Cummins India
BSE SENSEX
36,443
S&P CNX
10,987
5 March 2019
Update
| Sector:
Capital Goods
CMP: INR 719
TP: INR950 (+32%)
Buy
Focus on developing new growth areas, market share
Price hikes taken to counter rising raw material prices
We recently met the management of Cummins India Limited. Key highlights from
our meeting are as below:
KKC IN
277
199.2 / 2.8
885 / 612
-10/1/-18
416
49.0
Stock Info
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
Price hike of ~5% across multiple nodes:
Starting Nov’18, Cummins India
introduced price hikes of ~3-5% across nodes to mitigate the cost pressure due to
rising raw material prices. The company expects gross margins to expand by 100bp
if the price hike is absorbed by the system. Key point to note — Cummins India has
not hiked prices for the last four years.
Focus on market share and developing new areas for incremental domestic
growth:
While it is the market leader in HHP (~60% share) and MHP segment
(~50% share), Cummins is focusing on gaining greater market share in few selective
nodes in the 750kv and above segment —a key focus area for the company. It has
also developed new growth areas in the domestic market; a segment like Railways
now contributes INR2.5b to sales. The focus is now to increase its marine market
revenue from current INR250m to INR2.5b in a few years. Cummins also expects
manufacturing to start contributing to revenue.
FY20 revenue guidance of 10-12% for Domestic and 0-5% for Exports:
In its
guidance for FY20, Cummins India expects 10-12% growth in the Domestic market
backed by strong growth across infrastructure segments like Data Centers,
Hospitality and Metro. It is also seeing a demand pick-up in the manufacturing
segment. However, on the Exports front, it expects growth to remain flattish;
hence a weak guidance of 0-5%. Demand for Powergen segment products (major
part of its exports business) has witnessed a decline. Even key markets like the
Middle East (slowdown in investment) and Africa (payment concerns), which
contributes 50% to LHP exports have not picked up. Cummins expects its
distribution business to register steady growth of 8-10% growth YoY.
To launch a refreshed product range after new emission norms are implemented
in FY22:
Post implementation of CPCB4 norms, Cummins India will introduce a
refreshed range of products. If norms are implemented in entirety, it expects the
Indian market’s transition to electrical engines from mechanical engines. This
should help Cummins to improve realization and market share given its
preparedness to meet the new norms.
Capex plans mostly complete:
Currently, Cummins intends to do capex of INR1.8b
in HHP and CPCB4 related product development; post this it does not have any
major capex plans, barring the operational capex incurred on a yearly basis. This
would ensure healthy free cash flow generation for the company. Cummins has
very strong track record of distributing free cash to shareholders; it distributed
~70% of its profits as dividend to shareholders.
Financials Snapshot (INR b)
Y/E March
2019E 2020E 2021E
Net Sales
56.4
63.0
70.0
EBITDA
8.8
10.1
11.6
Adj PAT
7.5
8.5
9.6
EPS (INR)
26.9
30.7
34.8
EPS Gr. (%)
14.4
13.9
13.4
BV/Sh. (INR)
155.2 168.1 182.7
P/E (x)
26.7
23.4
20.7
P/BV (x)
4.6
4.3
3.9
RoE (%)
18.0
19.0
19.8
RoCE (%)
17.2
18.2
19.1
Shareholding pattern (%)
As On
Dec-18 Sep-18 Dec-17
Promoter
51.0
51.0
51.0
DII
24.9
24.0
21.0
FII
11.4
12.4
15.3
Others
12.7
12.7
12.7
FII Includes depository receipts
Stock Performance (1-year)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Ankur Sharma – Research Analyst
(Ankur.VSharma@MotilalOswal.com); +91 22 6129 1556
Amit Shah – Research Analyst
(Amit.Shah@MotilalOswal.com); +91 22 6129 1543