Cummins India - Strong power gen growth overshadowed by weak exports - PhillipCapital

Cummins India Q213 results missed consensus and our estimates at the operating profit level but reported a beat at the PAT level on higher other income and a lower tax rate. We cut our estimates for FY13 and FY14 for the miss and cut our target price to Rs400; retain Neutral.

Q213 highlights

- Sales for Q213 at Rs 10.7bn (flat YoY) were below our estimate of Rs11.6bn, primarily on weak exports. Power generation (35% of sales) grew by 15% YoY (-15% QoQ) driven by power shortages in South India. Exports at Rs3bn (-3% YoY, -15% volume) were impacted by the weak macro environment in Europe, Middle East and Asia. The Auto and Industrial segments witnessed a fall in sales of 75% YoY and 11% YoY, respectively. Strong growth in the distribution business continued in Q213 (+21% YoY) on increased focus on the after market.

- EBITDA margins at 17% (14.5% in Q212 and 17.3% in Q113) were in line with our estimate. EBITDA was at Rs1.8bn (+17% YoY). The margin improvement was on account of the cost cutting strategy adopted by the company.

- PAT at Rs 1.6bn (+25% YoY) was helped by higher other income (+42% YoY), which included dividend from subsidiaries of Rs 31mn and a lower tax rate (27% in Q213 vs. 29% in Q212).

- Management has reiterated its guidance for FY13 at 10% - 11% growth in domestic sales but has cut its exports guidance to flat growth. This is versus the previous guidance of a growth of 10-12% in exports (ex rupee depreciation). The cut in the export guidance has been due to weak end markets in Europe, M. East and Latam. 2H13 is expected to remain weak and a pickup in exports is seen only by 1H14.

- New emission norms for <800kva gensets which were to be introduced by Q113 are likely to be pushed out by a quarter.

- FY13 and FY14 capex has been revised down to Rs2.5bn and Rs5bn respectively. In our view, the down ward revision driven by weak end markets, domestic and overseas.

- As per management, DG set demand in the South along with demand in the north has picked up driven by the weak monsoons and higher power deficits.

- Competition continues to remain intense in the DG set market; the rupee fall has not lead to any reduction in the competitive intensity from imports.

Estimates and target price: We cut our estimates for FY13 and FY14 by 5% and 6% respectively to factor in the miss on revenues and margins. We assign a target PE multiple of 16x (kept unchanged) to get our target price of Rs400. We retain our Neutral rating on the stock.

Source : Equity Bulls

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