Cummins India - Positioned for a long haul - Edelweiss

We visited Cummins India to get an inside view on management thoughts, their perspective on growth and industry trends. We bring you the key observations post our recent meet.

Global recovery key to HHP exports; Low KVA to drives exports

Slowing demand from key markets like Europe and Middle East impacted FY13 High Horse Power (HHP) exports (down INR3bn to INR8bn) for the company. The management maintained exports would grow 5-8 % for FY14E, despite flattish outlook for HHP exports, led by a strong ramp up in low KVA gensets where the company supplies to end customer via distribution channels (High HP engines are shipped to Cummins UK, which are then sold as gensets). The company has set a 3-5 year target of achieving INR12-15bn turnover for low KVA gensets from the present INR2bn.

Near term domestic powergen market volatile

Mgt expects domestic volumes to pick up during Q2 & Q3FY14E before the likely Jan-2014E deadline of meeting CPCB-II emission norms, post which it expects some tapering off. With both cost and pricing for compliant engines (CPCB-II compliant electronic engines up to 800 kva), it expects profitability to improve by about 100 bps for new engines. The company expects the new range of electronic engines to remain in vogue over long term and do not see major changes in emission norm post CPCB-II for at least 3-5 years.

Cross over charges more dynamic than fixed

Mgt indicated the current cross over charge (at INR160mn in Q4FY13) is not fixed but would be reviewed from time to time depending upon the input from parent entities.

Outlook and valuations: Positive; maintain 'BUY'

We retain our positive stance for Cummins India over medium to long term, given its favorable market and product positioning in the DG set industry. Also, with upcoming emission norm change and volume ramp up from new plant (at Phaltan mega-site), we believe the company gains a strong edge over competition both in domestic and export market. Hence, we maintain our BUY/SO rating for Cummins with a TP of INR 578.

Source : Equity Bulls

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