Cummins India Ltd - Result Update - YES Securities

Expect gross margin contraction: Revise our FY21E EPS est. by 14% to factor in Q2FY21 operational beat, however our FY22E EPS est. remains largely unchanged (+4%) as we believe gross margins to come down at ~35% with normalization in sales mix & RM prices. In our view, Cummins would face multiple demand headwinds in next 4-5 quarter due to continued weakness in real estate sector (~40% of powergen sales). Though exports have bottomed out, sustainable growth visibility (except telecom demand) looks unclear. A faster than expected recovery in exports remains upside risk to our estimates. Considering weak end markets, gross margins could compress significantly post CPCB-IV launch. Retain 'SELL' with TP of Rs345 at 17x FY22E EPS.

Domestic demand recovery at slower pace: Power gen sales plunged 35% yoy to Rs2.6bn due to weak demand in LHP & construction. Industrial sales declined 21% yoy to Rs1.7bn owing to 50%/18% yoy drop in rail/construction segments respectively. Industrial segment faced headwinds on reduced rail power car demand. Distribution sales dropped 4% yoy to Rs3.2bn. Demand from rental, healthcare and data center is recovering at relatively faster rate while commercial realty, hospitality, residential realty and manufacturing are reviving at much slower rate. Management has not clearly mentioned supply sourcing arrangements for CPCB-IV products, hence the benefits of emissions norm changes may be skewed more towards Cummins Technology India (group company) than for KKC with transfer pricing clause.

Realistic exports run rate Rs3.2-3.4bn/qtr: Exports revenues grew 18% yoy led by pent-up demand and telecom demand especially in Asian countries like China, Malaysia & Philippines. Telecom demand likely to sustain for few more quarters. European markets shown early signs of recovery, however mgmt. remains uncertain on near term demand revival due to uncertainties arising out of 2nd wave of Covid-19 pandemic. Demand from MENA, Africa & LATAM markets continues to remain weak due to soft oil prices, Covid-19 & regional issues. Q3FY21 expected to be soft quarter on relatively higher base of Q3FY20. In long term, mgmt. reiterated its stance of launching new products in various markets.

Margin surprise is not sustainable: Higher gross margin was because the favorable sales mix - higher proportion of distribution, better mix between HHP and LHP. Favorable mix & lower RM prices helped in gross margin expansion by 250bps/100bps respectively, which won't sustain in upcoming quarters. Hence, gross margin should revert to normal as revenue normalizes. KKC expects gross margin to decline to its sustainable level of 35% once other segments witness recovery in demand. Pricing pressure continued led by tough competition. Segments like data center, the company provided customized value-added products which helped in better price realization. Favorable forex movement also helped in better realization from exports markets, which the company expects it to pass on to customers in next quarter.

Shares of CUMMINS INDIA LTD. was last trading in BSE at Rs.434 as compared to the previous close of Rs. 441.6. The total number of shares traded during the day was 24737 in over 1278 trades.

The stock hit an intraday high of Rs. 447.7 and intraday low of 431.25. The net turnover during the day was Rs. 10826232.

Source : Equity Bulls

Keywords