Cummins India Limited - Bright spot in darkness - Antique

We believe continued power demand growth despite economic slow down and continued power deficit particularly for southern states would help powergen business of the company. The sock has corrected on back of possible demand slow down and margin pressure going ahead. However recent CEA projection of increasing power deficit in South and currency benefit on export should impact positively for the stock. We maintain BUY considering strong balance sheet and operational efficiency and improved earnings visibility.

Power shortage in Southern region to increase

The power demand increased by 6.5% against the projected growth of 5.1% in FY13 and continued power deficit both in terms of energy and peaking availability would benefit the company. We believe the anticipated demand mismatch published by CEA in its annual Load Generation Balance Report (LGBR) for FY14 is positive for Cummins powergen business. The energy generation is expected increase by 7.3% to 978 bn unit energy deficit is expected to continue to ~ 6.7% in FY14 despite improvement in Western and Eastern region. The transmission constraints between Northern-North Eastern-Eastern-Western (NEW) Grid and Southern Regional Grid, which restricts flow of power to the Southern region would result in increase in peak power shortage from 18.5% in FY13 to 26.1% in FY14e.

Currency to support export

CIL derives ~3O% revenue from exports mainly to parent Cummins (~1.5% of Cummins Inc, USA). The increasing souring from low cost countries by parent is expected to help the company. It has revised export contracts for three years in December 2012 with adjustment for currency which impacted the margins in 4QFY13. The recent depreciation of rupee is expected to support export revenue growth and mitigate concern on margins.

Capex phase to be over in FY15; increased capacities to meet multi-year demand

Cummins India in the midst of meaningful capex program of INR20bn to be spent over FY11-15, including capex on Megasite, India office complex and Indian technical centre. The company has spent INR2.26bn in FY13, and will spend ~INR5bn each in FY14 and FY15. The capex program will be completed in FY15, which will result into significant jump in free cash flows from FY16 onwards. The expended capacities will be able to meet demand for many years, which will put Cummins India at a significantly advantageous position with respect to peers.

Valuation and Outlook

At the current price of INR460, the stock is trading at 16.9x FY14e and 14.2x 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 value company at 18xFY15 at INR588 and maintain Buy.

Source : Equity Bulls

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