Cummins India - Domestic demand spike may be flattening; exports need to pick up the gauntlet - Kotak

We note that the demand spike that started in 3QFY12 may have peaked already (KOEL has had two flat quarters now). Demand momentum and margins may be correlated (evident from simultaneous recovery since 3QFY12). While we do not expect contraction in genset demand as yet (power sector issues) and Cummins may be better-placed relatively, but the incremental growth momentum may be reliant on exports. Recovery on low base, new product/capacities bode well but global demand may be a risk. Retain ADD for now on high quality franchise and reasonable valuations (17X FY2014E).

Retain estimates and positive stance (high-quality franchise), but some risks are on horizon

We retain our estimates of Rs26.2 and Rs29.5 for FY2013-14E and our ADD rating (TP: Rs550; 18X one-year forward P/E) on (1) potential for export rebound (new product launches, SEZ capacity), (2) shortage-led demand, (3) sustained margins (pricing power, softer input prices, cost efficiency) and (4) reasonable valuations for a high-quality franchise (17X FY2014E).

Source : Equity Bulls

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