Maintain ‘buy’ on Cummins India (KKC) with a price target of R1,000, valuing the company at 30x FY17e P/E. Over the past few years, KKC has seeded various growth levers (like LHP gensets for domestic/exports, reconditioning and refurbishment).
We expect the revenue contribution of these segments to increase from 11% in FY14 to 27% in FY17e. Key triggers for the company include incremental success in LHP genset (both domestic and exports), which contributed R380 crore to revenues in FY14 and R800 crore in FY17; internal targets are ~R1,500-2,000 crore over the next 3-5 years.
Pick-up in the recon business with CPCB-II implementation (facilities have been recently established in Phaltan) and accelerated indigenisation of CPCB-2 compliant products will support margins.
Powergen demand in CY14 had been weak (down 14% y-o-y) and the market has still not stabilised for CPCB-2 products, with most players having a different strategy on technology. KKC is determined to defend its market share and, hence, willing to take pricing actions, if required.
On the positive side, market uncertainty in terms of new technology, product stabilisation, etc, is now behind us. There are early shoots of demand revival, particularly in commercial real estate and infrastructure.
On LHP Products, after the initial learnings, the attempt now is to garner an increasing pie.