Cummins - Well placed for the next boom in investment capex - Ambit

Cummins's revenue over the last two years increased by only 7% as compared to 17% in FY10-13 due to the slowdown in the investment cycle in India, which is hurting its power genset business (~37% of FY13 revenues). A pick up in the investment cycle looks tough in FY14 given that IIP growth for April and May has been flat at 0.1% YoY and this seems unlikely to change for the rest of the year given the tight liquidity conditions, no visible signs of interest rate cuts and Union elections in May 2014. Also, growth in exports (~28% of FY13 revenues) has been flat in the last four years given the slowdown Africa, the US and the Middle East.

However, from FY15, we assume growth to recover, given our expectation of a pick up in the investment cycle and a rise in market share for Cummins from the new CPCB norms (which solicits cleaner engines) and rising diesel prices (which increases demand for energy efficient engines). Also there is visible sign of industry consolidation with Mahindra Powerol now almost non-existent in the High HP segment. Also Perkins is going slow on its factory in Maharashtra given low demand. Cummins on the other hand continues to expands its Phaltan facility wherein it is going ahead with its Rs5bn capex in FY14 which is likely to give boost to its exports business from FY15 onwards.

Cummins's share price is currently trading at a one-year forward P/E multiple of 17.0x which is at a discount of 5% to its last five-year average multiple. We believe this may be due to the sluggish investment cycle which has resulted in depressed multiples. With our expectation of a pick up in the investment cycle in FY15, we expect earnings to increase by ~20% and with it the multiple to rerate back to its five-year average forward P/E of ~18.5x.

Source : Equity Bulls

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