The weaker-than-expected operational performance during the third quarter was largely led by weak exports; the growth may remain subdued in FY2017 given a weak HHP market. FY2016E growth in Powergen has been largely led by market share gains, which may not be forthcoming easily in FY2017.
Present price-implied expectations continue to factor good sales growth and margin improvement, leaving some scope for disappointments; we revise our TP to R875 (from 950); maintain reduce.
3QFY16 sales stood at 11.5 billion (up 6% y-o-y), 10% below estimate led by decline in export (down 6% y-o-y, down 17% q-o-q). The domestic market witnessed a growth of 15% y-o-y led by good growth in Powergen and Distribution businesses.
Adjusted EBITDA margin (for inventory provisioning) at 16.3% (down 120 bps y-o-y) was 20 bps below estimate on negative operating leverage. Higher-than-expected other income and lower tax rate helped report better-than-expected adjusted PAT.
The exports decline in the quarter was led by a broad-based demand slowdown across various markets. The company saw an LHP export decline of 4% in Africa, 6% in Mexico, 40% in Europe, 17% in Middle East as well as some decline in Turkey.
China slowdown continues to impact several countries across the globe and commodity and oil price decline has reduced the demand from Middle East, which forms a large export market for Cummins India (22% of total exports). Given the context, the company will focus on improving its market share for growth in a stagnant/declining market.