Buy Cummins India - Growth Momentum Continues - Motilal Oswal

Cummins India (KKC IN; Mkt Cap USD2.9b, CMP Rs671, Buy)

Growth momentum continues; encouraging demand outlook despite concerns of industrial slowdown

Domestic demand is broad-based, largely driven by the services, agriculture, hospitality, commercial, residential, infrastructure and healthcare sectors

With growing power shortage, demand for diesel engines for power-generation (50% of domestic sales) will continue to be strong.

We see FY11 domestic demand growing by 31%, 20% in FY12 and 19% in FY13. Cummins' strong growth in India will continue to be across product ranges.

Cummins Inc has identified India as a key outsourcing destination for its global markets. Most of Cummins India's exports are used to generate power.

Cummins India has maintained EBITDA margin during 9mFY11, YoY, despite a 30% increase in pig iron prices over the past 3 quarters.

Cummins India will invest Rs3.5b in FY11 in its mega site near Pune. The facility will house the group's expansion projects. Investments are expected to boost capacity by 20% CAGR over the next 3-5 years. We expect Cummins to post revenue and PAT CAGR of 22% and 25% respectively over FY11-13 with constant EBITDA margins of 20%. Further sharp increase in steel price is a key risk to margins. Maintain Buy with a target price of Rs800 on 20x FY12E earnings.

Source : Equity Bulls

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