Hot stock: Cummins India remains ‘Buy’ after Q3 results

MUMBAI: Shares of Cummins India are on a rise despite the company's poor show in margins and domestic revenues.

The company’s 23 per cent rise in net profit of Rs 181 crore, YoY, above an ET Now poll estimate of Rs 177 crore, included other income of Rs 41 crore. Net sales grew at Rs 1,057 crore against estimate of Rs 1,165 crore. EBITDA slipped to Rs 189 crore against expectation of Rs 203 crore.

However, brokerages are bullish on cash-rich company and believe the premiums are justified. They believe Cummins will be a beneficiary of increased public spending on infrastructure projects and recovery in industrial capex.

“We increase our medium term growth and margin estimates to factor in recovery in domestic Capex cycle in DCF. We believe that Cummins India is clear beneficiary of increased public spending on infrastructure projects and recovery in industrial capex,” said Kotak Securities – Private Client Research report.

The brokerage has revised its DCF based revised target price of Rs 1050 from Rs 890 earlier on account of change in medium/long term margin estimates.

The management was optimistic of a revival in domestic demand in FY16 but there has been no pick up as yet in industrial activity. According to analysts, exports will continue to be the main growth driver in FY15 and 1HFY16 for the company.

“CIL’s globally diversified business, market leadership position and high RoE (29 per cent, over FY09-FY14) will help sustain premium valuations. We broadly maintain our FY15/16/17 estimates and retain BUY on the stock with an increased target price of Rs 985/share from Rs 875,” said HDFC Securities report.

Consistent delivery, strong cash generation and high return ratios justify CIL’s premium valuation, the brokerage says.

Post Q3 results, the management is optimistic that the economic reforms that the new government is aiming along with infrastructure investments, will lead to economic growth. Cummins India is well positioned to take full advantage of the impending market recovery.

According to Motilal Oswal, key triggers for the company include, incremental success in LHP genset, which contributed Rs 3.9 billion to revenues in FY14, increased outsourcing, given cost restructurings in global powergen business and pick-up in the reconditioning and refurbishment business.

The brokerage has a buy rating and a price target of Rs 1000 on the stock.