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Domestic performance saves the day
Cummins India reported weak Q4FY19 numbers. Despite strong growth in domestic revenue, profitability took a hit due to lower export sales, higher operating cost and tax rate. Its total revenue grew by 8.7% to Rs 1,340cr led by 22% yoy growth in the domestic market to Rs 992cr. EBITDA was flat at Rs 172cr, while EBITDA margin contracted by 120bps yoy to 12.8% during the quarter. PAT during the quarter de-grew by 12.6% yoy to Rs 141cr. We believe pick-up in demand in all infrastructure sectors (construction, compressors, realty) increasing penetration in rail as well as marine and high demand from data centers will drive the growth in the domestic market. However, most of the export markets are likely to be subdued due to economic slowdown. We recommend accumulate on the stock with a target price of Rs 842.
Q4FY19 Result Update:
* Cummins’ domestic sales growth was led by 21% yoy growth in power gen segment driven by launch of value added products. Industrial segment grew by 37% yoy which was driven by consistent demand from rail and construction markets. Distribution sales were up by 10% yoy. The company has guided for 10-15% growth in domestic sales in FY20E. Further, despite the likelihood of order awarding activity slowing down in Q1FY20E, continuous government investments in Infrastructure shall lead to strong growth in domestic markets in the long-term.
* Cummins’ exports for the quarter fell by 17% yoy to Rs 322cr. There was weakness across all product categories particularly – Low, mid and heavy horse power. The guidance for exports is flat to marginally down for FY20E.
* Gross margin declined by 70 bps yoy to 34.2% due to unfavorable product mix in favor of lower range engines. EBITDA was flat yoy as a result of higher operating cost including employee cost. PAT declined by 12.6% yoy to Rs 141cr as tax rate increased to ~32.4% (vs 22.8% in Q4FY18) on expiration of SEZ benefits.
* Key conference call highlights:
a) Cummins is planning a capex of Rs 300-350cr in FY20E.
b) The tax rate for FY20E is likely to be stable at 30%.
c) In Industrial segment, compressor is likely to grow at a strong rate of 40-50% yoy, while construction may remain flat yoy.
d) Railways are likely to grow between 10-12% yoy, while mining and marine too are likely to witness strong demand in FY20E.
Outlook & Valuation:
Cummins’ investments in product enhancements (e.g. new power train solutions in industrial segment), increasing customer focus, and strengthening market share are the key growth triggers. The company has guided for domestic growth of 10-15% in FY20E, while exports guidance is flat to negative on a conservative basis. However, the long-term prospects remain promising given widening of product portfolio, implementation of CPCB norms, and recovery in key export markets going forward. We expect its sales and PAT to grow at a CAGR of 10.5% and 12.2% respectively over FY19-21E. We recommend accumulate on the stock with a target price of Rs 842.
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