Maintain BUY on Cummins - Recovery in sight - HDFC Securities

Mr. Parikshit D Kandpal, Institutional Research, HDFC Securities

Cummins India's (CIL) 3QFY21 strong financial performance is underpinned by positive commentary on (1) calibrated demand normalisation, (2) likely stabilisation of exports market, barring COVID-19 waves, (3) pick-up on power gen viz. data centres, etc., (4) being open to various long term corporate action pertaining to CITL + CIL, and (5) new technology like Hydrogen being routed via the listed entity. We believe this will support long-term valuation rerating. Management clarified that the new hydrogen technology will be rolled out in the medium term via CIL in product/market segments, where it has good scale. We roll forward to FY23E and revise FY21E/22E/23E EPS upwards by 8.2%/12.8%/11.8%, given strong margin recovery. Maintain BUY with increased TP of Rs 810 vs Rs 724 earlier (SOTP).

3QFY21-domestic segment recovery, margins surprise: Revenue: Rs 14.2bn (-2%/+23% YoY/QoQ, 11% beat). EBITDA: Rs 2.5bn (+12/+26% YoY, beat of 20%). EBITDA margin: 17% (+213/+48bps YoY/QoQ) vs est. of 14.2%. While depreciation and interest expenses were in line, other income saw a sharp jump of 36%/70% YoY/QoQ to Rs 984mn, driven by dividend income and forex gains. This drove even higher RPAT beat. Consequently, RPAT: Rs 2.34bn (+26/61% YoY/QoQ, 38% beat). Domestic: Exports split - 73:27, vs 65:35 QoQ and 75:35 YoY. BoD declared an interim dividend of Rs. 7 per equity share (277mn shares). High EBITDA margin is not likely to sustain, as costs will rise when business activity picks up steam. Moreover, there was a large high-value domestic order that skewed mix favorably.

Segmental commentary strong: Construction segment, which has supported growth, is expected to be strong in the near term. Implementation CPCB-4 norms have been delayed by six months. CIL expects orders in this regard from 1QFY23E and is looking for market share gain on the back of better engine and emissions technology. Railways has been lagging and will take a couple of quarters to normalise. Compressors is a very unpredictable cyclical segment and will keep growing as agriculture powers up further. Mining has rebounded strongly as demand for coal, iron ore and other metals is expected to sustain. New products in the marine segment have been introduced, with focus on capturing market share from global players.

Export markets gradual recovery: Exports had begun reviving, but due to the second COVID-19 wave, Latin America and EU region have turned sluggish. Asian markets continue to recover well. MENA region has been lukewarm and lies somewhere in between Asia & EU/Latin regions in terms of recovery.

Return ratios to expand, all-round cyclical recovery: We expect key segments-Infra, Data Centers, Healthcare, Residential-to see strong cyclical recovery. This shall coincide with lagged recovery in commercial real estate, hospitality and exports. Growth pick-up with better pricing should lead to RoE expansion from 14.2% in FY21E to 18.5% in FY23E.

Shares of CUMMINS INDIA LTD. was last trading in BSE at Rs.785.65 as compared to the previous close of Rs. 785.8. The total number of shares traded during the day was 80810 in over 2581 trades.

The stock hit an intraday high of Rs. 795 and intraday low of 778.05. The net turnover during the day was Rs. 63567014.

Source : Equity Bulls

Keywords