ICICI Securities is bullish on Cummins India and has recommended add rating on the stock with a target of Rs 555 in its February 1, 2013 research report.
"We upgrade Cummins India (CIN) from Reduce to ADD with a revised target price of Rs555 (18x FY14-15E average EPS) primarily on the back of: 1) management guidance that exports are likely bottoming out, 2) improving confidence with regard to implementation of CPCB II norm albeit with marginal delay, 3) continued power sector chaos and higher growth in the power-starved southern region fosters confidence of limited impact of diesel price hike given lack of alternative fuels, and 4) improved outlook of the company's domestic business segment such as mining, and improved performance of its distribution segment. Increase in target price is driven by earnings roll-forward to FY14-15E average from FY14E and a notch increase in the PE multiple from 17x to 18x given strong profitability growth expected between FY12-15E at a CAGR of 18% valuing company at a PER of 1x. CIN posted strong Q3FY13 results, with revenues witnessing 13% YoY growth at Rs10.9bn (I-Sec: Rs10.7bn) on the back of strong domestic sales performance (up 21% YoY) and higher-than-expected EBITDA margins at 19.1% (up 240bps YoY, ISec: 17.8%). We increase our FY13/14E earnings by 9.9%/0.2% respectively."
"CIN reported a better-than-expected revenue growth on the back of strong domestic revenues (up 21% YoY), led by power (up 50% YoY) and distribution segment (up 15%). Margins came in strong on the back of reduction in all cost heads, i.e. materials (down 33bps), employee costs (down 41bps) and SG&A expenses (down 166bps). The company guided for steady revenue growth and reiterated its earlier guidance of low-to-mid teens revenue growth. Marginal reduction in margins going forward (~50bps, ) was the only negative."
"CIN is likely to be a key beneficiary of CPCB II norms, which is expected to provide a fillip to DG set pricing (~20%) and profitability (likely to be introduced in Q3FY14). Further, continued power deficits (acute in the southern region) are expected to maintain a healthy growth for demand as well. While diesel price hike would logically be a negative, we believe it should not impact demand materially given that alternative fuels are less reliable in providing steady backup power. Given CIN's strong performance in 9MFY13, we upgrade our earnings estimate by 9.9% for FY13, increase target price to Rs555/share, and upgrade recommendation to ADD from Reduce. Key risks to our call are: lower pricing and demand post CPCB II norms, and margin impact due to adverse forex and commodity price movements," says ICICI Securities research report.
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