>CUMMINS INDIA: New emission norm and Bio-fuel boosts FY14/15 outlook

■ Bullish outlook, but disappointing new export policy
Cummins India reassured investors in the recent analyst meeting with guidance of over 15% revenue growth in CY12. The company also mentioned that Cummins Inc Group in India aims to grow at 25% CAGR and achieve US$7bn sales by 2016. In our opinion, however, it disappointed with the disclosure that Cummins Inc will manufacture new 60litre engine independently and Cummins India will not get to export these.


■ Demand has bounced back but has no near term upside
We are positively surprised by the pace of recovery in the sales of heavy engines and genset. The company reported 10% m-o-m growth in genset sales for the last three months from the low of Nov 2011. While the recovery has been quite swift, the company may not raise production of 30/50ltr engine from 18/day now in the next six months, as it expects demand to remain at current level.


■ New emission norm and Bio-fuel boosts FY14/15 outlook
Cummins India could benefit from (1) tightening of emission norm for genset in 2013 that could lead to 20-30% price hike, and (2) stronger demand for its new bio-fuel genset having business potential of over US$200mn. However, it is too early to factor in the benefit as the emission norm change may get delayed. Also its peers don't see prices rising by more than 5-8%.


■ Margin peaks off & capex surge to hurt
Currently Cummins India is trading at the higher end of its valuation with FY13E PE being 19x. Recent bounce back in the stock reflects the recovery in business. Likely decline in margin owing to absence of FX gain that had boosted Q3FY12 by 100bp could hurt stock. Also 4 fold jump in capex to Rs1.6bn in 2012-15 will hurt ROE and likely de-rate the stock.


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