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  1. Cummins rated buy; know why

Cummins rated buy; know why

The MHP and HHP is the core of KKC: KKC reiterated that it is a mainly a B2B company. B2C, especially in the LHP segment is not its mainstay in the domestic markets.

Published: December 21, 2017 3:34 AM
The sudden exit of the chairman & managing director is unlikely to have any impact on KKC given the strong management line up at KKC.

The sudden exit of the chairman & managing director is unlikely to have any impact on KKC given the strong management line up at KKC. Patrick Ward, currently the vice president and CFO of Cummins Inc, will be the interim MD. A new MD is expected to be appointed soon. Exports have bottomed out, in line with the Q2 concall commentary. The fall in exports at 17% in Q2FY18 was rather steep juxtaposed against a 3/2/3% y-o-y fall in Q1FY18/FY17/FY16. Despite aggressive competition in HHP segment, 55/40% of domestic Power Gen business/exports, KKC estimates to have gained ~1% market share. KKC charges a premium in this segment. The domestic sales including distribution had fallen 7% y-o-y in Q2FY18. The GST impact has been absorbed well. Power Generation (PG) business is back on 7-8% growth trajectory. The pricing has been stable in the PG business. Given the competitive pressures, it is difficult to raise prices in PG despite the rise in the raw material prices. KKC has been able to raise price in the industrial segment by ~2%.

The MHP and HHP is the core of KKC: KKC reiterated that it is a mainly a B2B company. B2C, especially in the LHP segment is not its mainstay in the domestic markets. It has maintained its pole position despite the increased competitive intensity in the MHP and HHP segments. Govt’s thrust on infrastructure would continue to drive KKC’s Industrial segment. With all the lead indicators for exports such as China’s GDP growth, oil prices, steel and copper prices firming up, we expect KKC to regain traction in export revenues in the ensuing quarters. We maintain our estimates of tepid revenue CAGR of 8% over FY17-20E. With the recent decline in the stock price of KKC, we upgrade KKC to a ‘buy’ with a TP of Rs 1,016 per share (31x Dec-19 EPS). GST impact on sales has reversed in H2. Also, worst in exports may be behind KKC.

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