/EBITDA
Based on the last 3 years average of EV/EBITDA i.e `12.49 and EBITDA of FY2013‐14 i.e `994.48, we arrived at a target price of
`451.06.
Consolidated Valuation
Considering future earnings growth visibility and current market scenario, we assigned 50% weight to the DCF approach followed by 25%
weight each to P/E and EV/EBITDA methodologies. With this, we arrived at a target price of `537.34 per share for Cummins India, 16.31%
upside from CMP of `462.00 per share.
Consolidated Valuation
Particulars Target Price Weight Share in Target Price
Value based on DCF approach 594.41 50% 297.21
Value based on P/E approach 509.48 25% 112.76
Value based on EV/EBITDA approach 451.06 25% 127.37
Consolidated Value 537.34
No comments:
Post a Comment