Cummins India in many ways benefits from the Indian rupee depreciation; we estimate possible margin expansion at around 125-150bp based on current rate of R58.4/$ (down 6.2% since December 2012). Pig iron prices also are down 14% since 3QFY13. Demand headwinds persist in HHP/MHP segments, both in domestic and exports market. LHP to be an important driver, but initial margins could possibly be lower. Stock has corrected 15% since 4QFY13 results; provides opportunity to accumulate.
KKC derives around 28% of sales from exports; thus, margins are strongly correlated with the movement of the rupee against the dollar. Producer pricing agreement with Cummins entails that the currency movement beyond a 3% band is shared to the extent of 50% (with forex rate reset once in three years). Thus, HHP segment (around 60% of exports) should witness a margin expansion under the producer pricing agreement, while in the case of LHP (40% of exports), almost the entire currency gain is being largely retained.
KKC?s raw material costs have historically demonstrated a direct correlation with pig iron prices (down 10.4% QoQ in 4QFY13/down 3.6% QoQ in 1QFY14 YTD). Declining trend in commodity prices should lead to savings in KKC?s raw material costs, particularly in the light of its ongoing efficiency measures such as Six Sigma, ACE and TRIMs.
We model Ebitda margins at 17.4% in FY14E/17.9% in FY15E (v/s 16.8% in 4QFY13), and expect KKC to report an EPS of R24.5 in FY14E/R28.5 in FY15E. Maintain ?buy?.
