OPEN AN ACCOUNT
1
Jun 05, 2018
Cummins India Ltd
India Research - Stock Broking
BUY
Recommendation (Rs.)
CMP (as on Jun 04, 2018) 682
Target Price 806
Previous Target Price 964
Upside (%) 18
Stock Information
Mkt Cap (Rs.mn/US$ mn) 189.12 / 2.82
52-wk High/Low (Rs.) 1044 / 663
3M Avg. daily value (Rs. mn)
401.0
Beta (x) 0.7
Sensex/Nifty 35012 / 10629
O/S Shares(mn) 277.2
Face Value (Rs.) 2.0
Shareholding Pattern (%)
Promoters 51.0
FIIs 14.1
DIIs 21.7
Others 13.2
Stock Performance (%)
1M 3M 6M 12M
Absolute (9) (14) (22) (27)
Relative to Sensex (10) (18) (27) (35)
Source: Bloomberg
Relative Performance*
Source: Bloomberg; *Index 100
Analyst Contact
De Arul Kaarthick
040 - 3321 6280
arul.kaarthick@karvy.com
For private circulation only. For important information about Karvy’s rating system and other disclosures
refer to the end of this material. Karvy Stock Broking Research is available on Thomson Reuters &
Bloomberg (Code: KRVY<GO>)
Exhibit 1: Valuation Summary
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Net Sales 47088 50773 50825 55058 61390
EBITDA 7751 8018 7325 8409 9852
EBITDA Margin (%) 16.5 15.8 14.4 15.3 16.0
Net Prot 7543 7346 7085 7381 8590
EPS (Rs.) 27.2 26.5 25.6 26.6 31.0
RoE (%) 22.6 20.3 18.3 17.9 19.4
PE (x)* 30.9 35.8 27.4 25.6 22.0
Source: Company, Karvy Research; *Represents multiples for FY16 - FY18 are based on historic market price
Thrust on Domestic Market and Less on Exports
We attended the analyst meet of Cummins India on June 1, 2018 post their Q4FY18
earnings release. The management highlighted its long-term strategy and indicated
in the next ve years it expects to grow its domestic business at 9-11% annually
on the back of industrial and powergen demand. Cummins expects to grow the
exports business at 0-5% annually depending on the global markets which we
believe as realistic. About Q4FY18, the revenue grew by 4.1% and earnings grew
by 1.1% on YoY basis. In the next two years, we expect earnings to grow at 10%
and EPS to reach Rs. 31. We have a ‘BUY’ rating on Cummins for a target price of
Rs. 806. Key risk to our call could be slower than expected pick-up in economic
activity which could impact earnings.
The management highlighted that it intends to 1) Increase the market share in the
existing market, 2) Increase the content of its oering and 3) deliver new products.
It also highlighted the technological scope of its oering, scale and reach in the
market to aid in delivering on its strategy. The top management spends ~70% of
its time in increasing the content and grow market share and CEO is spending
~40% of his time on new product oering. The management further claried on 1)
Sourcing Vs. Manufacturing strategy, 2) Cummins India serving as a manufacturing
base, 3) Mechanical Vs. Electronic oerings, 4) replacements in the market for its
product portfolio. Cummins is working on the use of predictive analytics in O&M
area, hybridization of existing oerings, electrication thro’ battery technology and
oering based on the alternate fuels.
Powergen market demand is driven by data centers, commercial real estate,
hospitality and hospitals rather than telecom sector. The management is condent
that it is pushing limits of engineering to oer output equal electronic platform in
its mechanical platform and has also indicated that it is working diligently towards
expected CPCB – III norms.
Cummins India serving as a manufacturing base: In the powergen exports
market, Cummins India has established itself as LHP sourcing hub, however, due
to subdued demand environment and sti competition, exports business remains
under pressure.
Management
Meet
Industrials - Machinery
Cummins India Ltd
Bloomberg Code: KKC IN
70
80
90
100
110
120
Jun-17
Jul-
17
Aug -17
Sep-17
Oct-17
Nov-17
Dec-17
Jan
-18
Feb-18
Mar -18
Apr-18
May-18
Cummins India Ltd
Sensex
2
Jun 05, 2018
Cummins India Ltd
Sourcing Vs. Manufacturing strategy: The management claried that manufacturing
of certain engines (K28 & K50) is left to associate company CTIL as the domestic
demand is in single-digit in terms of absolute volumes.
Mechanical Vs. Electronic oerings: The management also claried that 85-90% of
its oering are on both K & Q platforms.
Replacements to existing portfolio: The management is of the view that microgrids
or renewable or full electric as a replacement for existing product portfolio is farfetched.
In the Industrial market Cummins is working on 1) new product launches (Q50 &
K19), 2) maintaining market share in the compressor market, 3) increasing the content
in the railways and marine markets.
Distribution business revenues (net of GST) grew by 9% in FY18. The parts business
was set up in Phaltan in 2010 which led to material increase in customer satisfaction.
Cummins has ~3,500 engineers across ~200 branches adherence to the highest
standards of safety and customer satisfaction.
On margin expansion, Cummins aims to achieve thro’ cost control rather than straight
price hikes and is on programs like ACE, AMaZe, ASCent.
3
Jun 05, 2018
Cummins India Ltd
Financials
Exhibit 2: Income Statement
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Revenues 47088 50773 50825 55058 61390
Growth (%) 6.9 7.8 0.1 8.3 11.5
Operating Expenses 39337 42755 43501 46649 51538
EBITDA 7751 8018 7325 8409 9852
Growth (%) 5.9 3.4 (8.7) 14.8 17.2
Depreciation & Amortization 810 848 938 1,050 1,146
EBIT 6941 7170 6387 7359 8706
Interest Expenses 96 168 148 221 221
Other Income 2259 2080 2846 2263 2517
PBT 9104 9082 9084 9401 11001
Tax 1561 1736 2000 2020 2412
Adj. PAT 7543 7346 7085 7381 8590
Growth (%) (4.0) (2.6) (3.6) 4.2 16.4
Source: Company, Karvy Research
Exhibit 3: Balance Sheet
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Cash & Cash Equivalents 852 1238 1523 731 804
Sundry Debtors 9381 9557 13263 13274 13960
Inventory 6003 5621 5375 6844 7618
Loans & Advances 1480 1417 2569 3360 3483
Gross Block 19917 22705 29213 32713 9691
Net Block 12818 12240 12828 15277 17131
CWIP 5192 4631 380 380 380
Other current assets 9179 15706 19376 19376 19376
Total Assets 44905 50409 55312 59242 62752
Current Liabilities & Provisions 9628 12633 14847 15994 16266
Debt 304 303 284 284 284
Other Liabilities 159 51 320 320 320
Total Liabilities 10092 12987 15452 16599 16870
Shareholders Equity 554 554 554 554 554
Reserves & Surplus 34259 36867 39306 42089 45327
Total Networth 34813 37422 39861 42643 45882
Total Networth & Liabilities 44905 50409 55312 59242 62752
Source: Company, Karvy Research
4
Jun 05, 2018
Cummins India Ltd
Exhibit 4: Cash Flow Statement
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
PBT 9104 9082 9084 9401 11001
Depreciation 810 848 938 1050 1146
Interest 96 168 148 221 221
Tax Paid 1694 1867 1974 2020 2412
Inc/dec in Net WC 33 371 (4193) (334) (1188)
Other Income (1245) (933) (2285) (2263) (2517)
Other non cash items (3574) (3947.1) (4510) (4039) (4823)
Cash ow from operating activities 6918 7456 1157 6056 6252
Inc/dec in capital expenditure (4918) (2446) (1878) (3500) (3000)
Inc/dec in investments 1339 (3655) 2990 (791) (123)
Others 1458 1241 2846 2263 2517
Cash ow from investing activities (2121) (4860) 3959 (2028) (606)
Dividend paid (4669) (4663) (4671) (4599) (5351)
Interest paid (9) (90) (148) (221) (221)
Cash ow from nancing activities (4677) (2245) (4831) (4820) (5573)
Net change in cash 119 350 286 (793) 74
Source: Company, Karvy Research
Exhibit 5: Key Ratios
YE Mar FY16 FY17 FY18 FY19E FY20E
EBITDA Margin (%) 16.5 15.8 14.4 15.3 16.0
EBIT Margin (%) 14.7 14.1 12.6 13.4 14.2
Net Prot Margin (%) 16.0 14.5 13.9 13.4 14.0
Dividend Payout Ratio (%) 61.9 63.5 65.9 62.3 62.3
Net Debt/Equity (x) (0.02) 0.04 0.03 0.05 0.05
RoE (%) 22.6 20.3 18.3 17.9 19.4
RoCE (%) 17.1 15.4 12.0 13.1 14.4
Source: Company, Karvy Research
Exhibit 6: Valuation Parameters
YE Mar FY16 FY17 FY18 FY19E FY20E
EPS (Rs.) 27.2 26.5 25.6 26.6 31.0
DPS (Rs.) 16.8 16.8 16.9 16.6 19.3
BVPS (Rs.) 125.6 135.0 143.8 153.8 165.5
PE (x)* 30.9 35.8 27.4 25.6 22.0
P/BV (x)* 6.7 7.0 4.9 4.4 4.1
EV/EBITDA (x)* 30.0 33.0 26.7 22.7 19.4
EV/Sales (x)* 4.9 5.2 3.8 3.5 3.1
Source: Company, Karvy Research; *Represents multiples for FY16 - FY18 are based on historic market price
5
Jun 05, 2018
Cummins India Ltd
Stock Ratings Absolute Returns
Buy : > 15%
Hold : 5-15%
Sell : < 5%
Connect & Discuss More at
1800 419 8283 (Toll Free) research@karvy.com Live Chat
f
in
You
Tube
Disclaimer
y Analyst certication: The following analyst(s), De Arul Kaarthick, who is (are) primarily responsible for this report and whose name(s) is/are mentioned
therein, certify (ies) that the views expressed herein accurately reect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no
part of his (their) compensation was, is or will be directly or indirectly related to the specic recommendation(s) or views contained in this research report.
y Disclaimer: Karvy Stock Broking Limited [KSBL] is registered as a research analyst with SEBI (Registration No INH200003265). KSBL is also a SEBI
registered Stock Broker, Depository Participant, Portfolio Manager and also distributes nancial products. The subsidiaries and group companies including
associates of KSBL provide services as Registrars and Share Transfer Agents, Commodity Broker, Currency and forex broker, merchant banker and
underwriter, Investment Advisory services, insurance repository services, nancial consultancy and advisory services, realty services, data management,
data analytics, market research, solar power, lm distribution and production, proling and related services. Therefore associates of KSBL are likely to have
business relations with most of the companies whose securities are traded on the exchange platform. The information and views presented in this report are
prepared by Karvy Stock Broking Limited and are subject to change without any notice. This report is based on information obtained from public sources , the
respective corporate under coverage and sources believed to be reliable, but no independent verication has been made nor is its accuracy or completeness
guaranteed. The report and information contained herein is strictly condential and meant solely for the selected recipient and may not be altered in any
way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent
of KSBL. While we would endeavor to update the information herein on a reasonable basis, KSBL is under no obligation to update or keep the information
current. Also, there may be regulatory, compliance or other reasons that may prevent KSBL from doing so. The value and return on investment may vary
because of changes in interest rates, foreign exchange rates or any other reason. This report and information herein is solely for informational purpose and
shall not be used or considered as an oer document or solicitation of oer to buy or sell or subscribe for securities or other nancial instruments. Though
disseminated to all the customers simultaneously, not all customers may receive this report at the same time. KSBL will not treat recipients as customers by
virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or
strategy is suitable or appropriate to your specic circumstances. This material is for personal information and we are not responsible for any loss incurred
based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment
decisions based on their specic investment objectives and nancial position and using such independent advice, as they believe necessary. While acting
upon any information or analysis mentioned in this report, investors may please note that neither KSBL nor any associate companies of KSBL accepts any
liability arising from the use of information and views mentioned in this report. Investors are advised to see Risk Disclosure Document to understand the
risks associated before investing in the securities markets. Past performance is not necessarily a guide to future performance. Forward-looking statements
are not predictions and may be subject to change without notice. Actual results may dier materially from those set forth in projections.
y Associates of KSBL might have managed or co-managed public oering of securities for the subject company or might have been mandated by the subject
company for any other assignment in the past twelve months.
y Associates of KSBL might have received compensation from the subject company mentioned in the report during the period preceding twelve months from
the date of this report for investment banking or merchant banking or brokerage services from the subject company in the past twelve months or for services
rendered as Registrar and Share Transfer Agent, Commodity Broker, Currency and forex broker, merchant banker and underwriter, Investment Advisory
services, insurance repository services, consultancy and advisory services, realty services, data processing, proling and related services or in any other
capacity.
y KSBL encourages independence in research report preparation and strives to minimize conict in preparation of research report.
y Compensation of KSBLs Research Analyst(s) is not based on any specic merchant banking, investment banking or brokerage service transactions.
y KSBL generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a nancial interest in the securities or derivatives of
any companies that the analysts cover.
y KSBL or its associates collectively or Research Analysts do not own 1% or more of the equity securities of the Company mentioned in the report as of the
last day of the month preceding the publication of the research report.
y KSBL or its analysts did not receive any compensation or other benets from the companies mentioned in the report or third party in connection with
preparation of the research report and have no nancial interest in the subject company mentioned in this report.
y Accordingly, neither KSBL nor Research Analysts have any material conict of interest at the time of publication of this report.
y It is conrmed that KSBL and Research Analysts, primarily responsible for this report and whose name(s) is/ are mentioned therein of this report have not
received any compensation from the subject company mentioned in the report in the preceding twelve months.
y It is conrmed that De Arul Kaarthick, Research Analyst did not serve as an ocer, director or employee of the companies mentioned in the report.
y KSBL may have issued other reports that are inconsistent with and reach dierent conclusion from the information presented in this report.
y Neither the Research Analysts nor KSBL have been engaged in market making activity for the companies mentioned in the report.
y We submit that no material disciplinary action has been taken on KSBL by any Regulatory Authority impacting Equity Research Analyst activities.
Karvy Stock Broking Limited
Plot No.31, 6th Floor, Karvy Millennium Towers, Financial District, Nanakramguda, Hyderabad, 500 032, India
Tel: 91-40-2331 2454; Fax: 91-40-2331 1968
For More updates & Stock Research, visit www.karvyonline.com