Accumulate Cummins India; target of Rs 946: Prabhudas Lilladher

Prabhudas Lilladher's research report on Cummins India

Cummins (KKC) reported PAT of Rs1.9bn in Q2FY17 in line with our estimates. While sales were better than estimates due to good performance in export markets (up 1% YoY), domestic market continued to be steady (up 8% YoY). Margin was lower YoY largely due to an unfavourable mix. KKC commented that the domestic recovery is on track, albeit at a slower pace. Key segments for demand drivers in domestic markets include Data centre/Roads/Railways/Pharma/Healthcare. KKC continues to make inroads and gain market share domestically. Outlook on exports remain muted. However, KKC remains optimistic about its potential of export business growing in mid‐teens in the medium/long term. The company has maintained its guidance for domestic sales at 10‐12% and flat export sales (with a negative bias) for FY17. KKC continues to focus on profitability and optimizing operational costs; improving efficiency which should support margins. We remain positive on KKC, given its strong domestic outlook, gradual likely revival of export markets and strong cost focus. Low utilization (60%) leaves upside surprise on margins once volumes improve. We have cut our earnings by 5% for FY16/17 to factor in slight lower margins. We believe current price offers good entry point for investors with a medium‐term view. We maintain Accumulate with a TP of Rs 946.

The stock is trading at 27x FY18E earnings. We have cut our earnings by 5% for FY16/17 to factor in lower margins. We believe that the current price offers good entry point for investors with a medium‐term view as low expectation on margin and exports leaves room for upside surprise. We maintain Accumulate. We remain positive on CIL’s medium/long‐term potential in the domestic market, driven by structural factors like revival in Infrastructure/Industrial demand, unreliable quality of power in India and lack of creditable options for power back‐up.