Cummins India Ltd. share price target

Cummins India Limited, 51% subsidiary of US based Cummins Inc limited, is India's leading manufacturer of diesel and natural gas engines. One of the eight legal entities of the Cummins Group in India, Cummins India Limited comprises of three business units - Engine, Power Systems, and Distribution. CIL is a market leader in the all key product categories in India with exports (including exporting to Cummins group of companies globally) being a major part of Cummins India limited revenues, CIL has its plants located at Kothrud, PDC at Phaltan, Power...

Cummins India reported a robust Q2FY19 result, beating street estimates by a wide margin. Its revenue increased by 28.9% yoy to Rs1,487cr driven by strong domestic and export sales. EBITDA increased by 49.8% yoy to Rs251cr during the quarter led by strong sales, better product mix and favorable currency movement.

Strong Q2 Performance from Cummins: Cummins revenue for the quarter was up by 29% beating our estimates by 17%(consensus by 13%), driven by domestic sales up by 34% YoY and supportedby export growth of 21% YoY.

Cummins India Ltd Q2FY19 results Comment Revenue increased by 11.96% to Rs. 1451.55 Cr in Q2FY19 when compared to the previous quarter. Also, it increased by 29.78% when compared with Q2FY18

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...