Buy Cummins India; target of Rs 835: JM Financial

JM Financial's research report on Cummins India

Cummins India (KKC)’s balance sheet has seen a stark change in the past 5 years, with increased allocation to investment properties and current investments, leading to a 150% rise in interest and rental income vs. a 12% decline in EBITDA over the same period. Other key takeaways from the annual report are: a) management increased focus on the industrial division through bundled offerings and new product introductions to capture a larger share of railways, mining, defence and construction (new emission norms from CY20) as power gen/export sales growth remain muted, b) it maintained tight control on expenses and trimmed its overall employee strength, but onboarding of engineers for its new Tech Centre led to a sharp increase in average remuneration by 20% vs. a median increase of 15%, c) the free cash flow yield improved to 3.7% in FY17-18 vs. 0.9% in FY14-16 as capital expenditure dipped, but RoIC declined to 16% vs. an average of 37% over the past 10 years, d) rental income jumped 33% on the commissioning of a new Tech Centre in Pune and is expected to cross INR 1bn in FY19 and e) group companies’ performances was muted, resulting in flat growth in dividend income.

Outlook

We maintain BUY with an SOTP-based target price of INR 835.