>CUMMINS INDIA: Exports to grow 3x by FY12, driving 37% EPS CAGR over FY10-12

Encouraging long-term outlook, as parent looks at sourcing more from India; domestic sales to grow at a steady pace

■ Strong demand to boost growth: Cummins India (CIL), the largest engine
manufacturer in India, is likely to post accelerated growth over the next two years,
led by improving demand in the domestic market and strong rebound in exports
on the back of increased outsourcing by its parent. Better product mix, healthy
pricing environment, stable commodity prices, and continuous cost-cutting
initiatives will keep margins strong.

■ Domestic business to grow at 26% CAGR over FY10-12: After sluggish demand
in FY09 and 1HFY10, the domestic engine market has shown impressive recovery.
With growing power shortage, diesel engine demand for power-generation
applications will continue to be strong. We expect robust demand pull from the
industry segment as well, particularly from construction and mining.

■ Exports to grow 3x by FY12; parent raises guidance: CIL is among Cummins
Inc's leading manufacturing bases, and meets its global requirement for several
key products and components. After reaching a high of Rs13b in FY09, exports
sharply declined to Rs4.8b in FY10, as US and European economies shrank.
However, buoyed by strong recovery in American and Asian markets, its exports
have grown sharply since 4QFY10. We expect exports to reach Rs15b by FY12.
Cummins Inc has also raised its sales guidance for CY10 to US$13b, which
augurs well for CIL.

■ Superior product mix, cost-cutting boost margins; more surprises likely:
CIL has surprised markets by sharp improvement in margins during the last two
years. In FY10, EBITDA margin expanded 410bp to 18.5%. The company has
maintained strong margin momentum, posting 21.3% (up 290bp YoY) in 1QFY11.
We believe that better product mix, healthy pricing environment, stable commodity
prices and continuous cost-cutting initiatives will keep margins strong, going
forward.

■ Powerful tailwind; aggressive capacity expansion: Given quality standards
and cost benchmarks that CIL has established, Cummins Inc will enhance the
product portfolio that it outsources from India. To meet domestic demand and
export requirements, CIL will spend around US$300m at its new mega-site near
Pune over the next five years, which will add capacity at 20% CAGR. This is a
significant positive for the company's growth.

■ Earnings CAGR at 37%; stock trades at 17x FY12E earnings; Buy: CIL has
exhibited strong 26% earnings CAGR over the last four years, despite uncertain
business environment globally. We expect the company to post a robust 37%
earnings CAGR over FY10-12. We believe that the stock will command higher
valuations due to long-term growth potential and possible upside to earnings
expectations in the medium-term. We upgrade the stock to Buy, with a target
price of Rs840 (20x FY12E earnings).

To read the full report: CUMMINS INDIA