Cummins India Ltd. share price target

Gross margin expands led by cost savings and better product mix: Gross margin improved 170bp YoY to 36.9%, led by cost-saving measures (like value engineering initiatives with vendors) and a better product mix. KKC expects 2HFY18 gross margins to sustain at the current levels. Operating margin contracted 110bp YoY to 14.5%, given negative operating leverage. Cutting guidance on exports, but maintaining on domestic revenue: For FY18, KKC lowered its exports growth guidance to -5-10% growth (from flatto-negative 5%), and maintained its 5-10% growth outlook in the domestic business. It expects the domestic markets to bounce back over 2HFY18,...

Valuation and Outlook: We forecast 13% CAGR in revenues till FY19. Further, with cost rationalization and TRIMS, we forecast, in a base-scenario, KKC IN will grow its EBITDA by 22% CAGR over next two fiscals. Notwithstanding the conventional engine market, the benefit for 6B and 6C series engines in marine applications and many more will surprise the street on the upside. Thereby, we think, there are too many wheels that can change the company fortune around. We value this company on 29x...

Guidance for FY18E maintained: Cummins India management maintained the guidance for full year with domestic business expected to grow between 5%-10% on the back of Government CapEx and demand from service sector while lower demand from Middle-East and African nations to contract exports by 5% or at best make it flat by end of year.

Maintain NEUTRAL with a TP of Rs 974/sh (30x Jun-19 EPS). Cummins Indias (KKC) 4QFY17 revenues at Rs 13.5bn came in-line with our estimates. An unfavourable product mix and increase in staff costs led to EBITDA margins declining 180bps YoY to 14.6%. Higher other income (Rs 583mn; +40.3% YoY) was offset by higher taxes (Rs 625mn; +42.1% YoY), resulting in 8.4% decline in APAT to Rs 1.7bn. During the quarter, KKC recognised exceptional gain (net of tax) of Rs 438mn on sale of assets. Mgt has maintained its revenue growth guidance of 5 to 10% in the domestic biz, and flat to -5% for exports in FY18.

Yet its flagship domestic power generation business faltered (~8%) not least due to India's declining power deficit and subdued demand from manufacturing sector. Despite overall economic stress in H2 induced by demonetization, Cummins did manage to make noticeable headways in data centers, IT&ITES; and commercial realty for most last fiscal. Robustness in domestic demand did little to prevent operating margins to fall to the lowest level in seven years for the margins have now descended in three of the last four quarters with Q4's 14.4% - induced by adverse...

Revenue decreased by 12.73% to Rs. 1155.6 Cr in Q4FY17 when compared to the previous quarter.

Results-inline: Given the front loaded push by Govt. and unique product profile, domestic revenue saves the day. KKC, however, has cut the guidance to 5-10%, as against 10-12%. Soaring commodity oil prices should augur well for K and Q series, we believed. However, as KKC downplays that prospect in near to medium term, the proof of the pudding was starker....

Cummins Indias (KKC) 4QFY17 revenue/APAT came in below our estimates by 10.4/12.9% resp. The confluence of 20.4% growth in the domestic business and 7.0% decline in exports led to revenue growth of a mere 11.1% YoY. An unfavourable product mix resulted in EBITDA margins declining ~240bps YoY to 14.4%.

BUY Cummins India Ltd CMP at Rs. 882 and add on dips to Rs. 815 - 882 for the Target of Rs. 1070

Cummins' Q3FY17 PAT of Rs 2 bn (up 5%) beat our est of Rs 1.9 bn on higher exports (up 23%) and spares (up 18%). Management upped FY17 exports guidance to +5% (flat to -5% earlier); maintained domestic guidance at 10-12%. FY18 guidance: domestic +10%; exports +5%, margins volatility of 100-150 bps m..