We maintain ‘reduce’ rating on Cummins India with a revised target price of R720 per share (earlier R640) as we roll-forward to September 2016e earnings of 19x. We build in higher export-growth estimates and related moderation in margin improvement. We revise our estimates to R26.7 (vs 27.5), R32.6 (vs 31.8) and R43.7 (vs Rs 39.9) for FY15-17, respectively. We build in the benefit of stronger export growth (for mid-range HP units). Related tax benefit (30-35% of overall from SEZ facility) is partly negated by lower margins and higher working capital for exports (as seen in Q2FY15).
Sequentially, export growth of 24% to R480 crore was driven by a one-time R50 crore order from China. Adjusted, the sequential growth was about 12%, driven by low HP and mid-range sales. Growth potential for the segment is strong in all three segments – low-HP export run-rate is expected to grow 3-4x over the next three years, high-HP exports are growing (bottomed out a year ago) and potential scale-up of mid-range HP exports will possibly start from early CY15. We believe this can drive 40-45% revenue CAGR for exports over FY14-17e.
Cummins said it expects the recovery to be more linked with an increase in capital formation, which it expects will take place in early FY16. The government’s focus on making India a manufacturing hub is expected to support Cummins’ long-term growth potential. For FY15 it has maintained its 0-5% growth guidance.
By Kotak Institutional Equities