Microsec sees 20% upside in Cummins India; recommends ‘buy’

NEW DELHI: Microsec Capital Ltd has re-initiated coverage on Cummins India Ltd (CIL) with a ‘buy’ rating and a target price of Rs 556, which translates into an upside of over 20 per cent from its Thursday’s closing price of Rs 463.05.

At 10:50 am, Cummins India Ltd was trading 0.6 per cent higher at Rs 466. It touched a high of Rs 476.95 and a low of Rs 460 in trade today.

“We are re-initiating the stock at current levels on account of strong growth in domestic revenue supported by powergen business, recovery in industrial business, and growth in exports,” said a Microsec Capital report.

At the current price of INR459, the stock is trading at adjusted P/E of 17.23x its FY14e EPS and 15.67x its FY15e EPS.

Microsec Capital is of the view that CIL will continue to enjoy premium valuations due to its dominant market positioning, impressive long-term growth outlook, healthy balance-sheet, and strong ROE as compared to its peers and dividend yield of 2.83 per cent.

The management envisages the margins to remain stable at the Q4FY13 levels. The brokerage firm believes that the company will be able to improve profitability in the domestic market due to continuous cost cutting, possible 15-20 per cent price increase on implementation of CPCB - II norms and regular price hikes taken by the company.
The average P/E of CIL has been trading in the range of 8x-26x for the last 10 years. The company is now trading at a P/E of 16.7x, which is at a premium of 40 per cent to its peer group.

Hence Microsec Capital expects this trend to continue over FY15e. The brokerage firm has valued the stock by assigning a P/E multiple of 19x FY15e EPS of 29.29 and arrived at a target price of Rs 556 per share .i.e. an upside of over 20 per cent from the Thursday’s closing price of Rs 463.05.