Motilal Oswal

We recommend a ?buy? rating on Cummins India with a target price of R585. The initial traction in LHP exports has been encouraging and the revised expectations are that revenues could potentially increase to R2,000 crore pa in the next 4-5 years (vs the earlier expectation of R1,200 crore.)

The key markets are West Asia and South Africa, with India being established as a global hub for such products.

The powergen factory (for Urja Gensets) will be commissioned in April/May 2013. Exports in Q3FY13 were impacted given the ongoing inventory correction and the trend has now normalised.

The strategy for domestic power generation markets would be to defend market share in MHP/HHP segments and to launch new products in the LHP segment. LHP products could be important growth drivers.

Cross-service charges will be recovered by the parent company from January 2013, and while the amount is still under discussion, the impact is likely at R100-200 m/quarter (4-8% of PBT by FY14). These charges pertain to support like product, marketing and HR-related services and are separate from technical support, which is being recovered via royalty.

Margin expansions witnessed in Q3FY13 to 19.1% are largely driven by value engineering and cost rationalisation programmes. However, given the volatility in commodity prices, unfavourable currency movement, the management stated that the Ebitda margin could possibly decline by 50 bps.

During Q3FY13, KKC’s margins improved despite flat revenues, supported by twin trends of currency depreciation and lower commodity prices and benefits accruing from 2.5-3% price hike from June 2012. We believe that the 3% further price increase taken during January 2013 will again support margins and expect 4QFY13 Ebitda margin at 19.3%.

Currency depreciation makes KKC more competitive in the global network of Cummins Inc. We estimate revenue growth of 11%,16%, 17% in FY13E, FY14E and FY15E, respectively, and Ebitda margin of 18.8%, 19.4% and 19.5% (FY12 16.9%). Our EPS estimate stands at R25.3 (up 27% y-o-y) for FY13E, Rs 28.9 (up 13% y-o-y) for FY14E and R33 (up 14%) for FY15E. On current estimates, KKC trades at 20x FY13E, 17.4x FY14E and 15.3x FY15E. We maintain a ?buy? rating with a target price of R585 based on 18x FY15E EPS.