Buy Cummins India; target of Rs 556: Microsec

Microsec's research report Cummins India

• Domestic Powergen business (35 percent of total domestic revenue) to gain ground on continued power shortages.
• Exports to continue with the traction of growing at low teens; Management expects exports to grow between 3-5 percent in FY14e.
• Industrial Business to witness recovery over FY15e.
• Distribution to perform consistently at an average rate of 19 percent over FY15e; Auto to recover in FY15e.
• Change in Emission norms to be one of the drivers for the volume growth in FY14e and margin growth in FY15e.
• Higher absorption of corporate cross charges seen further at ~2 percent of revenue; Royalty to remain stable between 2-3 percent.
• Capex to spend INR400-500 crores both in FY14e and FY15e at Megasite, Technical Centre and India Office Campus.
• Domestic Revenue to grow between 8-10 percent in FY14e.
• Q4FY13 Margins dented due lower export margins and higher corporate charges; Margins to remain stable at 22 percent.

We are re-initiating the stock a "BUY" at current level on account of strong growth in domestic revenue supported by powergen business and recovery in industrial business, growth in exports though in low teens, volume growth due to pre-buying on change of emission norms, 15-20% price hike post emission norms, and stable margins due to its cost control efficiencies. At the current price of INR459, Cummins India is trading at adjusted P/E of 17.23x its FY14e EPS and 115.67x its FY15e EPS. We believe that CIL will continue to enjoy premium valuations due to its dominant market positioning, impressive long-term growth outlook, healthy balance-sheet, strong ROE as compared to its peers and dividend yield of 2.83 percent. The average P/E of CIL has been trading in the range of 8x-26x in last 10 years. It is now trading at a P/E of 16.7x, which is at a premium of ~40 percent to its peer group. Hence, we expect this trend to continue over FY15e. We have valued the stock by assigning a P/E multiple of 19x FY15e EPS of 29.29 and arrived at a target price of INR556 per share .i.e. an upside of 21 percent from the current market price of INR459 per share. We recommend Cummins India Ltd (CIL) a buy," says Microsec research report.

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