Cummins India - Bright spot in darkness - Antique

We expect Cummins India Limited (CIL) to maintain strong earnings growth of 17.1% CAGR over FY12-15 on back of 1) Continued power shortage where we believe availability scores over affordability, 2) Technology advantage in emission norm change and 3) Recovery in industrial segment from low base over next two years. The company has significantly improved margins in recent quarters and we believe cost leadership along with revenue growth should help Cummins improve profitability going ahead. We are upgrading stock to BUY considering impressive growth potential and outsourcing opportunity from parent.

Domestic demand set to grow in long term due to power shortage

CIL derives ~40 -45% of its total revenues from domestic power generation segment, which continues to see traction due to acute power shortage. The current installed capacity in India is ~214GW (as of March 2013), which has grown at a CAGR of 8.6% since the last five years (FY07-12). However, the power deficit in the country remains at a level of ~8.5% with peak deficit witnessed at 10.6% in FY12 and 9.8% in January 2013. Apart from base deficit, the availability of power is expected to be constrained by coal and gas shortage and regulatory hurdles. CIL stands to be a natural beneficiary considering leadership position in Diesel Generator set market and we expect ~14% CAGR growth in domestic business to INR42.15bn over FY12-15.

Export Opportunities amidst crisis, expect 10% CAGR to INR to 16bn FY12-FY15

Export business grew by 14.3% in 9MFY13 to INR9.98bn and we have assumed 10% CAGR growth in exports to INR16bn in FY12-15. CIL derives ~30% revenue from exports mainly to parent Cummins Inc (accounts ~1.5% of parent revenue). We believe, there is increasing pressure on parent company Cummins Inc, USA to source from manufacturing bases in low cost countries like India, Brazil and China, particularly powergen engines (CIL exports powergen engines only).

New Emission norms provide new growth opportunities

Under new regulation of Central Pollution Control Board (CPCB), India is likely to adopt tighter CPCB II norms, which are similar to Euro Stage III norms. New emission norms, likely be implemented from July 2013 (with some possible delays), will change the dynamics of the Indian DG set industry. We believe that, Cummins, with its strong technology base, will be the biggest beneficiary of this.

Valuation

We expect Cummins to post earnings CAGR of 17.1% over FY12-15 and maintain ROE of ~25%. At the current price of INR490, the stock is trading at 16.9x FY14e and 14.84x FY15e earnings. We believe that CIL will continue to enjoy premium valuations due to its dominant market positioning, impressive long-term growth outlook and healthy balance-sheet. We valued company at 18xFY15 at INR585 and upgrade to BUY.

Source : Equity Bulls

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