Lackluster export outlook intensifies margin pressure
Dismal performance on all front
Cummins India’s (KKC) Q1FY20 revenue grew merely ~1% yoy, with domestic revenue (76% of sales) growing by ~16% yoy and exports (24% of sales) de-growing by 26% yoy. The domestic business was buoyed by strong demand from industrial (+37% yoy) and powergen (+9% yoy) segments whereas the exports business impacted by weak demand in low horsepower segment (-39% yoy). Gross margin came at 34% in Q1FY20, down 330bps yoy due to adverse sales mix, unfavorable currency movement and competitive pricing pressure. Though KKC has taken blended price hike of ~3% in Q1, EBITDAM nosedived 489bps yoy led by gross margin contraction and lower operating leverage.
Cut earnings estimates by 22% as export outlook dampens
Despite of stronger domestic growth in Q1FY20, KKC has lowered its FY20 domestic sales growth guidance to 8-10% from 10-15% foreseeing demand slowdown from construction, powergen & marine segments. It has also slashed the export sales guidance with 12-15% dip in FY20 as export outlook remains weak and recovery looks elusive with uncertainties on the account of structural demand slowdown in Middle East, Asia (excl. China) & Africa markets. We expect KKC to face margin headwinds like unfavorable product mix (increasing share of industrial within domestic sales, lower export), pricing pressure due to stiff competition and rising other expenses owing to new product launches. Pricing pressure in India is worse than global levels so it would be difficult to control the material cost through price hikes. We are cutting our sales & EBITDA estimates by 9%/13% & 17%/19%, leading to EPS cut of 20%/22% in FY20/FY21 respectively. Hence, we downgrade the stock to ‘SELL’ with TP of Rs509 at 18x FY21E EPS.
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