Buy Cummins India; target of Rs 880: JM Financial

JM Financial's research report on Cummins India

Cummins India 1QFY19 results were in-line with estimates. Net sales declined by 1% YoY (7% below JMFe) as domestic sales registered a 7% decline (high base effect), while exports reported healthy growth of 12% YoY. However, operating profits grew by 10% YoY (in-line with JMFe), as operating margins grew by 160bps YoY to 16.2%, buoyed by currency tailwinds and favourable sales mix. Being cautiously optimistic, management maintain its annual sales growth guidance (domestic: 8-10%, exports: 0-5%) as it suspected that the bump in exports may be due to inventory correction. Adjusted net profit growth was stunted at 3% YoY, as tax rate increased to 28% (vs 22%), due to expiry of first 5 year concessional rate for Phaltan SEZ.

Outlook

Over FY18-21E, we forecast 12%/14% CAGR in sales/EBTIDA as we build in a recovery in both domestic and exports market, while we expect EBITDA margins to be maintained at 15%. We maintain BUY with our SOTP based Sep’19 TP of INR880.