Cummins India - Selective Domestic Recovery Seen; Equipped to Tap Growth; Result Update Q3FY15 ::Edelweiss

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Cummins India (KKC) reported weak sales impacted by low domestic market demand, while margins sustained led by internal cost reduction initiatives and higher mix of profitable export sales. Domestic sales improved 5% QoQ, but dipped 7% YoY. While exports fell 19% QoQ, it surged 39% YoY led by small generator exports. Management indicated strong traction in IBU segment following robust demand in railways, marine, etc. Management expects domestic power generation volumes to improve over 12-15 months, and highlighted upside risk to near-term exports guidance. We maintain ‘BUY’ with a revised TP of INR950 (earlier -INR814) as we introduce and roll forward our valuations on FY17EPS.  We value the stock at 26x FY17E earnings, given solid competitive positioning in domestic power generation segment, and strong upsides from growing industrial and exports business in small generators.

Exports sustain healthy pace; domestic market grows QoQ

KKC sustained strong 39% YoY growth in exports, led by rising penetration in global small generators market. It recorded strong recovery in industrial segment, led by the government spending in railways, mining, marine, etc. Power generation however, remained muted registering 7% YoY dip. Management expects power generation to improve over 12-15 months as GDP revives and capex picks up.

Exports, IBU key triggers; Domestic power gen volumes to pick up

Despite the strong 39% YoY growth in export sales, management remained upbeat on export volumes piggy-banking on competitive cost structure as Cummins penetrates the large global market. Also, with the rate reversal cycle commencing and GDP growth outlook improving, power generation volumes are set to improve incrementally.

LINK
https://www.edelweiss.in/research/Cummins-India--Selective-Domestic-Recovery-Seen;-Equipped-to-Tap-Growth;-Result-Update-Q3FY15/28223.html