Cummins India Ltd Bloomberg Code: KKC IN

Transcription

1 Company Update Margins Under Pressure; Domestic Recovery Underway Half-yearly revenue was flat; margins were under pressure: Cummins India revenue, EBITDA and PAT for H1FY17 reached to Rs.24,784mn, Rs.4,649mn and Rs.4,972mn which is a 1.5% growth in terms of revenue and a drop of 4.4% and 7.0% at EBITDA and PAT level respectively on YoY comparison to H1FY16. On quarterly comparison, revenue, EBITDA and PAT reached to Rs.12,500mn, Rs.1,700mn and Rs.1,969mn respectively in Q2FY17 which is 7.4% higher on revenue and lower at EBITDA and PAT level to the tune of 27.0% and 24.2% respectively on YoY comparison to Q2FY16. Margin pressure due to change in mix: Revenue mix in terms of domestic and exports has recovered to 65:35 range as domestic business grew by 7% while exports revenues dropped by about 12% during H1FY17. Margin contraction seems to be bottoming out to near lowest material margin, EBITDA margin, EBIT margin and PAT margin reached to 34.1%, 18.8%, 17.1% and 20.1% respectively which are lower by 140bps, 115bps, 118bps, 183bps respectively on a YoY comparison to H1FY16. Largely maintained FY17E guidance: Management has largely maintained its domestic business growth guidance in the range of 10%-12% whereas it expects exports business could contract by 5% during FY17E. Domestic economic recovery underway; exports to remain sluggish: Government spending remains a major demand driver for domestic business as the private corporate spending, particularly manufacturing sector spending, is expected to pickup with a lag effect. Exports to remain under pressure as the global economic recovery remains sluggish. Valuation and Outlook Investment led economic recovery, favourable product mix, cost control measures and value engineering could expand margins going forward and boards well to maintain BUY rating on Cummins India valuing the company at 33.9x FY18E EPS of Rs.29.1 for the revised target price of Rs.986 representing an upside potential of 16%. Exhibit 1: Valuation Summary Industrials-Machinery-Engine & Transmission Bloomberg Code: KKC IN India Research - Stock Broking YE Mar - Standalone (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Net Sales EBITDA EBITDA Margin (%) Adj. Net Profit EPS (Rs.) RoE (%) PE (x)* , *Represents multiples for FY14, FY15 & FY16 are based on historic market price For private circulation only. For important information about Karvy s rating system and other disclosures refer to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY<GO>, Thomson Publishers & Reuters Recommendation (Rs.) Oct 28, 2016 CMP 849 Target Price 986 Previous Target Price 1054 Upside (%) 16 Stock Information Mkt Cap (Rs.mn/US$ mn) / wk High/Low (Rs.) 1103 / 746 3M Avg. daily volume (mn) 0.3 Beta (x) 0.7 Sensex/Nifty / 8638 O/S Shares(mn) Face Value (Rs.) 2.0 Shareholding Pattern (%) Promoters 51.0 FIIs 16.2 DIIs 19.6 Others 13.2 Stock Performance (%) 1M 3M 6M 12M Absolute (6) (4) (2) (20) Relative to Sensex (5) (3) (10) (23) Source: Bloomberg Relative Performance* Nov-15 Dec-15 Jan-16 Feb-16 Source: Bloomberg; *Index 100 Analyst Contact De Arul Kaarthick Mar-16 Apr-16 Cummins India May-16 arul.kaarthick@karvy.com Jun-16 Jul-16 Aug-16 BUY Sep-16 Sensex Oct-16 1

2 Exhibit 2: Q2FY17 margins under pressure Oct 28, 2016 YE Mar - Standalone (Rs. Mn) Q2FY17 Q2FY16 YoY(%) Q1FY17 QoQ(%) H1FY17 H1FY16 YoY(%) FY16 Turnover (net) Op. Expenditure EBITDA (27.0) 2369 (28.3) (4.4) 8948 Depreciation Interest Other Income (6.5) 3486 PBT (19.4) 2864 (15.1) (5.8) Tax (net) PAT (24.2) 2423 (18.8) (7.0) 9968 EBITDA Margin (%) (640 bps) 19.3 (569 bps) (115 bps) 19.5 EBIT Margin (%) (635 bps) 17.6 (568 bps) (118 bps) 17.8 PAT Margin (%) (656 bps) 19.7 (398 bps) (183 bps) 21.7, # Standalone Q2FY17 Revenue Mix Exhibit 3: Domestic revenue mix Exhibit 4: Exports revenue mix Automotive 1.9% Distribution 31.6% Industrials 17.6% Others 10.4% Powergen 38.4% Heavy Duty 7.0% High HP 35.0% Mid range 32.0% Low HP 20.0% Spares & others 6.0%, HP- Horse Power Q2FY17 Domestic Product Mix Exhibit 5: Domestic Powergen revenue mix Exhibit 6: Domestic Industrials revenue mix Heavy Duty (320KV- 380KV) 7.2% High HP (above 500 KV) 55.1% Mid (82.5KV- 252KV) 29.0% Low HP (15KV- 62.5KV) 8.7% Mining 9.6% Railways 19.2% Construction 41.7% Marine 3.2% Misc. 3.8% Compressors 22.4%, HP-Horse Power 2

3 Key Takeaways of Conference Call: Oct 28, 2016 Annual Guidance: Cummins management has largely maintained its domestic business growth guidance in the range of 10%-12% whereas it expects exports business could contract by 5% during FY17E. Domestic sectors/industries to drive demand: As government led investment in sectors like roads and railways, data centres, hospitals, hospitality and reality are some of the major sectors driving demand. Industrials business could overtake powergen business going forward: As investment demand from key sectors could drive growth in industrials business with possibility of overtaking powergen business in the medium to long term. Powergen segment could grow in single digits during FY17E. Margins: to remain as a function of product mix with continued pursuance of optimised cost structure and value engineering initiatives to limit downside to margins. Material margins are near bottoming out. CapEx, Rental Income and dividends: Non-core capex continues in terms of property development and Cummins India is investing close to Rs.3,000mn for Tower III of India Operations Center (IOC). For H1FY17, rental income was at Rs.140mn which could be annualised and to remain consistent. Total dividend income for Q2FY17 was at Rs.310mn due to higher payout by subsidiaries apart from mutual fund dividend. 3

4 Oct 28, 2016 Standalone Financials Exhibit 7: Income Statement YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Revenues Growth (%) (13.4) Operating Expenses EBITDA Growth (%) (16.5) Depreciation & Amortization Other Income EBIT Interest Expenses PBT Tax PAT Growth (%) (14.6) 31.0 (4.3) (3.9) 11.7 Exhibit 8: Balance Sheet YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Cash & Inventories Sundry Debtors Inventory Loans & Advances Investments Gross Block Net Block CWIP Other current assets Total Assets Current Liabilities & Provisions Debt Other Liabilities Total Liabilities Shareholders Equity Reserves & Surplus Total Networth Total Networth & Liabilities

5 Oct 28, 2016 Exhibit 9: Cash Flow Statement YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E PBT Depreciation Interest Tax Paid (2308) (1853) (1694) (2179) (2303) Inc/dec in Net WC (1607) (1204) (507) Other Income (601) (958) (1245) (2154) (2058) Other non cash items (605) (1157) (694) (0.3) 0 Cash flow from operating activities Inc/dec in capital expenditure (4678) (3304) (4523) (1750) (1550) Inc/dec in investments Others Cash flow from investing activities 539 (563) (1780) Dividend paid (4216) (4216) (4671) (4516) (4643) Interest paid (42) (45) (9) (20) (20) Cash flow from financing activities (4258) (4261) (4679) (4536) (4663) Net change in cash (95) Exhibit 10: Key Ratios YE Mar FY14 FY15 FY16 FY17E FY18E EBITDA Margin (%) EBIT Margin (%) Net Profit Margin (%) Dividend Payout Ratio (%) Net Debt/Equity (x) (0.03) (0.02) (0.02) (0.09) (0.14) RoE (%) RoCE (%) Exhibit 11: Valuation Parameters YE Mar FY14 FY15 FY16 FY17E FY18E EPS (Rs.) DPS (Rs.) BVPS (Rs.) PE (x)* P/BV (x)* EV/EBITDA (x)* EV/Sales (x)* , *Represents multiples for FY14, FY15 & FY16 are based on historic market price 5

6 Oct 28, 2016 Stock Ratings Absolute Returns Buy : > 15% Hold : 5-15% Sell : <5% Connect & Discuss More at (Toll Free) research@karvy.com Live Chat f in You Tube Disclaimer y Analyst certification: The following analyst(s), De Arul Kaarthick, who is (are) primarily responsible for this report and whose name(s) is/are mentioned therein, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. y Disclaimer: Karvy Stock Broking Limited [KSBL] is registered as a research analyst with SEBI (Registration No INH ). KSBL is also a SEBI registered Stock Broker, Depository Participant, Portfolio Manager and also distributes financial products. The subsidiaries and group companies including associates of KSBL provide services as Registrars and Share Transfer Agents, Commodity Broker, Currency and forex broker, merchant banker and underwriter, Investment Advisory services, insurance repository services, financial consultancy and advisory services, realty services, data management, data analytics, market research, solar power, film distribution and production, profiling and related services. Therefore associates of KSBL are likely to have business relations with most of the companies whose securities are traded on the exchange platform. The information and views presented in this report are prepared by Karvy Stock Broking Limited and are subject to change without any notice. This report is based on information obtained from public sources, the respective corporate under coverage and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of KSBL. While we would endeavor to update the information herein on a reasonable basis, KSBL is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent KSBL from doing so. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. KSBL will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither KSBL nor any associate companies of KSBL accepts any liability arising from the use of information and views mentioned in this report. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Past performance is not necessarily a guide to future performance. Forward-looking statements are not predictions and may be subject to change without notice. Actual results may differ materially from those set forth in projections. y Associates of KSBL might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. y Associates of KSBL might have received compensation from the subject company mentioned in the report during the period preceding twelve months from the date of this report for investment banking or merchant banking or brokerage services from the subject company in the past twelve months or for services rendered as Registrar and Share Transfer Agent, Commodity Broker, Currency and forex broker, merchant banker and underwriter, Investment Advisory services, insurance repository services, consultancy and advisory services, realty services, data processing, profiling and related services or in any other capacity. y KSBL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. y Compensation of KSBL s Research Analyst(s) is not based on any specific merchant banking, investment banking or brokerage service transactions. y KSBL generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. y KSBL or its associates collectively or Research Analysts do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. y KSBL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report and have no financial interest in the subject company mentioned in this report. y Accordingly, neither KSBL nor Research Analysts have any material conflict of interest at the time of publication of this report. y It is confirmed that KSBL and Research Analysts, primarily responsible for this report and whose name(s) is/ are mentioned therein of this report have not received any compensation from the subject company mentioned in the report in the preceding twelve months. y It is confirmed that De Arul Kaarthick, Research Analyst did not serve as an officer, director or employee of the companies mentioned in the report. y KSBL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. y Neither the Research Analysts nor KSBL have been engaged in market making activity for the companies mentioned in the report. y We submit that no material disciplinary action has been taken on KSBL by any Regulatory Authority impacting Equity Research Analyst activities. Karvy Stock Broking Limited Plot No.31, 6th Floor, Karvy Millennium Towers, Financial District, Nanakramguda, Hyderabad, , India Tel: ; Fax: For More updates & Stock Research, visit 6