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Research
Follow-up on Cummins India 'buy' rating - Geojit BNP Paribas Financial Services
Posted On : 2012-07-14 21:48:34( TIMEZONE : IST )
- Cummins India has been rated a 'buy' with the target price of Rs.495.
- The following points are highlighted as a follow - up on the buy rating.
- Regarding competition, the company has acknowledged that certain competitors are pricing their product at a 10% discount to those of Cummins as an entry strategy. These are imported products and the competitors are not making money on these products as they are sold at a discount. These imported products are not suited for Indian conditions and consumers wanting a genset as insurance against outages and only want to use them two- three hours a day would go for such imported items.
- Also, it seems that new competitors would take at least two years to set up manufacturing facilities in India and another two years for break-even.
- Tighter emission norms are set to be introduced mid CY13 for low KVA gensets and delay in the implementation of emission norms is unlikely.
- Tightening emission norms will increase cost of all players by 25-30%. Cost of the company to increase by at least 25% to comply with tighter emission norms for low KVA gensets.
- Competitors are expected to face similar or more acute cost pressures as they have to source technology from outside while Cummins already has the technology.
- So, prices of gensets are expected to go up by at least 25-30%.
- Margins will be under pressure in the near term as the sales mix moves towards lower KVA gensets. However, the EBIT margin is expected to improve in the long term and will touch the targeted 18% as low KVA gensets exports achieve scale and add Rs.1000 crore to the top-line by FY16.
- Currently, the company exports engines meant to be fitted on gensets. Now it is going to export entire low KVA gensets.
- One of the major threats faced by the company is the chance of customers making their own engines instead of buying from Cummins. However, this threat is expected to overcome by offering superior technology engines by the company.
