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Good parts of the business are firing; no need for liberal extrapolation. 3QFY15 results include good performance from key growth drivers (LHP exports, HHP domestic powergen, industrials, margin). Overall weakness is driven by (1) low-HP powergen (premium pricing impacting off-take, correcting shortage demand) and (2) high-HP exports (limited near-term, medium-term growth potential). We build in improvement in the growth drivers (double-digit global market share for LHP exports by FY2017E, industrials CAGR of 25%, 200 bps margin increase), though find it difficult to match CMP-implied expectations (18% decadal FCF CAGR). We revise TP to `750 from `720 on higher 20X target multiple.
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LHP exports can support superior growth over the next two years Exports have ranged around `4 bn quarterly levels for the past couple of quarters. Scale-up in LHP exports from the current base (US$127 mn in FY2015E) can drive growth for exports for another two years (we build 30% CAGR). CIL would by then have a decent global market share, in our view. HHP exports may remain muted in the near term (weak global mining capex) and in the medium term (incremental capacities for large engines being set up outside CIL). We build a 50% CAGR in low-HP export revenues and 9% CAGR for non-LHP exports over FY2014-17E. Domestic – LHP part further contracts; HHP growth over low base, pick-up in industrials supports As in 1HFY15, domestic revenues have declined 7% yoy in 3QFY15. The weakness was driven by the powergen segment (down 22% yoy) as the LHP portfolio continued to contract (currently slightly lower than pre-CPCB-II regime despite 15-20% realization increase). To stop and reverse share loss in the LHP segment, Cummins is trying to de-feature its offering (at price premium to competition). The HHP segment business (two-thirds of product sales) has recovered (double-digit growth in 9MFY15) and made up for most of the decline in FY2014. The industrials business has improved significantly on a qoq basis based on government spending. CIL is optimistic of a revival in spending for select sectors (mining, defense, railways, shipyards). Margins – several levers can play, though already factored in estimates Margins at current 17.5% levels discount high export share (related loss made good by declining warranty costs and other expenses). We assume margin expansion by 200 bps over FY2015E- 17E, incorporating benefits from (1) a decline in commodity prices (down 6% over past three quarters), (2) imports getting substituted (as CTIL expands HHP range), (3) improving capacity utilization (65% for LHP exports) and (4) pricing power in key segments (sans domestic LHP). High expectations built in CMP, increasing chances of disappointment We revise our estimates to `28.2, `31.2 and `38.9 from `26.7, `32.7 and `43.7 for FY2015- 17E on changes made to revenue, margin and tax-rate estimates (Exhibit 7). We revise our TP to `750 (from `720) on 20X December 2016E earnings (from 19X September 2016E EPS).
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily04022015rq.pdf
Good parts of the business are firing; no need for liberal extrapolation. 3QFY15 results include good performance from key growth drivers (LHP exports, HHP domestic powergen, industrials, margin). Overall weakness is driven by (1) low-HP powergen (premium pricing impacting off-take, correcting shortage demand) and (2) high-HP exports (limited near-term, medium-term growth potential). We build in improvement in the growth drivers (double-digit global market share for LHP exports by FY2017E, industrials CAGR of 25%, 200 bps margin increase), though find it difficult to match CMP-implied expectations (18% decadal FCF CAGR). We revise TP to `750 from `720 on higher 20X target multiple.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
LHP exports can support superior growth over the next two years Exports have ranged around `4 bn quarterly levels for the past couple of quarters. Scale-up in LHP exports from the current base (US$127 mn in FY2015E) can drive growth for exports for another two years (we build 30% CAGR). CIL would by then have a decent global market share, in our view. HHP exports may remain muted in the near term (weak global mining capex) and in the medium term (incremental capacities for large engines being set up outside CIL). We build a 50% CAGR in low-HP export revenues and 9% CAGR for non-LHP exports over FY2014-17E. Domestic – LHP part further contracts; HHP growth over low base, pick-up in industrials supports As in 1HFY15, domestic revenues have declined 7% yoy in 3QFY15. The weakness was driven by the powergen segment (down 22% yoy) as the LHP portfolio continued to contract (currently slightly lower than pre-CPCB-II regime despite 15-20% realization increase). To stop and reverse share loss in the LHP segment, Cummins is trying to de-feature its offering (at price premium to competition). The HHP segment business (two-thirds of product sales) has recovered (double-digit growth in 9MFY15) and made up for most of the decline in FY2014. The industrials business has improved significantly on a qoq basis based on government spending. CIL is optimistic of a revival in spending for select sectors (mining, defense, railways, shipyards). Margins – several levers can play, though already factored in estimates Margins at current 17.5% levels discount high export share (related loss made good by declining warranty costs and other expenses). We assume margin expansion by 200 bps over FY2015E- 17E, incorporating benefits from (1) a decline in commodity prices (down 6% over past three quarters), (2) imports getting substituted (as CTIL expands HHP range), (3) improving capacity utilization (65% for LHP exports) and (4) pricing power in key segments (sans domestic LHP). High expectations built in CMP, increasing chances of disappointment We revise our estimates to `28.2, `31.2 and `38.9 from `26.7, `32.7 and `43.7 for FY2015- 17E on changes made to revenue, margin and tax-rate estimates (Exhibit 7). We revise our TP to `750 (from `720) on 20X December 2016E earnings (from 19X September 2016E EPS).
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily04022015rq.pdf
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