CD Equisearch's report on Cummins India (CIL)
CIL's lackluster domestic off take in last few years has swooned investors - its last fiscal's revenue was 9% smaller than what it was four years ago. Most of its domestic businesses have suffered: power gen 22% smaller; industrial 8%; auto 53%. But conditions could turn for the better. CIL has been able to win back some of the lost market share in CPCB II products last quarter by rationalizing prices. Backup power requirement would surge with GOI's renewed push on industry and infrastructure growth. Industry segment is not behind not least for government's impetus on loosening mining laws and boosting local defence manufacturing.
Record shipments from CIL's low horsepower generator set at the SEZ in Megasite last fiscal helped overcome the stagnation in its export revenues; exports grew by just 2.2% in the two years ending fiscal 2013. Much of the increase could be attributed to extension of its product range including mobile and telecom application products.
But all is not rosy. Off take of high hp engines continues to remain weak not least due to feeble powergen market globally. Mining activity has also failed to take off not least for the meltdown in global commodity prices. As a result, stacking up orders on a high base of last year would be a mammoth task - we estimate CIL's exports to rise by just 8% in current fiscal (50% probability) compared to 44% last fiscal (see chart).
By some measure CIL's appetite of piling up fixed assets shows no signs of satiating: total capex in last three years to fiscal 2015 was 47% higher than the total in the seven preceding years (see chart). Bulk of the total investments of nearly Rs 1040 crs in last three years has gone into India Office Campus (total investment for phase I of IOC: Rs 683 crs); the company completed the second tower of IOC last fiscal. It plans to spend at least Rs 500 crs in the current year some of which would go in phase II of IOC (investment: Rs 272 crs).
Dramatic shift of fortunes of CIL's export business helped turn the tide. Income from operations as a result rose by 10.8%, the second highest absolute addition in last four years. Revenue share of domestic business continues to plummet -from nearly three-fourths in FY11 to three-fifths now. Yet turnaround is in sight if recent pick up in domestic industrial activity is anything to go by. As a result, we expect CIL's domestic revenues to rise by 11% (with no more than 50% probability) in the current year. But gain in overall operating margins would be hard to come by (see chart). Assiduous attempts are being made to undo the harm done by steep pricing (15-20% increase) of CPCB II compliant gensets - most prominent was loss in market share - by cutting prices, hiking local content and launching some new products.
"The stock currently trades at 36.8x FY16e EPS of Rs 25.84 and 33.3x FY17e EPS of Rs 28.49. The re-rating of the stock in last one year or so has more to do with reducing equity risk premium in general. CIL's earnings have climbed 16% last fiscal precipitated by sturdy jump in dividend income from Cummins Valvoline (otherwise earning would have grown by just 9%). We project average annual earnings to grow by a shockingly 6.5% over the next two years. Even positive surprises in earnings leave little headroom for appreciation in stock price. We therefore assign "reduce" rating on the stock with price target of Rs 760 based on 27x FY17e earnings (average five year ttm P/E: 27)", says CD Equisearch report.
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