BSE Sensex S&P CNX 20,860 6,217 19 December 2013 Update Sector: Capital Goods Cummins India CMP: INR461 TP: INR540 Buy Stock Info Bloomberg KKC IN Equity Shares (m) 277.2 52-Week Range (INR) 550/365 1, 6, 12 Rel. Per (%) 15/-11/-16 M.Cap. (INR b) 127.9 M.Cap. (USD b) 2.1 Financial Snapshot (INR b) Y/E March 2014E 2015E 2016E Net Sales 41.2 45.1 52.4 EBITDA 7.0 7.9 9.5 Adj PAT 6.2 7.0 8.3 EPS (INR) 22.3 25.2 29.9 EPS Gr. (%) (6.6) 13.0 18.7 BV/Sh. (INR) 94.3 102.5 113.7 RoE (%) 24.8 25.9 27.9 RoCE (%) 25.4 26.5 29.2 Payout (%) 68.3 67.4 62.7 Valuations P/E (x) 20.7 18.3 15.4 P/BV (x) 4.9 4.5 4.1 EV/EBITDA (x) 17.0 15.0 12.1 Div Yield (%) 2.8 3.1 3.5 Shareholding pattern (%) Sep-13 Jun-13 Sep-12 Promoter 51.0 51.0 51.0 Dom. Inst 19.8 19.5 21.9 Foreign 15.8 16.5 12.7 Others 13.4 13.0 14.4 Stock Performance (1-year) CPCB-2: Important long-term driver Consolidation I LHP Products I Recon and Refurbishment Central Pollution Control Board (CPCB) has notified CPCB-2 norms for implementation wef April 1, 2014 for Diesel gensets upto 800kw (~1000hp). We expect that KKC would be an important beneficiary, as stringent norms would lead to increased consolidation, given the technology requirements. Implementation of the norms will improve the business visibility and traction for new segments like: Low Horse Power (launched in 2HFY12) and Refurbishment business. Upgrade Earnings; Maintain Buy. 4QFY14 to witness pre-buying, operating leverage to support margins 4QFY14 powergen revenues are expected to be supported by pre-buying as the cost of the new compliance could lead to higher engine prices by ~15-20% wef April 2014. While this will be offset by weaker 1QFY15 volumes, the base levels will remain higher given the price increase. Operating leverage will support 4Q margins (we model 17.2% in 3Q/4Q), despite the currency reset in Dec 2013. Channel checks suggest that KKC has already received the certification for most of its products. In the past, the management had stated that CPCB-2 implementation will not lead to a meaningful change in royalty payments and we await further understanding on the same. Another risk is increased aggression by MNC players like Perkins, etc particularly in sub 800kva segment. Improve business viability and traction for LHP / Refurbishment Reconditioning & Refurbishment could be an important business as post CPCB norms implementation, pricing gap will widen meaningfully. Also, we understand that KKC will possibly be the only organized player. The revised norms will likely support KKC s expansion in the LHP market (7.5kva to 82.5kva), given the technology edge. KKC had launched products in this segment in 2HFY12, and the target is revenues of ~INR5b over the next 3-5 years (FY14 estimates at ~INR800m-1b). Upgrade earnings, maintain Buy We have revised our estimates to factor in the possible pre-buying impact in 4QFY14; and for FY15/16 to factor in the higher DG set pricing and also improved traction in LHP/Refurbishment business. Another important earnings driver will be the decline in tax rates (we now model 100bps reduction till FY16) given increased manufacturing in SEZ. We now expect KKC to report FY14 EPS at INR22.3/sh (upgrade of 4.6%), FY15 at INR25.2/sh (upgrade of 7.1%); and expect FY16E EPS at INR29.9/sh. Maintain Buy, with price target of INR540/sh (18x FY16E). Satyam Agarwal (AgarwalS@MotilalOswal.com); +91 22 3982 5410 Nirav Vasa (Nirav.Vasa@MotilalOswal.com); +91 22 3982 5422 Investors are advised to refer through disclosures made at the end of the Research Report.
Cummins India 4QFY14 powergen revenues are expected to be supported by pre-buying as the cost of the new compliance could lead to higher engine prices by ~15-20% wef April 2014 Operating leverage will support 4Q margins (we model 17.2% in 3Q/4Q), despite the currency reset in December 2013 KKC: 4QFY14 margins likely to be supported by operating leverage (%) Y/E March 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14E 4QFY14E PowerGen 4,380 3,710 3,570 4,360 3,290 2,348 2,750 3,612 Distribution 2,190 2,360 2,300 2,040 2,300 2,270 2,600 2,175 Industrial 1,080 1,110 1,485 1,460 1,360 1,200 1,150 1,173 Auto 400 270 551 370 400 150 350 452 Others 160 200 317 90 177 150 175 198 Domestic 8,210 7,650 8,223 8,320 7,527 6,118 7,025 7,610 Urja Exports 500 1,200 730 1,450 900 1,000 750 1,182 HHP Exports 3,710 1,830 1,760 1,510 1,860 2,020 1,800 2,544 Exports 4,210 3,030 2,490 2,960 2,760 3,020 2,550 3,726 Total 12,420 10,680 10,713 11,280 10,287 9,138 9,575 11,336 % YoY 21.6% 0.1% 13.6% 10.5% -17.2% -14.4% -10.6% 0.5% Source: MOSL, Company EBITDA margins in 4QFY14 to be supported by strong operating leverage 15.8 16.8 15.1 16.3 13.6 13.7 14.7 11.0 13.3 13.2 18.7 13.3 18.4 18.1 EBITDA Margin (%) 22.6 20.4 21.3 19.9 18.1 17.1 16.8 16.1 16.7 18.7 18.5 18.4 19.1 16.8 16.7 16.4 17.2 17.2 1QFY07 2QFY07 3QFY07 4QFY07 1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 Source: Company, MOSL Reconditioning & Refurbishment could be an important business as post CPCB norms implementation, pricing gap will widen meaningfully Facilities commissioned on Megasite at Phaltan Domestic Tariff Area Upfit Centre for mid range engines (B5.9, 6.7 & 8.9) ReCon for low cost sales (Bring back worn out parts) HHP rebuild centre from 19 litres to 60 litres Parts Distribution Centre Special Economic Zone ReCon for low cost sales (Bring back worn out parts) Diesel engines for less than 200kva for exports HHP Facility Tata Cummins CTIL KKC KKC CTIL KKC CTIL Source: Company, MOSL 19 December 2013 2
Cummins India In the past, the management had stated that CPCB-2 implementation will not lead to a meaningful change in royalty payments KKC paid 4.2% of revenues as Royalty, etc to Cummins Inc FY10 FY11 FY12 FY13 Services Received Cummins Power Generation Ltd - 130 155 - Cummins Technologies Ltd 208 414 556 878 Others 124 114 121 376 Transfer of technology including royalty Cummins Inc 274 612 649 650 Others - 9 - - Total Payment 606 1,278 1,480 1,904 % of Revenues 2.1 3.2 3.7 4.2 Source: MOSL, Company Expert Call: Takeaways from concall with Industry Expert CPCB-2 notification is still an Advance copy on behalf of Government of India. There has been a Gazette notification by the Ministry of Environment and Forests. The effective date is April 1, 2014. Most of the key manufacturers are ready with the compliant products, as the notification has already been delayed by 18 months. There can be few gaps in specific product segments, but companies had been working towards this. The changes in norms entail possible price increase of ~15-20% for higher range engines and ~8-10% for smaller products. Large manufacturers, given the strong technology support and financial position, are in an advantageous position and can time the price increases in a gradual manner; while smaller players will need to take an immediate increase and thus the industry consolidation can accelerate. Most of the imports in India (95%+) have been in 800kva+ segment, which was already subjected to relatively stringent norms. The current notification is on products upto 800kva and thus this segment is not covered. Imported products may witness ~2-3% price increase to meet the emission compliance, and this is largely a software variation. Post the price increase due to CPCB norms implementation, imported products will increasingly become competitive in sub 800kva segments, as well. While the pricing gap still remains, any currency appreciation will support imports. Expect pre-buying and a demand spurt in 4QFY14, but will be offset by weak demand in 1QFY15. 19 December 2013 3
Cummins India Operational Matrix FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E Segmental Revenue (INR m) Power 6,964 10,225 9,970 10,461 13,495 12,620 16,000 12,000 12,600 14,490 Industrial 2,889 3,526 3,550 4,400 5,588 5,360 5,140 4,883 5,371 6,177 Auto 963 1,528 1,060 2,600 2,600 2,490 1,590 1,352 1,554 1,787 Distribution 6,335 6,496 7,590 8,860 10,116 7,620 8,900 9,345 10,653 12,251 Domestic 12,357 16,455 22,170 26,321 31,799 28,800 32,400 28,350 30,949 35,476 Exports 6,050 7,239 13,129 4,883 10,604 11,720 12,690 12,056 13,261 15,913 Net Sales (before eliminations) 18,408 23,507 35,299 31,204 42,403 40,520 45,090 40,405 44,210 51,389 Eliminations - - 2,256 2,755 2,949 0 0 0 0 0 Net Sales 23,244 28,899 33,043 28,449 39,454 40,520 45,090 40,405 44,210 51,389 Growth (%) 19.2 24.3 14.3-13.9 38.7 2.7 11.3-10.4 9.4 16.2 Revenue Growth (%) Power 17.0 46.8-2.5 4.9 29.0-6.5 26.8-25.0 5.0 15.0 Industrial 64.6 22.0 0.7 23.9 27.0-4.1-4.1-5.0 10.0 15.0 Auto 119.5 58.7-30.6 145.3 0.0-4.2-36.1-15.0 15.0 15.0 Distribution 10.4 2.6 16.8 16.7 14.2-24.7 16.8 5.0 14.0 15.0 Domestic 32.7 33.2 34.7 18.7 20.8-9.4 12.5-12.5 9.2 14.6 Exports 13.9 19.6 81.4-62.8 117.2 10.5 8.3-5.0 10.0 20.0 RM Costs (%) 65.0% 69.0% 66.7% 62.1% 63.8% 64.3% 62.9% 61.3% 61.5% 62.0% Contribution Margins (%) 35.0% 31.0% 33.3% 37.9% 36.2% 35.7% 37.1% 38.8% 38.5% 38.0% EBITDA margin (%) 15.8 13.1 15.6 20.0 18.9 16.9 18.2 16.9 17.5 18.2 Net Working Capital (Days) 82.2 65.2 71.3 54.2 48.4 62.1 65.5 72.1 67.0 60.3 Net Cash /Debt (INR m) 2,889 3,856 3,803 7,528 7,836 7,455 9,289 9,609 9,882 12,353 Source: Company, MOSL 19 December 2013 4
Financials and valuation Cummins India Income statement (INR Million) Y/E March 2011 2012 2013 2014E 2015E 2016E Net Sales 40,425 41,172 45,894 41,219 45,113 52,389 Change (%) 40 2 11-10 9 16 EBITDA 7,635 6,972 8,349 6,958 7,881 9,505 EBITDA Margin (%) 18.9 16.9 18.2 16.9 17.5 18.1 Depreciation 366 420 473 565 650 750 EBIT 7,268 6,552 7,877 6,393 7,231 8,755 Interest 48 54 46 60 60 60 Other Income 804 1,233 2,067 1,950 2,068 2,200 PBT 8,025 8,246 10,514 8,283 9,239 10,896 Tax 2,114 2,334 2,872 2,112 2,263 2,615 Tax Rate (%) 26.3 28.3 27.3 25.5 24.5 24.0 Reported PAT 5,911 5,913 7,641 6,171 6,975 8,281 Extraordinary items 0-514 -616 0 0 0 Adjusted PAT 5,911 5,501 6,606 6,171 6,975 8,281 Change (%) 33-7 20-7 13 19 Balance sheet (INR Million) Y/E March 2011 2012 2013 2014E 2015E 2016E Share Capital 396 554 554 554 554 554 Reserves 17,667 19,877 23,313 25,267 27,540 30,631 Net Worth 18,063 20,432 23,867 25,822 28,094 31,186 Debt 183 0 0 0 0 0 Deferred Tax -187-70 328 328 328 328 Total Capital Employed 18,058 20,362 24,195 26,150 28,422 31,514 Gross Fixed Assets 9,144 9,703 10,415 12,915 15,415 16,415 Less: Acc Depreciation 4,734 5,054 5,480 6,045 6,695 7,445 Net Fixed Assets 4,411 4,649 4,934 6,869 8,719 8,969 Capital WIP 0 497 1,208 1,000 1,000 1,000 Investments 7,255 5,976 6,276 6,276 6,276 6,276 Current Assets 16,804 19,826 24,279 23,259 24,634 29,103 Inventory 5,190 5,676 5,304 4,517 4,944 5,741 Debtors 7,182 6,783 8,550 8,131 9,146 10,047 Cash & Bank 1,037 2,235 3,547 3,867 4,140 6,611 Loans & Adv, Others 3,396 5,132 6,878 6,744 6,404 6,703 Curr Liabs & Provns 10,411 10,585 12,502 11,255 12,207 13,834 Curr. Liabilities 7,109 6,849 7,719 6,832 7,477 8,686 Provisions 3,302 3,736 4,783 4,423 4,729 5,149 Net Current Assets 6,393 9,241 11,777 12,004 12,427 15,268 Total Assets 18,058 20,362 24,195 26,150 28,422 31,514 E: MOSL Estimates 19 December 2013 5
Financials and valuation Cummins India Ratios Y/E March 2011 2012 2013 2014E 2015E 2016E Basic (INR) Adj. EPS 21.3 19.8 23.8 22.3 25.2 29.9 Cash EPS 22.6 22.8 29.3 24.3 27.5 32.6 Book Value 65.2 73.7 86.1 93.2 101.4 112.5 DPS 15.0 11.0 12.0 13.0 14.5 16.0 Payout (incl. Div. Tax.) 82.3 59.8 50.9 68.3 67.4 62.7 Valuation(x) P/E 19.4 20.7 18.3 15.4 Cash P/E 15.8 19.0 16.8 14.2 Price / Book Value 5.4 5.0 4.6 4.1 EV/EBITDA 14.9 17.8 15.7 12.8 Dividend Yield (%) 2.6 2.8 3.1 3.5 Profitability Ratios (%) RoE 35.1 30.7 34.5 24.8 25.9 27.9 RoCE 43.3 34.1 35.4 25.4 26.5 29.2 Turnover Ratios (%) Asset Turnover (x) 2.4 2.1 2.1 1.6 1.7 1.7 Debtors (No. of Days) 64.8 60.1 68.0 72.0 74.0 70.0 Inventory (No. of Days) 46.9 50.3 42.2 40.0 40.0 40.0 Creditors (No. of Days) 68.2 46.0 45.8 46.0 46.0 46.0 Leverage Ratios (%) Debt/Equity (x) 0.0-0.1-0.1-0.1-0.1-0.2 Cash flow statement (INR Million) Y/E March 2011 2012 2013 2014E 2015E 2016E OP/(Loss) before Tax 8,025 7,732 9,898 8,283 9,239 10,896 Depreciation 366 420 473 565 650 750 Interest 48 54 46 60 60 60 Direct Taxes Paid 2,114 2,334 2,872 2,112 2,263 2,615 (Inc)/Dec in Wkg Cap -1,253-1,072-1,509 311-350 -590 Extraordinary items (net) 0 514 616 0 0 0 CF from Op. Activity 5,072 5,314 6,651 7,106 7,335 8,501 (Inc)/Dec in FA & CWIP -1,440-2,082-1,469-2,292-2,500-1,000 (Pur)/Sale of Invt 75 1,652-340 0 0 0 Others 0 0 0 0 0 0 CF from Inv. Activity -1,366-429 -1,809-2,292-2,500-1,000 Inc/(Dec) in Net Worth 1,389-225 84 0 0 0 Inc / (Dec) in Debt 96-183 0 0 0 0 Interest Paid 48 54 46 60 60 60 Divd Paid (incl Tax) 4,666 3,185 3,607 4,434 4,503 4,969 CF from Fin. Activity -3,228-3,647-3,570-4,494-4,563-5,029 Inc/(Dec) in Cash 478 1,237 1,273 320 273 2,472 Add: Opening Balance 559 1,037 2,275 3,547 3,868 4,140 Closing Balance 1,037 2,275 3,547 3,868 4,140 6,612 E: MOSL Estimates 19 December 2013 6
Cummins India N O T E S 19 December 2013 7
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This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited: Anosh Koppikar Kadambari Balachandran Email : anosh.koppikar@motilaloswal.com Email : kadambari.balachandran@motilaloswal.com Contact: (+65) 68189232 Contact: (+65) 68189233 / 65249115 Office address: 21 (Suite 31), 16 Collyer Quay, Singapore 04931 Motilal Oswal Securities Ltd Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025 Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com 19 December 2013 8