Buy Cummins India; target Rs 983: SMC Global Securities

SMC Global Securities has a buy call on Cummins India with a target price of Rs 983.

The current market price of Cummins India is Rs 798.

Time period given by the brokerage is 10 months when Cummins India price can reach the defined target.


Investment rationale of the brokerage
Cummins India Limited is a subsidiary of Cummins. It manufactures a variety of engines operating on diesel, natural gas and dual fuel, provides innovative solutions across the industrial business, power-generation and service support. It currently has a manufacturing capacity of over 75,000 engines.

Exports business of the company is showing continuous improvement. It grew by 21 per cent YoY after recovery in the certain global powergen market like the Middle East and Africa. The management guided that there are a lot of new products in the pipeline which will drive future growth.

All segments of the company are performing well and it was able to gain market share during Q2 FY19. Of the total domestic sales, Rs 410 crores was from powergen segment, Rs 240 crore was from industrial and Rs 350 crores from distribution. Railways segment is growing significantly and is showing strong traction. The management is of the view that government’s efforts on infra sector is helping the overall growth.

Owing to a robust demand outlook from powergen, railways and industrial segments, the company has revised its domestic sales growth to 10-12 per cent compared to earlier guidance of 8-10 per cent for FY 19. As against flat exports growth, growth has now been guided at 3-5 per cent. The company has planned for a capex of around Rs 400 crore in FY 19. This includes capex on high Horse Power capacity for new CPCV 3 criteria which will be made in India. On the marine and construction side, too, the company was able to improve market share.

Net sales of the company stood Rs 1,452 crores, which grew by 30 per cent YoY. Net profit before tax was at a record high of Rs 298 crores which came 53 per cent higher YoY. The company saw its margins improve by 1.5 per cent due to forex gains, cost control and better realizations. Ebitda margins stood at 16.9 per cent.

Risk: Increasing competition and commodity price fluctuation.

Valuation: In this quarter, the company was able to overcome certain execution constraints that it had encountered in the previous quarters. The management is confident on the medium to long-term outlook for domestic sales as underlying demand remains positive, arising from sustained investments by the government in creating infrastructure for the Indian economy. The company is positioned to outperform in the industry and is investing judiciously in product enhancements, increasing customer focus while maintaining strong controls over the cost of operations and improved productivity. It is expected that the stock will see a price target of Rs 983 in 8 to 10 months time frame on a target P/E of 31 times and FY20 EPS of Rs 31.7.