Maintain BUY on Cummins - Muted performance - HDFC Securities

Mr. Parikshit D Kandpal, CFA, HDFC Securities and Mr. Chintan Parikh, Institutional Research Analyst, HDFC Securities

Cummins India Ltd. (CIL) reported muted 4QFY21 as revenue came in 16.3% less than our estimates. Gross margin contracted 182/250bps to 33% on higher-than-expected raw material cost/fixed price under absorption. Higher-than-expected other income narrowed the APAT miss to 7%. While export markets have started to look up, utilisation levels have dropped to 50% from 70% in 4QFY21. Nevertheless, government's focus on infra creation and data localisation will provide impetus for demand. We continue to remain positive on CIL as we believe the following could lead to a rerating of the stock: (1) normalisation of demand; (2) likely stabilisation of exports; and (3) pick-up in power gen-set business. We maintain BUY on CIL with reduced SOTP-based target price of INR 1,024 (INR 1,068 earlier). We have cut FY22E/23E EPS by 10.4%/2.5% to account for the impact of the second wave of the pandemic.

Covid, supply chain issues and muted exports hurt topline; higher raw material prices impact margins: CIL reported revenue at INR 12.5bn (+18%/-12% YoY/QoQ), 16% miss, on subdued exports (+1% YoY, -32% QoQ). Gross margin contracted 182/251bps YoY/QoQ on higher raw material costs/fixed price under absorption. EBITDA margin came in at 13.4% (+710/-354bps YoY/QoQ), against the estimate of 15.5%. EBITDA was at INR 1.7bn (~2.5x 4QFY20, -31% QoQ, miss of 27%). While depreciation and interest expenses were in line, other income saw a sharp jump of 24%/13% YoY/QoQ to INR 1.1bn, on higher dividend income. Consequently, APAT came in at INR 1.9bn (+52%/-21% YoY, 7.7% miss). CIL has taken price hikes where there are commodity price-linked clauses in the contract. With other customers, it will take price hikes through negotiations.

Levers in place for sustained demand in domestic market: Domestically, demand for power generation was strong, led by construction sector. However, lockdown, following the second wave of the pandemic, derailed the recovery. Government's focus on infrastructure to kick start the economy will lead to sustained demand in domestic market for power gen-sets. Data localisation policy will provide further impetus. In the industrials, mining continues to do well. Railways will recover once it operates at capacity.

CPCB 4 implementation unlikely to be delayed: CIL does not expect any delay in implementation of CPCB 4, as government is focusing on reducing carbon intensity of the economy. Steep price hike is expected as industry leapfrogs from CPCB 2 to CPCB 4. Management believes the transition would lead to better margins given its leadership in technology.

Capex largely over; return ratio to improve: Although 1HFY22 is likely to remain muted given the second wave, we expect key segments-infra, data centers, healthcare, and residential - to see strong cyclical recovery. Growth pick-up with better pricing should lead to RoE expansion from 14.4% in FY21 to 19.3% in FY23E.

Shares of CUMMINS INDIA LTD. was last trading in BSE at Rs.787.55 as compared to the previous close of Rs. 771.75. The total number of shares traded during the day was 150154 in over 4978 trades.

The stock hit an intraday high of Rs. 804.5 and intraday low of 775.25. The net turnover during the day was Rs. 119297164.

Source : Equity Bulls

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