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 39767 44058 47243 47866 51456 EBITDA 6967 7318 7604 8233 9339 EBITDA Margin (%) 17.5 16.6 16.1 17.2 18.2 Adj. Net Profit 6000 7859 7519 7226 8074 EPS (Rs.) 21.6 28.3 27.1 26.1 29.1 RoE (%) 24.2 28.8 24.8 21.9 22.3 PE (x)* 27.6 30.9 31.0 32.6 29.1, *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) 235357 / 3521 52-wk High/Low (Rs.) 1103 / 746 3M Avg. daily volume (mn) 0.3 Beta (x) 0.7 Sensex/Nifty 27941 / 8638 O/S Shares(mn) 277.2 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* 110 100 90 80 70 Nov-15 Dec-15 Jan-16 Feb-16 Source: Bloomberg; *Index 100 Analyst Contact De Arul Kaarthick 040-3321 6280 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
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) 12500 11638 7.4 12284 1.8 24784 24420 1.5 45831 Op. Expenditure 10800 9311 16.0 9915 8.9 20135 19558 3.0 36883 EBITDA 1700 2327 (27.0) 2369 (28.3) 4649 4863 (4.4) 8948 Depreciation 209 200 4.6 206 1.3 415 403 2.9 810 Interest 43 24 80.3 21 101.4 65 48 34.7 96 Other Income 982 910 7.9 722 36.1 1704 1823 (6.5) 3486 PBT 2430 3013 (19.4) 2864 (15.1) 5874 6235 (5.8) 11529 Tax (net) 461 417 10.7 440 4.8 901 888 1.5 1561 PAT 1969 2597 (24.2) 2423 (18.8) 4972 5347 (7.0) 9968 EBITDA Margin (%) 13.6 20.0 (640 bps) 19.3 (569 bps) 18.8 19.9 (115 bps) 19.5 EBIT Margin (%) 11.9 18.3 (635 bps) 17.6 (568 bps) 17.1 18.3 (118 bps) 17.8 PAT Margin (%) 15.8 22.3 (656 bps) 19.7 (398 bps) 20.1 21.9 (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
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
Oct 28, 2016 Standalone Financials Exhibit 7: Income Statement YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Revenues 39767 44058 47243 47866 51456 Growth (%) (13.4) 10.8 7.2 1.3 7.5 Operating Expenses 32799 36740 39639 39633 42116 EBITDA 6967 7318 7604 8233 9339 Growth (%) (16.5) 5.0 3.9 8.3 13.4 Depreciation & Amortization 528 797 810 962 1001 Other Income 1777 2866 2279 2154 2058 EBIT 8217 9387 9073 9425 10397 Interest Expenses 42 13 9 20 20 PBT 8175 9374 9064 9405 10377 Tax 2175 1515 1546 2179 2303 PAT 6000 7859 7519 7226 8074 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 865 799 897 3088 5463 Sundry Debtors 7820 9355 9506 9180 9868 Inventory 5513 6823 6003 5978 6395 Loans & Advances 8405 7472 7363 7469 7305 Investments 534 457 517 517 517 Gross Block 5480 4934 780 473 0 Net Block 9175 12246 12818 13682 14232 CWIP 958 1706 5192 5192 5192 Other current assets 4458 4360 3471 3396 3396 Total Assets 37727 43217 45768 48502 52369 Current Liabilities & Provisions 11409 13538 13003 13027 13462 Debt 202 183 235 235 235 Other Liabilities 465 631 817 817 817 Total Liabilities 12076 14352 14055 14079 14515 Shareholders Equity 554 554 554 554 554 Reserves & Surplus 25097 28311 31159 33868 37300 Total Networth 25652 28865 31713 34423 37854 Total Networth & Liabilities 37727 43217 45768 48502 52369 4
Oct 28, 2016 Exhibit 9: Cash Flow Statement YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E PBT 8175 9374 9064 9405 10377 Depreciation 528 797 810 962 1001 Interest 42 13 9 20 20 Tax Paid (2308) (1853) (1694) (2179) (2303) Inc/dec in Net WC (1607) (1204) 305 269 (507) Other Income (601) (958) (1245) (2154) (2058) Other non cash items (605) (1157) (694) (0.3) 0 Cash flow from operating activities 3624 5012 6556 6323 6530 Inc/dec in capital expenditure (4678) (3304) (4523) (1750) (1550) Inc/dec in investments 1489 1296 0 0 0 Others 3728 1445 2744 2154 2058 Cash flow from investing activities 539 (563) (1780) 404 508 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) 188 97 2190 2375 Exhibit 10: Key Ratios YE Mar FY14 FY15 FY16 FY17E FY18E EBITDA Margin (%) 17.5 16.6 16.1 17.2 18.2 EBIT Margin (%) 20.7 21.3 19.2 19.7 20.2 Net Profit Margin (%) 15.1 17.8 15.9 15.1 15.7 Dividend Payout Ratio (%) 70.3 53.6 62.1 62.5 57.5 Net Debt/Equity (x) (0.03) (0.02) (0.02) (0.09) (0.14) RoE (%) 24.2 28.8 24.8 21.9 22.3 RoCE (%) 21.7 26.2 19.8 18.8 19.0 Exhibit 11: Valuation Parameters YE Mar FY14 FY15 FY16 FY17E FY18E EPS (Rs.) 21.6 28.3 27.1 26.1 29.1 DPS (Rs.) 15.2 15.2 16.8 16.3 16.7 BVPS (Rs.) 92.5 104.1 114.4 124.2 136.6 PE (x)* 27.6 30.9 31.0 32.6 29.1 P/BV (x)* 6.4 8.4 7.4 6.8 6.2 EV/EBITDA (x)* 23.7 33.2 30.6 28.2 24.6 EV/Sales (x)* 4.1 5.5 4.9 4.9 4.5, *Represents multiples for FY14, FY15 & FY16 are based on historic market price 5
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