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Edelweiss Financial Services has a buy call on Cummins India with a target price of Rs 830.
The current market price of Cummins India is Rs 670.50.
Time period given by the brokerage is one year when Cummins India price can reach the defined target.
View of the brokerage firm on the company: Despite lower-than-expected turnover, Q1FY19 (EBIDTA/PAT) came in line for Cummins India (KKC) driven by a better revenue mix/favorable currency.
Key highlights: a) Exports rose 12/13 per cent YoY/QoQ driven by emerging economies, sustaining the momentum for the second quarter.
This is improving the mix, in our view.
b) Uptick in large engines (both domestic/exports) boosted EBIDTA margin by 160bps YoY (+110bps due to mix) and is likely to sustain according to management.
While we maintain the BUY/SO rating given potential for better returns, we are cutting TP to Rs 830 (from Rs 930) building in higher tax rate guidance and weak Q1 revenue resulting in 10 per cent/11 per cent earnings cut for FY19/20E.
Q1 top line weak; large engines/currency aid PAT: While export/domestic revenue grew 13/5 per cent QoQ, domestic revenue dropped 7 per cent YoY on a high base (up 12 per cent YoY in Q1FY18 due to pre-buying ahead of GST) that resulted in largely flat Q1 revenue.
Uptick in large engines both in domestic/exports and favourable currency (net exports) aided margin expansion.
We believe the large engine mix has bottomed out; this coupled with sustained cost reduction programs (ACE/AMaZe) and volume ramp-up would drive up OPM.
Exports/domestic market getting better; new product in focus: Exports are a relative sweet spot with the Middle East and Africa particularly logging healthy growth.
Management commentary is more confident too in our view given reasonable improvement in data from the US (Class 8 market), oil gas, etc.
This aligns with parent’s commentary, as well as a few global industrial peers’.
Focus on infra is driving industrial BU visibility, though it is still flattish owing to weak compressors.
Commercial realty, manufacturing, health care, data centres, etc are improving on the back of encouraging railway outlook.
Besides, KKC is looking to launch products in the data centre segment by December this year, which could increase its target market.
Outlook and valuations: Improving prospects; maintain ‘BUY’: Growth – both domestic and exports – clearly suffered in the past 12–15 months, leading to strong underperformance and earnings-cut.
While the volume pick-up over the last two quarters is encouraging (though slow overall), recovery in large engines is vital for OPM.
Maintain ‘BUY/SO’.
