>CUMMINS INDIA LIMITED: Investment in new capacity creation at Phaltan Megsite

Cummins India Ltd (CIL) is a wholly owned subsidiary of USA based Cummins Inc. Established in 1962, Cummins India Ltd manufactures a variety of Engines operating on diesel, natural gas and dual fuel in their currently operational 5 plants at Kothrud (Pune), Nagar road (Pune), Loni, Daman and Pirangut (Pune). Cummins India Ltd is amongst the largest exporters of engineering products in India.


Q1FY13 HIGHLIGHTS



􀂉 In Q1FY13, CIL registered a revenue of `12588 mn which has registered an impressive growth of 21.8% on Y-o-Y basis and 21% growth on Q-o-Q basis. The sales improvement was largely due to the increase in demand in power generation BU which grew by 24% as well as distribution business which grew by 12% whereas CIL’s industrial BU declined by 15% and automotive BU declined by 30% compared to corresponding quarter previous year . However, CIL do not anticipate sustaining the growth rate that is demonstrated.



􀂉 In Q1FY13, CIL’s EBITDA margin stood at 18.5%, which has shown a substantial improvement of 160 bps on Y-o-Y basis whereas it has registered a decline of 20bps on Qo- Q basis. Margins improved over the previous quarter despite continued input cost increases mainly due to volume leverage, favorable exchange trends, and CIL’s continued focus on improving efficiencies. The margins during the quarter has also been positively impacted by better realization of export and an improved product mix.



􀂉 CIL’s net profit margin in Q1FY13 stands at 14.3%, showing a marginal improvement of 40bps on sequential basis but it has declined by 280bps on Y-o-Y basis. The net profit margin during the quarter is also boosted by 36% (Y-O-Y) growth in other income which include foreign exchange benefits as well.



CIL’s management is optimistic about long term growth prospects and continued to
18 invest in new capacity creation at Phaltan Megsite. The investment program is on track which include the new power generation plant at Phaltan Megasite and technical sector, the
B,C,L up-fit centre. CIL intend to incur a capital expenditure of ~ `2500 mn in FY13. The
revenue mix for the quarter includes power generation business - 34% (Vs. 31% in
Q4FY12), Industrial business – 10% ( Vs. 13% in Q4FY12) Automotive business 3% (Vs.
6% in Q4FY12), Distribution business 18% (Vs. 19% in Q4FY12) and exports 35% (Vs.
31% in 4FY12).



Valuation & Recommendation:
At CMP of `463, Cummins India Ltd is currently trading at P/E Multiple of 19.4x on FY13E
EPS of `23.9. Considering the current global and domestic scenario in engine and power
generation business and volatile commodity prices, we maintain our target price at
`430.2/ share which is at 18x P/E on FY13 EPS of `23.9 and maintain “HOLD” rating.