Hold Cummins India; target of Rs 619: Prabhudas Lilladher

Prabhudas Lilladher's research report on Cummins India

Cummins India (KKC) reported one of its weakest quarterly performance with flat sales and ~490bps YoY dip in EBITDA margin in Q1FY20. While domestic sales up 16% YoY, exports fell sharp 26%YoY at Rs3.3 bn (much lower than earlier guidance). With weak Q1FY20 performance and expectations of further weakness, KKC management has lowered its overall revenue guidance with reducing domestic revenue growth guidance from 10-15% YoY to 8-10% and de-growth of 12-15% in exports (earlier guided for flat to marginal decline) for FY20. Powergen and Distribution business is holding up well but the industrial part of the business has been weak
due to slowdown in the construction and mining end-market. Construction segment was affected largely due to financial crunch and monsoon effect. During the quarter export markets like Middle east, Africa and Asia (excluding China) have seen decline of 25-30%. KKC is seeing weak demand from exports markets amid uncertain global growth and volatile forex markets.

Outlook

We have cut EPS estimates by 13% each for FY20/21E, factoring weak demand outlook. The stock is currently trading at 25x/22x FY20/21E. We have downgraded the stock to Hold from Accumulate with revised TP of Rs619 (22xFY21E).