MOSL: CUMMINS INDIA (Buy)-Competition, cost pressure taking toll on margins
Cummins India: Competition, cost pressure taking toll on margins
(KKC IN, Mkt Cap USD3b, CMP INR770, TP INR945, 23% Upside, Buy)
- Operating performance below expectations: 3QFY19 revenue grew by a healthy 11% YoY to INR15.0b, in line with our estimate of INR14.9b. EBITDA grew 15% YoY to INR2.3b, below our estimate of INR2.4b. Operating margin improved 60bp YoY to 15.1%, supported by lower other expenses (10.8% v/s 12.7% in 3QFY18). Adj. PAT increased 9% YoY to INR1.9b, marginally ahead of our estimate of INR1.8b, driven by higher-than-estimated other income (INR755m v/s INR501m in 3QFY18). For 9MFY19, revenue/EBIDTA/PAT increased by 13%/25%/19% YoY.
- Domestic business shines: Domestic business grew by a robust 14% YoY to INR10.3b, supported by strong growth in the power generation (+30% YoY) and industrial (+21% YoY) segments. Data center, construction and infrastructure segments, too, expanded with their markets shares, supporting domestic growth. Distribution & service segment de-grew by 4% YoY to INR3.5b, impacted by a high base (3QFY18 was strong on account of GST implementation). Exports grew by a muted 5% YoY due to a high base (3QFY18: +32% YoY to INR3.9b), weak demand from Africa and Middle East, and the temporary impact of product change in Europe.
- Gross margin impacted by adverse revenue mix, higher RM cost: Gross margin shrank 190bp YoY to 35% due to the weak revenue mix and the inability to pass on RM cost increase to end-consumers. However, EBIDTA margin improved 60bp YoY to 15.1%, led by lower other expenses (10.8% v/s 12.7% in the year-ago period).
Cummins India is engaged in the manufacturing of diesel and natural gas engines. Co.'s operations are comprised of four business units; Industrial Engine, which caters to the industrial sector with its spectrum of diesel engines ranging from 65 HP to 3500 HP; Power Generation, which addresses standby and prime power needs through the design and manufacture of pre-integrated generator sets, transfer switches, paralleling equipment and controls; Distribution, which provides products, packages, services and solutions for uptime of Co. equipments; and Automotive, which integrates Co.'s diesel and natural gas engines with related technologies.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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