Cummins India - High PEG may cap the valuations - Avendus

KKC's domestic revenue growth may recover to c10% in 2HFY13, but overall growth may be dragged down by further weakening in exports. We assume the EBITDA margins to slip in 2HFY13 on lower operating leverage. Pick up in demand in the northern region and continuing power deficits in the country point to a healthy revenue outlook. The 19x one-year forward P/E prices in a strong growth revival, even though growth may continue to be sluggish for few quarters. Our FY13f-FY15f EPS is cut by up to 4%, on lower exports. We rollover our TP to Sep13 to INR437 based on a 16.0x P/E. Downgrade to Reduce.

Fall in exports and mid-HP product sales pulls down Q2 growth

The outlook on exports reversed significantly, as export revenues fell 3% y-o-y and 28% q-o-q. Excluding the sales of the newly-introduced low KVA engines, the export revenue contraction would have been sharper by 50% q-o-q, indicative of the large slowdown in overseas demand for high-HP engines. An inventory correction drove a 30% q-o-q drop in the mid-HP product sales - largely contributing to the surprise dip in the domestic revenue growth from 9% in the Jun12 quarter to 1% in the Sep12 quarter.

Cut FY13f revenue growth to 8%, margins may fall further on leverage

The management guided to recovery in domestic revenue growth to around 10% in 2HFY13, while exports recovery may be over two quarters away. Factoring the above, we cut the FY13f revenue by 5%, implying a 4% y-o-y revenue growth in 2HFY13f. Peaking gross margins and lower operating leverage may lead to further slippage in the EBITDA margins in 2HFY13. KKC completed only c16% of its FY13 guided capex, leading to higher other income. Our FY13f-FY15f EPS is cut by up to 4%. Implementation of CPCB norms may be delayed beyond Jul13 by over a quarter, dampening growth prospects over the next three quarters.

Downgrade to Reduce; TP of INR437; PEG high at current growth rates

With margins near their peak levels, the one-year forward P/E of 19x already prices in a strong revival in revenue growth next year. Revenue growth has pulled back sharply from the spurt to 21% seen in the Jun12 quarter, increasing the risk of disappointment over the next two quarters. The target P/E is maintained at 16.0x and implies a PEG of 1.2x to the 14% CAGR in EPS over FY14f-FY15f. We rollover our TP to Sep13 and cut it to INR437 (from INR438). We downgrade the stock to Reduce. Increase in power deficits and a fall in commodity prices are the key risk factors.

Source : Equity Bulls

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