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MOSL: CUMMINS INDIA Downgrade to Neutral)-Cost cutting measures, one-offs lead to margin surprise

Cummins India: Cost cutting measures, one-offs lead to margin surprise

(KKC IN, Mkt Cap USD2.3b, CMP INR600, TP INR670, 12% Upside, Downgrade to Neutral)

 

Earnings surprise led by higher margins, growth outlook remains weak

• Cummins 3QFY20 revenue declined 3% YoY to INR14.5b (in-line). EBITDA declined 5% YoY to INR2.2b and was 12% ahead of our est. EBITDA margins contracted 30bp YoY to 14.8% (v/s our est. 13.0%). PAT was 10% ahead of our est., up 5.6% YoY to INR2.0b.
• Cummins has maintained its bleak revenue growth guidance for the domestic/export market. On margins, it has admitted that 3QFY20 run-rate may not sustain only on cost cutting measures, as it is dependent on exports. 

Non-recurring items key reason for surprise in earnings

• Distribution revenue (29% of sales) grew 18% YoY to INR4.2b, helped by one large order worth INR700m from the bus segment. Excluding this, distribution revenue would have declined 2.3% YoY, leading to overall domestic revenue decline of 3% (v/s 4% reported growth).
• Since, distribution revenue commands higher margins compared to the Power Gen segment, EBITDA margins were positively impacted.
• On account of INR100m lower royalty during the quarter, other expenses were lower at INR1.5b v/s run-rate of INR1.6b. This is just a one-off impact on other expenses and won’t be recurring from next quarter. 

Revenue guidance maintained, but outlook remains weak

• Domestic revenue guidance was maintained at 3-5%. In 9MFY20, domestic revenue grew 4% YoY (or 2% excl. the large order in distribution segment).
• Exports guidance was also maintained at 20% decline (v/s 22% decline in 9MFY20). While export market may have bottomed out, growth outlook still remains weak; exports are likely to be flattish over the next 2 quarters.