Cummins India - Higher gross margin limits earnings slippage - ICICI Securities

Cummins India's (Cummins) export revenues declined 61% YoY and domestic revenues fell 64% YoY in Q1FY21, lower than our expectations. However, better mix and lower commodity prices led to higher gross margins limiting the overall slippage in operating profitability. Increased acti0vity is witnessed in the US and China markets while the Middle East, Europe and South-East Asia continue to be under stress. Though near-term execution is expected to be weak, we believe, focus on cashflows, leadership in technology and gradual recovery in export markets augur well for long-term growth. Factoring-in the higher gross margins in Q1FY21, we raise FY21E and FY22E earnings by 11.7% and 8%, respectively. Given long-term structural growth drivers such as change in emission norms to CPCB-IV+ and benign valuation, we maintain BUY on the stock with a revised SoTP target price of Rs505 (previously: Rs465).

- Higher gross margins and other income limited earnings decline: Gross margins are high due to favourable product mix, higher contribution from distribution and one-time E&O benefit. Other income, which grew 33% YoY to Rs1bn, was supported by income tax refund of Rs350mn. This limited PBT decline to 64% YoY at Rs705mn.

- Weakness in domestic market accentuated by Covid: Overall domestic sales fell 64% YoY to Rs3.6bn due to decline in all segments (powergen dropped most at 76% YoY to Rs960mn). Industrial segment declined 68% YoY at Rs795mn and was partially supported by mining (up 50% YoY to Rs150mn). Within domestic segments, distribution declined the least with 47% YoY drop to Rs1.8bn. Management believes, recovery in distribution will be faster than industrial and powergen.

- Export headwinds continue, green shoots in certain markets visible: Exports declined 61.3% YoY in Q1FY21 to Rs1.3bn, impacted by shipment delays due to lockdown. Challenging outlook continued in most overseas geographies apart from China and the US, which limited the decline in exports.

- Maintain BUY on cashflows and long-term growth: Factoring-in the higher gross margins in Q1FY21, we raise our earnings estimates by 11.7% and 8% for FY21E and FY22E respectively. We factor-in gradual improvement in margins and expect exports to recover in FY22E. We believe long-term growth potential is intact with the introduction of CPCB-IV+ norms. We revise our SoTP-based target price to Rs505 (previously Rs465).

Shares of CUMMINS INDIA LTD. was last trading in BSE at Rs.447.5 as compared to the previous close of Rs. 436.65. The total number of shares traded during the day was 96738 in over 3552 trades.

The stock hit an intraday high of Rs. 459.15 and intraday low of 428. The net turnover during the day was Rs. 43123150.

Source : Equity Bulls

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