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CD Equisearch Pvt Ltd July 13, 2015

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Cummins India Ltd (CIL)

No. of shares (crore) 27.72

Mkt cap (Rs crs) 26333

Current price (10/07/2015) 950

Price target (Rs)

760

52 week H/L (Rs.) 990/584

Book Value (Rs.) (fv:5) 104

P/BV (16e/17e)

8.5/7.8

P/E (16e/17e) 36.8/33.3

EPS growth (FY15/16e/17e) 16.0/2.9/10.3

ROE (FY15/FY16e/FY17e) 25.5/23.9/24.3

Beta 0.7

Daily volume (avg. weekly) 143470

BSE Code 500480

NSE Code CUMMINSIND

Bloomberg KKC IN

Reuters CUMM.BO

Shareholding pattern % Promoters 51.0

MFs / Banks / FIs 17.3

Foreign 18.3

Non-Promoter Corp. 3.6

Public & others 9.7

Total 100.0

As on Mar 31, 2015

Recommendation

REDUCE

Analyst

KISHAN GUPTA, CFA, FRM

Phone: + 91 (33) 4488 0043

E- mail: [email protected]

(Figires in Rs crs)

FY13 FY14 FY15 FY16e FY17e

Income from operations 4589.38 3976.67 4405.80 4832.06 5360.49

Other Income 268.31 177.71 286.58 197.80 207.15

EBITDA (other income included) 1103.19 874.44 1021.63 985.43 1105.04

Net Profit after EO item 641.59 600.22 695.98 716.30 789.78

EPS (Rs) 23.15 21.65 25.11 25.84 28.49

EPS growth (%) 24.1 -6.4 16.0 2.9 10.3

Highlights

� CIL had an unusual last quarter for its operating margin plummeted to the

lowest level in fourteen quarters triggered by margin squeeze in CPCB II

compliant gensets as well as export of high hp engines. After raising prices

of CPCP II compliant wares in the first half (to cover the high input costs),

the company rationalized prices in the second half to shield market share.

To make matters worse it outdid its peers in hiking prices only to roll back

some of the rise later, fearing dramatic loss in market share. Save Q2FY15,

operating profit has barely grown in other three quarters of last fiscal (in

fact it shrunk by 4.2% in Q3FY15) reflecting the misery of domestic power

generation and industrial sectors.

� Acceleration in CIL's exports (up some 44%) last fiscal year helped

somewhat mollify scare of 4% fall in domestic revenues. Exports, whose

revenue share peaked to 40%, got a bump up from robust demand of lhp

gensets from Africa, Asia and Middle East. Poor dispatches of high hp

engines though remain a sore point. None of the domestic businesses

showed traction with revenues of flagship power generation business

sliding by 6%. Both its industrial and auto businesses have failed to show

any signs of coming out of abyss.

� For the fiscal, income from operations advanced by 10.8% and operating

profit by measly 5.5%. Had it not been for the profit on sale of long term

investments of Rs 82.63 crs and increased dividends from Valvoline

Cummins, net profit would have grown by just 9% compared to headline

31%. OPM for full year plunged to 16.7%, the lowest level in last six years.

� But the year saw CIL launch new products. Most notably, its power

generation business unveiled CPCB II compliant prime power and stand-by

ratings across engine platforms. Its industrial business developed the

QSK60 engine for a commercial marine main propulsion application. It also

partnered with the Indian Railway Organization for Alternate Fuels

(IROAF) to introduce compressed natural gas-fuelled diesel electrical

multiple unit (DEMU). No less worth mentioning is roll out of power

generation products for telecom market in Africa and rest of Asia.

� The stock currently trades at 36.8x FY16e EPS of Rs 25.84 and 33.3x FY17e

EPS of Rs 28.49. We project earnings to grow annually (average) by a

shockingly 6.5% over the next two years. Even positive surprises in

earnings leave little headroom for appreciation in stock price. We therefore

assign "reduce" rating on the stock with price target of Rs 760 (previous

target: Rs 618) based on 27x FY17e earnings (average five year ttm P/E: 27).

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Outlook & Recommendation

Export growth plateaued

Record shipments from CIL's low horsepower generator set at the SEZ in Megasite last fiscal helped overcome the stagnation

in its export revenues; exports grew by just 2.2% in the two years ending fiscal 2013. Much of the increase could be attributed

to extension of its product range including mobile and telecom application products. Others include launch of new products

and expansion of distributor base in Africa, South America, Middle East and South Pacific. Particularly, demand was strong in

Africa, where robust laying of cellular networks has propelled shipments of gensets.

But all is not rosy. Off take of high hp engines continues to remain weak not

least due to feeble powergen market globally. Mining activity has also failed

to take off not least for the meltdown in global commodity prices. As a

result, stacking up orders on a high base of last year would be a mammoth

task - we estimate CIL's exports to rise by just 8% in current fiscal (50%

probability) compared to 44% last fiscal (see chart). Yet few new initiatives

could help shore up orders. It has started exporting components to various

Cummins engine manufacturing facilities and to China UK and USA Fuel

System manufacturing locations. Its low hp genset plant at SEZ recently

became CE (Conformité Européenne) certified, indicating its capability to

ship to European Union member states.

Powering domestic markets

CIL's lackluster domestic off take in last few years has swooned investors - its last fiscal's revenue was 9% smaller than what

it was four years ago. Most of its domestic businesses have suffered: power gen 22% smaller; industrial 8%; auto 53% (see

chart). Had it not been for the 21% advance in distribution business, the revenue count would have shrunk by over 16%.

Little wonder sluggishness in domestic economic activity would explain much of that business sclerosis.

But conditions could turn for the better. CIL has been able to win back some

of the lost market share in CPCB II products last quarter by rationalizing

prices. Backup power requirement would surge with GOI's renewed push

on industry and infrastructure growth. Industrial segment is not behind not

least for government's impetus on loosening mining laws and boosting local

defence manufacturing. Demand could rise for rail track maintenance

machines (result of renewed focus on gauge conversion) and for diesel

electric multiple units (higher spend on last mile connectivity). Its

distribution business would get a push from the recently concluded CRM

system in all its dealership across India; the company realizes need to prop

up dealer base for below 160 kva engines.

Record capex

By some measure CIL's appetite of piling up fixed assets shows no signs of satiating: total capex in last three years to fiscal

2015 was 47% higher than the total in the seven preceding years (see chart). Bulk of the total investments of nearly Rs 1040

crs in last three years has gone into India Office Campus (total investment for phase I of IOC: Rs 683 crs); the company

completed the second tower of IOC last fiscal. It plans to spend at least Rs 500 crs in the current year some of which would go

in phase II of IOC (investment: Rs 272 crs).

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Source: Cummins India

[

Other projects in the pipeline include the Cummins Technical Center India (CTCI), the largest research and development

center for Cummins globally, and the Global Analytics Center (GAC), a knowledge processing hub for supporting business

processes across different regions. Also on the anvil are two world class training centers, one for the general employee

training and the other as a technical training center to support its distribution business. The latter will have the capacity to

train more than half a thousand engineers and 300 customers on special programs on controls, alternators etc. Besides, plans

are afoot to unveil by September this year a residential campus facility for employees of the Company near Megasite,

Phaltan.

Launches

To spur flagging domestic power gen sales, CIL lined up an army of new products last fiscal. Most remarkably, CPCB II

compliant 42 prime power and 15 stand-by ratings across engine platforms were launched. It also revealed the indigenized

‘fit-for-market’ series of the QSK50 generator for the 1750 kVA to 1975 kVA segment. . Its industrial business developed the

QSK60 engine for a commercial marine main propulsion application. It also partnered with the Indian Railway Organization

for Alternate Fuels (IROAF) to introduce compressed natural gas-fuelled diesel electrical multiple unit (DEMU). To gain firm

foothold in thriving telecom markets of Africa and other Asian markets new products were unveiled.

Financials & valuation

Dramatic shift of fortunes of CIL's export business helped turn the tide. Income from operations as a result rose by 10.8%, the

second highest absolute addition in last four years. Revenue share of domestic business continues to plummet -from nearly

three-fourths in FY11 to three-fifths now- not least due to abysmal off take of power gen and industrial businesses; power

gen revenues declined annually (average) by 5.9%, while the industrial business dipped by 2% in last four years.

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Yet turnaround is in sight if recent pick up in domestic industrial activity is anything to go by. As a result, we expect CIL's

domestic revenues to rise by 11% (with no more than 50% probability) in the current year. But gain in overall operating

margins would be hard to come by (see chart). Assiduous attempts are being made to undo the harm done by steep pricing

(15-20% increase) of CPCB II compliant gensets - most prominent was loss in market share - by cutting prices, hiking local

content and launching some new products.

Despite positive sound bites of Cummins Inc on the toughening emission standards in Japan, Mexico, Russia, India , China

and others, growing exports in teens on the current base would be a tall order. Consequently, profit after tax would barely

grow this year. Fixed asset turnover would slide for most of its forthcoming additions to fixed assets (IOC; training centers;

residential campus etc) would not add much to top line in medium term. But thanks to technological prowess, it would

continue to generate industry-beating return on capital.

The stock currently trades at 36.8x FY16e EPS of Rs 25.84 and 33.3x FY17e EPS of Rs 28.49. The re-rating of the stock in last

one year or so has more to do with reducing equity risk premium in general. CIL's earnings have climbed 16% last fiscal

precipitated by sturdy jump in dividend income from Cummins Valvoline (otherwise earning would have grown by just

9%). We project average annual earnings to grow by a shockingly 6.5% over the next two years. Even positive surprises in

earnings leave little headroom for appreciation in stock price. We therefore assign "reduce" rating on the stock with price

target of Rs 760 (previous target: Rs 618) based on 27x FY17e earnings (average five year ttm P/E: 27). (For more info, refer to

our report dated Aug 6, 2014)

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Cross Sectional Analysis

Company Equity* CMP Mcap*

Op.

inc. Profit* OPM** NPM**

Int

cov. ROE**

Mcap

/ OI P/BV P/E EV/EBITDA

Cummins 55 950 26333 4406 696 16.7 15.8 188.5 25.5 6.0 9.1 37.8 27.7

Greaves Cot 49 128 3117 1698 122 11.7 7.2 74.4 14.8 1.8 3.8 25.6 13.8

Kirloskar Oil 29 281 4070 2507 143 9.9 5.7 1028.2 11.0 1.6 3.0 28.4 13.2

* Figures in Rs crs; P/E on TTM basis ** in %

Risks & Concerns

Increased competition

Post implementation of CPCB II norms last fiscal year, prices of generator sets were increased in the domestic market to account

for rise in input costs. But due to steep rise in its generator set prices, Cummins suffered loss of market share and margin

pressure last fiscal. Expansion of local footprint of global OEMs in generator sets and M&HCV segments has also increased

competition for incumbents.

Auto sector woes

Sharp comeback in the domestic medium and commercial vehicle (MHCV) sales - volumes grew 16% in FY15 after a fall of 25%

in FY15 -has done little to galvanize sales mainly due to tepidity in local mining activity; its auto sales (domestic) slipped to Rs

110 crs last fiscal from Rs 130 crs a year ago.

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Financials

Quarterly Results Figures in Rs crs

Q4FY15 Q4FY14 % chg. FY15 FY14 % chg.

Income from operations 1133.51 971.62 16.7 4405.80 3976.67 10.8

Other Income 66.09 31.45 110.1 286.58 177.71 61.3

Total Income 1199.60 1003.07 19.6 4692.38 4154.38 13.0

Total Expenditure 957.60 800.69 19.6 3670.75 3279.94 11.9

PBIDT 242.00 202.38 19.6 1021.63 874.44 16.8

Interest 0.95 1.06 -10.4 4.52 4.18 8.1

Depreciation 19.08 14.58 30.9 79.72 52.75 51.1

PBT 221.97 186.74 18.9 937.39 817.51 14.7

Tax 31.53 44.95 -29.9 151.54 217.49 -30.3

PAT 190.44 141.79 34.3 785.85 600.02 31.0

Extraordinary Item - - - 89.87 -0.20

-

45035.0

Adjusted Net Profit 190.44 141.79 34.3 695.98 600.22 16.0

EPS (F.V. 2) 6.87 5.12 34.3 25.11 21.65 16.0

Income Statement Figures in Rs crs


Income from operations 4589.38 3976.67 4405.80 4832.06 5360.49

Growth (%) 11.5 -13.4 10.8 9.7 10.9

Other Income 268.31 177.71 286.58 197.80 207.15

Total Income 4857.69 4154.38 4692.38 5029.86 5567.65

Total Expenditure 3754.50 3279.94 3670.75 4044.44 4462.61

EBITDA 1103.19 874.44 1021.63 985.43 1105.04

Interest 4.61 4.18 4.52 4.75 4.98

EBDT 1098.58 870.26 1017.11 980.68 1100.05

Depreciation 47.25 52.75 79.72 96.76 116.74

Tax 287.22 217.49 151.54 167.63 193.53

Reported PAT 764.11 600.02 785.85 716.30 789.78

Extraordinary item 122.52 -0.20 89.87 - -

Adjusted Net Profit 641.59 600.22 695.98 716.30 789.78

EPS (Rs.) 23.15 21.65 25.11 25.84 28.49

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Balance Sheet Figures in Rs crs


SOURCES OF FUNDS

Share Capital 55.44 55.44 55.44 55.44 55.44

Reserves 2331.29 2509.71 2831.08 3046.92 3336.25

Total Shareholders Funds 2386.73 2565.15 2886.52 3102.36 3391.69

Long term debt - - - - -

Total Liabilities 2386.73 2565.15 2886.52 3102.36 3391.69

APPLICATION OF FUNDS

Gross Block 1041.47 1511.98 1883.01 2333.01 2733.01

Less: Accumulated Depreciation 548.04 592.83 649.05 745.81 862.55

Net Block 493.43 919.15 1233.96 1587.20 1870.46

Capital Work in Progress 120.79 95.76 170.61 100.00 70.00

Investments 627.56 495.35 465.04 252.22 307.22

Current Assets, Loans & Advances

Inventory 530.35 551.34 682.26 750.49 825.53

Sundry Debtors 854.99 782.03 935.54 1029.09 1152.59

Cash and Bank 354.65 86.49 79.86 90.58 99.88

Loans and Advances 215.22 154.66 291.11 302.97 310.09

Total CA & LA 1955.21 1574.52 1988.77 2173.14 2388.09

Current liabilities 752.80 670.78 833.66 893.23 981.27

Provisions 348.82 353.01 393.67 436.61 446.12

Total Current Liabilities 1101.62 1023.79 1227.33 1329.84 1427.38

Net Current Assets 853.59 550.73 761.44 843.30 960.71

Net Deferred Tax -32.78 -46.51 -63.08 -82.19 -92.19

Other Assets (Net of liabilities) 324.14 550.67 318.55 401.83 275.48

Total Assets 2386.73 2565.15 2886.52 3102.36 3391.69

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Cash Flow Statement Figures in Rs crs


Net Income (a) 764.11 600.02 785.85 716.30 789.78

Non cash exp. (b) -135.07 -57.49 -168.70 -12.09 -2.17

Depreciation 47.25 52.75 79.72 96.76 116.74

Deferred taxes & others 39.73 13.73 -24.38 19.11 10.00

Profit / loss on sale of assets / inv -135.59 -16.52 -106.48 0.00 0.00

Interest income -17.60 -47.35 -21.73 -27.97 -27.45

Dividends -68.86 -60.10 -95.83 -99.99 -101.46

Change in working capital & others (c ) -104.86 -184.51 -120.69 -89.89 -101.77

Inventory 37.26 -20.99 -130.92 -68.23 -75.05

Debtors -176.65 72.96 -153.51 -93.55 -123.49

Loans & advances -90.89 -147.44 -6.51 -12.25 -7.12

Current & long term liabilities 88.97 -80.97 160.99 59.57 88.04

Provisions 36.45 -8.07 9.26 24.57 15.85

Operating cash flow (a+b+c) 524.18 358.02 496.46 614.31 685.84

Capex (Net) -214.78 -467.83 -330.36 -477.67 -250.00

JV investments & Others (Net) 63.55 - 84.64 -6.50 -

Other Investments (Net) 30.18 148.93 44.91 219.32 -55.00

Interest income 13.54 54.22 23.50 28.36 27.45

Dividend income 68.86 60.10 95.83 99.99 101.46

Bank Deposits -139.99 259.81 25.20 - -

Investing cash flow (d) -178.64 55.23 -56.28 -136.50 -176.09

Net borrowings - - - - -

Dividends paid -354.39 -421.61 -421.60 -467.09 -500.46

Financing cash flow (e) -354.39 -421.61 -421.60 -467.09 -500.46

Net change (a+b+c+d+e) -8.85 -8.36 18.58 10.72 9.29

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Key Financial Ratios


Growth Ratios (%)

Revenue 11.5 -13.4 10.8 9.7 10.9

EBIDTA 22.9 -10.8 6.5 5.8 12.1

Net Profit 24.1 -6.4 16.0 2.9 10.3

EPS 24.1 -6.4 16.0 2.9 10.3

Margins (%)

Operating Profit Margin 18.2 17.5 16.7 16.3 16.8

Gross Profit Margin 21.3 21.9 21.0 20.3 20.5

Net Profit Margin 14.0 15.1 15.8 14.8 14.7

Return (%)

ROCE 34.6 24.4 29.0 24.0 24.4

RONW 29.0 24.2 25.5 23.9 24.3

Valuations

Market Cap / Sales 3.0 4.2 5.5 5.4 4.9

EV/EBIDTA 13.1 18.3 25.6 26.2 23.4

P/E 21.5 27.5 34.9 36.8 33.3

P/BV 5.8 6.4 8.4 8.5 7.8

Other Ratios

Interest Coverage 202.5 196.6 188.5 187.2 198.3

Debt-Equity Ratio - - - - -

Current Ratio 1.8 1.5 1.6 1.6 1.7

Turnover Ratios

Fixed Asset Turnover 9.6 5.6 4.1 3.4 3.1

Total Asset Turnover 2.1 1.6 1.6 1.6 1.7

Debtors Turnover 6.0 4.9 5.1 4.9 4.9

Inventory Turnover 6.8 6.1 6.0 5.6 5.7

Creditors Turnover 7.0 6.3 6.7 6.3 6.3

Working Capital Turnover 5.9 5.7 6.7 6.0 5.9

WC Ratios

Debtors Days 61.0 75.1 71.1 74.2 74.3

Inventory Days 53.4 60.2 61.3 64.7 64.5

Creditors Days 51.8 57.6 54.6 58.1 57.9

Cash Conversion Cycle 62.5 77.8 77.9 80.7 80.8

Cash Flows (Rs crs)

Operating Cash Flow 524.2 358.0 496.5 614.3 685.8

FCFE 485.5 413.3 440.2 477.8 564.7

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