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MOSL: CUMMINS INDIA (Buy)-Focus on developing new growth areas, market share

CUMMINS INDIA: Focus on developing new growth areas, market share; Price hikes taken to counter rising raw material prices 

(KKC IN, Mkt Cap USD2.8b, CMP INR719, TP INR950, 32% Upside, Buy)

 

We recently met the management of Cummins India Limited. Key highlights from our meeting are as below: 

• Price hike of ~5% across multiple nodes: Starting Nov’18, Cummins India introduced price hikes of ~3-5% across nodes to mitigate the cost pressure due to rising raw material prices. The company expects gross margins to expand by 100bp if the price hike is absorbed by the system. Key point to note — Cummins India has not hiked prices for the last four years.
• Focus on market share and developing new areas for incremental domestic growth: While it is the market leader in HHP (~60% share) and MHP segment (~50% share), Cummins is focusing on gaining greater market share in few selective nodes in the 750kv and above segment —a key focus area for the company. It has also developed new growth areas in the domestic market; a segment like Railways now contributes INR2.5b to sales. The focus is now to increase its marine market revenue from current INR250m to INR2.5b in a few years. Cummins also expects manufacturing to start contributing to revenue.
• FY20 revenue guidance of 10-12% for Domestic and 0-5% for Exports: In its guidance for FY20, Cummins India expects 10-12% growth in the Domestic market backed by strong growth across infrastructure segments like Data Centers, Hospitality and Metro. It is also seeing a demand pick-up in the manufacturing segment. However, on the Exports front, it expects growth to remain flattish; hence a weak guidance of 0-5%. Demand for Powergen segment products (major part of its exports business) has witnessed a decline. Even key markets like the Middle East (slowdown in investment) and Africa (payment concerns), which contributes 50% to LHP exports have not picked up. Cummins expects its distribution business to register steady growth of 8-10% growth YoY.