Cummins India Ltd. share price target

CIL raised its guidance, after strong beat in Q2Fy19 results - a) +200bps for domestic market to 10-12%; and b) 3-5% for exports from 0% earlier. We increase our EPS estimates by 5% and consequently, target price by 4% to INR 915/sh. Key highlights- (1) Demand - growth has been strong in Railways, Data Centres and Infra / construction, while real estate still remains sluggish. (2) Pricing Gross margins benetted by 150bps in 2Q & 50bps in 1H from INR depreciation, and should normalize with price resets in 2H. However, company took 3-5% price hikes domestically (67% of revenues) in order to arrest cost ination. (3) New product launches in Rail and mechanical generators helped improve market...

Cummins is a leader with 40% market share in the diesel engines/gensets industry. Further, it has strong presence in high value and high margin high horse power (HHP) gensets with approximately 62% market share as on FY18 end.

In our earnings model, we build 1/ bottoming out of Powergen business and showing modest recovery and 2/ continued momentum in industrial and distribution business driven by infrastructure sector. Exports could potentially surprise, given the bounce back in crude oil prices leading to the recovery in Middle East & Africa market and Europe. In our forecasts, we are factoring margins below the historical peak. We build...

Challenges Persist for Cummins: Cummins India's revenue dropped by 1% YoY to Rs. 13 bn in line with our estimates, however, adjusted earnings was higher by ~ 10% and reached Rs.6.6, which is below our estimate. In terms of segments, Q1 performance was in complete divergence of full year guidance of 8-10% domestic business growth and 0-5% exports business growth which it re-iterated as FY19E guidance in the Q1 concall as well.

Buoyed by exports, margins post positive surprise Cummins India 1QFY19 results were in-line with estimates. Net sales declined by 1% YoY (7% below JMFe) as domestic sales registered a 7% decline (high base effect), while exports reported healthy growth of 12% YoY. However, operating profits grew by 10% YoY (in-line with JMFe), as operating margins grew by 160bps YoY to 16.2%, buoyed by currency tailwinds and favourable sales mix. Being cautiously optimistic, management maintain its annual sales growth guidance (domestic: 8-10%, exports: 0-5%) as it suspected that the bump in exports may be due to inventory correction. Adjusted net profit growth was stunted...

FY18 Annual Report Analysis: Capital allocation hurts RoIC Cummins India (KKC)'s balance sheet has seen a stark change in the past 5 years, with increased allocation to investment properties and current investments, leading to a 150% rise in interest and rental income vs. a 12% decline in EBITDA over the same period. Other key takeaways from the annual report are: a) management increased focus on the industrial division through bundled offerings and new product introductions to capture a larger share of railways, mining, defence and construction (new emission norms from CY20) as power gen/export sales growth remain muted, b) it maintained tight control on expenses and...

Content growth is driven by offering more solutions to an existing customer for example, in the road construction industry, KKC supplies the DG sets for backup power, engines for use in excavators, loaders, road rollers, and asphalt-laying machines while also providing connected solutions. Similarly, for the rail segment, it earlier supplied only the engines it has moved on to supplying generators along with the engines and now provides silent DG sets. Lastly, in terms of new products, KKC is already working on CPCB-3/BS-VI emission-compliant engines to be introduced in 2020 and very few competitors would be able to adapt to the new norms; BS-VI will have near-zero emission. At the top of these is technology leadership not only does it have access to its parents knowhow, it has also set up a technical center in Pune to develop new products for local and global markets.

We expect Cummins India to be able to deliver growth at c.16.4% CAGR (against flat YY growth in FY18E) between FY18-20 given the continued momentum in industrial demand and potential benefits arising from improving economic outlook in exports market (business impact yet to be confirmed by the management). Continued efforts towards cost rationalization (maintain Gross margins through value engineering efforts) and operating leverage will be able to offset the cost inflation to a large extent. We see margins reverting towards FY15-16 levels (still far from...

In the Financial Year 2017-18, continued investments in infrastructure and implementation of reforms such as GST, if coupled with a normal monsoon, is expected to spur the domestic growth momentum. Company expects that the investments in the IT/ITES sector and particular in datacenter capacity would sustain the growth in the high horse power segment,...

We maintain our Hold rating on CIL with a Target Price of Rs. 891. CIL reported a flat YoY growth in Q3FY18 revenue (+17% QoQ). Domestic revenue (68% of total sales) was up by 3%YoY while exports revenue declined by 7%YoY. EBITDA margins declined 220bps YoY to 14.5% mainly due to adverse product mix given limited exports and increase in other expenses (higher R&D;) despite improvement in gross margins (+130bps YoY). Management has lowered its domestic growth guidance to 0-5% from 5-10% earlier due to sluggish industrial and real estate demand while exports was maintained at 5-10% decline for FY18. While we expect de-growth in earnings for FY18, earnings recovery is likely in FY19 due to recovery in domestic...