Cummins India: Valuation reasonable; TP at Rs 643

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Updated: October 8, 2019 1:29:01 AM

Increase FY20-22F EPS by 2-6% on tax rate reduction; our 10-year annual report analysis highlights pricing/competitive pressure throughout; increase TP to Rs 643; 'Neutral'.

KKC has been at the forefront of innovation with timely product launches that has enabled the company to address opportunities in growing areas like rail, data centre and marine, among others.

Increase FY20-22F EPS by 2-6% on tax rate reduction; our 10-year annual report analysis highlights pricing/competitive pressure throughout; increase TP to Rs 643; ‘Neutral’.

The cut in corporate tax rate to 25.17% from 34% leads to an increase in our EPS estimates but operationally, the situation continues to be challenging. With subdued infra ordering till date and weak exports, we expect H1FY21 to be weak. Our decadal annual report analysis reveals interesting insights.

KKC has been at the forefront of innovation with timely product launches that has enabled the company to address opportunities in growing areas like rail, data centre and marine, among others. This has led KKC to retain or gain market share despite competitive pressures.

However, overall markets did not seem to have evolved as per management expectations as softness continued in areas like mining and pricing pressure increased after emission norms changes despite management expectation to the contrary.

Our analysis of 10 years of annual reports highlights that competition and pricing pressure have intensified since FY15. With new emission norms and a rise in costs in the low HP ranges, we expect margin pressure in LHP as the demand environment remains weak. Current share price factors in ROE of 20% and 15% EPS CAGR, in our view: Thus, the stock appears to be fairly valued at present.

We value KKC at an unchanged P/E of 21.5x rolled-forward to Sept-20F to arrive at a higher TP of Rs 643, implying ~12% upside; maintain ‘Neutral’.

Improved exports is a key upside risk, while further margin decline is a key downside risk. We prefer L&T (LT IN, Buy) over KKC.

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