Geojit BNP Paribas Financial Services downgrades Cummins India to 'reduce' - TP Rs.318; CMP - Rs.378

- Cummins India has been downgraded to 'reduce' with a target price of Rs.318 against the earlier 'buy' rating with a target price of Rs.495. The scrip is currently traded in the market in the range of Rs.378.

- The scrip has been downgraded to 'reduce' with a 44% cut in TP from Rs.495 to Rs.318 as the earnings estimates have been cut by 22% for FY14 and by 29% for FY15 on weak demand outlook for domestic power gensets and no revival in domestic capex cycle and export despite steep depreciation of the rupee.

- Earnings estimate cuts come from the analysts' view of slowing genset sales due to lower power deficits and rising competition. Cut in estimates is also due to the absence of recovery in exports because of slowdown in global metals and mining capex and a delay in revival of India's capex cycle.

- Analysts project a yoy sales decline of 7.5% for FY 14, which is below the company's reduced guidance of flat to 5% yoy decline in sales.

- The new target price of Rs.318 is based on ascribing a lower P/E multiple of 14.3x against the previous P/E multiple of 20x.

- A P/E multiple derating is warranted as it seems that the company's earnings to grow at a tepid 9.7% over FY14-16.

- Upside risks to the target price include unexpected recovery in demand and better margins.

- The outlook on the scrip would turn positive when there is sustained recovery in India's capex cycle, for which the manufacturing PMI is a lead indicator. The outlook may also turn positive when the company's exports segment on a recovery in global metals and mining capex.

- It seems that the company is well placed to weather the current downtrend, owing to its strong balance sheet and remains the best way to play a capex cycle recovery in India as it has adequate capacity to cash in on a strong demand revival.

Source : Equity Bulls

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