Neutral on Cummins India, target price Rs 360: Motilal Oswal

Motilal Oswal has given a neutral rating to Cummins India with a target price of Rs 360. The share price moved up by 1.47 per cent from its previous close of Rs 369.65. The stock’s last traded price is Rs 375.10.

According to the brokerage, Cummins India’s 4QFY20 operating performance nosedived, weighed by decline in revenues, coupled with higher fixed cost. Higher other income and a lower tax rate in FY20 led to lower decline in PAT at 13 per cent year on year. While domestic sales in FY20 were down 3 per cent year on year, exports de-grew much sharper at 20 per cent year on year.

Cummins has refrained from giving guidance as it is still assessing the Covid-19 impact and operations are yet to normalise. Recovery in the export markets is key for revival in the company’s margin and growth trajectory.


Investment Rationale

After a conference call with Cummins management, the brokerage says the company expects the Distribution segment to rebound faster than other segments as the refurbishment of existing equipment would be the top priority for most customers.

Source: Motilal Oswal

In the export market, the US and China are looking better, with China witnessing the fastest rebound. The easing/lifting of the lockdown is gradually being witnessed in other markets and so growth recovery is yet to be seen. The outlook for exports is highly correlated with rebound in global economies. While the management believes the decline in exports may have bottomed out, the brokerage says it is difficult to predict their growth trajectory.

The company has reduced its employee headcount by 15 per cent as it sought to optimise the cost structure even prior to the Covid-19 outbreak. The benefit of this move would reflect from April’20 onward.

The brokerage has cut its FY21E estimates by 12 per cent to factor slower recovery, but maintain its FY22 estimates. Its revenue / EBITDA / adj. PAT CAGR over FY20–22E stands at 4 per cent/10 per cent/-2 per cent.

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 1041.92 crore, down -27.22 per cent from last quarter sales of Rs 1431.54 crore and down -21.27 per cent from last year's same quarter sales of Rs 1323.42 crore. The company reported net profit after tax of Rs 141.25 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 50.99 per cent stake in the company as of March 31, 2020, while FIIs held 7.46 per cent, DIIs 30.37 per cent and public and other 11.18 per cent.