Hold Cummins India; target of Rs 388: Emkay

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Hold Cummins India; target of Rs 388: Emkay

Emkay Global Financial Services has recommended hold rating on Cummins India with a target of Rs 388, in its February 10, 2012 research report.

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Emkay Global Financial Services has recommended hold rating on Cummins India with a target of Rs 388, in its February 10, 2012 research report.

"After a disappointing Q2FY12, Cummins India (CIL) reported improved performance during in Q3FY12. Revenues increased marginally by 0.7% yoy to Rs10.0 bn - led by 12% yoy growth in exports. Domestic business posted muted growth at 1% yoy. EBITDA margins fell 20 bps yoy to 17.9% (+180 bps qoq) (Vs estimate of 16.2%) - positive surprise. Higher than expected EBITDA margins were due to (1) forex gains of Rs0.1 bn (2) favourable revenue mix and (3) cost reduction measures, which negated high input costs. Hence, EBITDA was ahead estimates at Rs1.8 bn (-0.4% yoy). Net profit was marginally ahead estimates at Rs1.4 bn, after considering higher tax incidence (tax rate up 450 bps yoy to 27.5%)."

"Domestic business (excluding distribution) posted muted growth at 1% yoy to Rs5.0 bn in Q3FY12 (-9% qoq) - led by 0% yoy growth in Power co-gen (-19% qoq) and 3% yoy decline in industrial segment (+9% qoq). Automotive business grew at a healthy 9% yoy (-3% qoq). Growth in CSS segment and Exports was healthy at 9% yoy and 12% yoy respectively, thereby arresting any revenue decline. CIL shared encouraging outlook for FY13E citing improvement in business environment and expects demand to pick-up in the ensuing quarters. CIL expects domestic business to drive growth in FY13E (expected to grow in high-teens), while exports expected to clock growth in low-teens. It also expects to maintain its operating margins on the back of improving asset utilization levels and improvement in price realizations (from implementation of new emission norms). However, Cummins Inc has shared a muted guidance for its India operations (including other subsidiaries) - Cummins Inc expects India revenues to grow by 2.4% to $1171 mn in 2012. India revenues to be led by domestic market while revenues from exports expected to remain muted (Source - CY11 presentation)."

"We have already factored pick-up in demand in domestic business (+13%) and healthy growth in exports (+15%) for FY13E. We also expect CIL's operating margins to improve in FY13E by 30 bps - led by some gains from softening-off of commodity prices in FY13E. Hence, we maintain our earnings estimates of Rs19.5 per share for FY12E and Rs22.3 per share for FY13E. We will await consecutive quarters of strong domestic demand (highteens - as indicated by CIL) to upgrade our FY13E earnings estimates. Post the 24% rise in CIL's stock prices in past one month, we believe that the stock is fully valued at 20.6X FY13E earnings. There exist concerns on delayed pick-up in demand in domestic market coupled slowdown in export growth momentum (owing to high base effect). Further, there exist challenges to earnings growth in the short-to-medium term. Hence we retain our Hold rating with price target of R388 per share. Consecutive quarters of strong domestic demand to serve as a re-rating catalyst," says Emkay Global Financial Services research report.          

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