MOSL: CUMMINS INDIA (Buy)-Miss on all fronts-hurt by weakness in higher-margin exports biz
CUMMINS INDIA: Miss on all fronts; hurt by weakness in higher-margin exports biz
(KKC IN, Mkt Cap USD2.4b, CMP INR603, TP INR695, 15% Upside, Buy)
- performance below expectations: KKC missed our expectations on all fronts. Revenue growth was tepid at 1% YoY (our estimate: 10%) in 1QFY20 due to a decline in exports (-26% YoY). De-growth in the higher-margin export business dragged the overall margin to its lowest level in a decade at 11.3%. Thus, EBITDA declined 30% YoY to INR1.5b (35% miss). Adj. PAT was down 23% YoY to INR1.4b (25% miss).
- The root cause - weak demand trends in overseas markets: The decline in exports is attributable to weak demand in the key markets of Africa, the Middle East and Asia. LHP exports declined 39% YoY to INR1.3b, while HHP exports were down 10% YoY to INR1.7b. Domestic business grew robustly by 16% YoY to INR9.9b, led by strong growth in Power Generation (+9% YoY) and Industrial (+39% YoY) segments. Distribution & Services segment delivered moderate growth of 8% YoY to INR3.5b. However, management has lowered its domestic revenue growth guidance to 8-10% from 12-15% earlier owing to the ongoing economic slowdown. This implies residual growth of 6-9% in the remaining nine months of FY20.
- Margins - no relief in sight given weak exports outlook: Operating margin shrank 490bp YoY to 11.3% in 1QFY20 on account of a weak revenue mix (25% exports revenue v/s 34% in 1QFY19). Also, INR movement adversely impacted the margin by 100bp. With global markets expected to remain soft and low visibility in the key markets of Africa and South America, management expects exports to decline 12-15% in FY20 (v/s guidance of flat-to-negative growth at the start of the year). To factor in the potential adverse revenue mix in FY20, we have scaled down our margin estimates by 170bp for FY20 (13.4% v/s 15.2% earlier).
- Lowering earnings estimate and TP; maintaining Buy on cheap valuations: We cut our earnings estimate by 13%/11% for FY20/21 to factor in (a) the pressure on margins, given intense competition in the domestic business and (b) the weak exports outlook. We scale down our TP to INR695 as we assign a target multiple of 24x FY21E EPS. At CMP, the stock trades at FY20/21E P/E of 24x/21x. We maintain Buy given cheap valuations.
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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