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Cummins India Ltd. (KKC) - Qtr. Update - Dated - May 13, 2013




Axis Capital Limited


14 May 2013





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Cummins’ Q4 disappointed due to margin erosion on support charges to parent, export price reduction on currency adjustment, and adverse mix. Management guided for 8-10% revenue growth in FY14 to be driven by 10% growth in domestic powergen and 3-5% growth (5-10% earlier) in exports led by low HP. Guidance factors in pre-buying in Q3FY14 before norms change followed by decline in Q4. Management indicated that competitive intensity is at all-time high. We lower our FY14/FY15 EPS to Rs 23/Rs 25 from Rs 27/ Rs 30 on lower margin (lowered to 17% from 19%) and revenue. Downgrade to SELL as (a) high HP volume growth is unlikely to recover due to improving power scenario and (b) margin erosion of 200 bps in FY14 is structural. Revised TP of Rs 439 (Rs 511 earlier) is based on 16x FY15E standalone EPS of Rs 25 and JVs at Rs 32/sh. At CMP of Rs 512 (implies 14% downside), the stock trades at PE of 21x FY14E EPS of Rs 23 and 19x FY15E EPS of Rs 25 (adj. for value of JVs of Rs 32/sh). Segmental outlook for FY14  Powergen segment (38% of revenue): Growth will slow down from 29% YoY in FY13 to 10-11% in FY14, as new projects are slowing down. Within powergen, the high margin HHP segment will slow to 5-6% vs. 31% in FY13. Majority of the growth will be driven by low HP segment. The domestic market has already started showing signs of weakness as Q1 is expected to be weak due to inventory correction at dealers-end and high base  Exports (26% of revenue): Management indicated exports likely to grow by 3-5% in FY14. Growth in exports will be driven by low HP engines on the back of commissioning of new manufacturing facility at Phaltan. High HP exports are expected to decline in FY14  Spares (21% of revenue): Expects growth of 15% vs. 19% in FY13. Sequential decline in Q4 was an aberration  Industrial (13% of revenue): Growth in industrial segment is expected to recover in FY14 as decline in compressors will be offset by growth in Railways, Marine and Oil & Gas segments Regards, Bhavin Vithlani (Executive Director – Power & Cap Goods) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1144 Charanjit Singh (Vice President – Capital Goods) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1123

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