Cummins India Ltd. share price target

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...

Q3 revenue at Rs 13.5 bn was flat YoY and missed expectations due to 7% decline in exports on continuing drop in low kilowatt generator sets (sales down 21% YoY). Domestic sales increased 3% YoY Powergen down 6%, Industrial up 8%, and Distribution up 11%.

Recovery in Domestic Business Imminent; Exports Scenarioto Stabilise: Domestic business grew by 3% y/y in 9MFY18 due to slower growth in Industrial (3%, y/y) and Powergen business (5.7%, y/y) which was largely mitigated byhigher growth in Distribution business (11.7%, y/y).

Operating performance below expectations: Cummins India's (KKC) 3QFY18revenue was flat YoY at INR13.5b, below our estimate of INR14.3b. Gross margin improved 130bp YoY to 36.9%. EBITDA declined 13% YoY to INR1.7b(our estimate: INR2.5b), with margin contracting 220bp YoY to 1 4.5% (our estimate: 17.2%) due to higher other expenses (12.7% of sales v/s 10.8% in3QFY17). PAT fell 13% YoY to INR1.7b (our estimate: INR2.1b). Revenue decline witnessed in key segment of power gen and exports:Domestic business registered muted revenue growth of 3% YoY, supported by distribution business (INR3.6b, +11% YoY) and industrial segment(INR2.1b, +8% YoY). However, key power generation business witnessed 6%decline YoY to INR3.3b. Exports declined 7% YoY due to weakness in LHP segment (-22% YoY) and HHP segment (-14% YoY) demand

With the recent decline in the stock price, we maintain a BUY with a TP of Rs 1,004/sh (31x Dec-19 EPS). Cummins Indias (KKCs) 3QFY18 revenue were flat YoY/grew 17% QoQ to Rs 13.5bn owing to a 3% YoY rise/7% fall in domestic/ export revenues to Rs 9bn/Rs 4.2bn. Higher other expenses (up 17% YoY owing to payment for services from the parent and higher R&D; spend) and negative oplev led to EBITDAM fall of 220bps YoY to 14.5% (vs our estimate of 15%). EBITDA was down 13% YoY to Rs 1.96bn. Net profit fell 13% YoY to Rs 1.72bn vs our estimate of Rs 1.86bn. KKC lowered FY18 domestic revenue growth guidance to 0 to 5% (vs earlier 5 to 10%), while maintaining the exports guidance to -10% to -5%.

Near-term outlook: GST impact on sales has reversed in 2H. Also, worst in exports may be behind KKC. BUY. Govts thrust on Infrastructure would continue to drive KKCs Industrial segment. With all the lead indicators for exports such as Chinas GDP growth, oil prices, steel and copper prices firming up, we expect KKC to regain traction in export revenues in the ensuing quarters. We maintain our estimates of tepid revenue CAGR of 8% over FY17-20E. With the recent decline in the stock price of KKC, we upgrade KKC to a BUY with a TP of Rs 1,016/sh (31x Dec-19 EPS).

Guidance maintained for FY18E: Cummins India management maintainedits full year guidance for domestic business between 5%-10% on the back of Government CapEx and service sector demand; However, lower demand from Middle-East and African nations to contract exports by 5% to flat in FY18E.

Maintain NEUTRAL with a TP of Rs 1008/sh (32x Sept-19 EPS). Cummins Indias (KKC) 2QFY18 revenue fell 10/14% YoY/QoQ to Rs 11.5bn owing to a 7/17% YoY fall in domestic/ export revenues to Rs 7.5bn/Rs 3.7bn. EBITDAM fell 105bps YoY to 14.5%, the result of a rise in staff costs and other expenses. EBITDA declined 15.8% YoY to Rs 1.7bn. Lower other income (Rs 536mn, down 22.5% YoY), coupled with higher tax incidence (21.7% vs 19% YoY owing to lower contribution of Phaltan SEZ exports) resulted in a 22% YoY decline in APAT at Rs 1.5bn. KKC maintained FY18 domestic revenue growth guidance of 5 to 10%, while revising the exports guidance downward from (-5% to 0%) to (-10% to -5%).