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Cummins India expects its low KVA generators (<200 KVA) plant to be commissioned in the next 18 months with an annual capacity of 40,000 generators; its current capacity stands at 14,000. Almost the entire incremental generators capacity will go into the companys export revenues. The high HP engine reconditioning and rebuild facility has begun operations with despatch of around two engines per day now. While the company has been garnering more than 90% of its revenue from the primary market (>500 hrs/annum) and the balance 10% from the standby market,the management expects a strong shift towards the latter,going ahead,which will lead to a shift in the revenue mix as well.
CAGR (compound annual growth rate) over the next 3-4 years in the industrial business (currently 25% of the total revenues),led by strong traction in mining,construction,etc. Mining and construction accounts for a major portion of the companys industrial revenues.
Sustainable product leadership advantage gives the company huge pricing power,which coupled with multiple growth avenues like gas engines,improved outsourcing,and stricter emission norms augurs well for its long-term growth potential. We perceive the mega-site expansion as a pro-active step towards strengthening the India product portfolio to meet both domestic as well as increased export demand. The stock currently trades at a P/E (price-to-earnings) of 22x (times) & 17x for FY11e & FY 12e,respectively. We reiterate our positive outlook on the company and maintain our Buy/Sector Outperformer recommendation on the stock.
Key drivers for IBG
Changing emission norms to be positive: With India expected to adopt stage III emission norms with effect from April 2011,more than 30% of the construction industry will be impacted,which augurs well for the company.
Shift towards higher tonnage in mining: The sector is dominated by coal,which accounts for 60% of the total sector. There is a clear shift from lower to higher tonnage in the mining industry. Cummins has around 40% market share in the global mining industry and is hopeful of achieving the same status in the Indian market,going ahead. While the India mining portfolio is from 400-2,300 HP only,the company relies on the parent for engines above 2,300 HP up to 3,500 HP.
Cummins is a play on the multiple segments of power requirement,rising mobile penetration across rural and suburban geographies,strong coal requirement (driving demand in mining),and continued growth in automobile sales on the back of large potential in environment-friendly natural gas fuel-based engines.
We expect Cummins to benefit from growth in the above segments. Furthermore,the company will benefit from Phaltan expansion which should cater to Cummins growing business demands wef FY12e.
Key risks: Any slowdown in the economy is bound to have an impact on the capital goods industry. By nature,the capital goods industry is the first to be affected by an economic slowdown and the last to benefit from an economic upturn. Any major slowdown in export markets for Cummins India could be a potential risk to our revenue growth assumptions.
Edelweiss
