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Change in product mix impacts margins Cummins
India (KKC) reported Q4FY19 PAT of Rs1.4 bn which missed our expectations (PLe Rs1.8bn) due to lower EBITDA margin and higher tax rate during the quarter. Sales were up 9% YoY at Rs13.4 bn (PLe Rs14 bn) with domestic sales up 22% YoY and exports down 17% YoY at Rs3.2 bn. Domestically, the company grew faster than the overall market. KKC remains positive on the outlook for domestic sales as the underlying demand remains positive arising from sustained investments by the government in creating infrastructure for the Indian economy. The company has guided for domestic revenue growth of 10-15% YoY for FY20. KKC expects good growth in HHP segment mainly driven by data center, commercial realty, manufacturing etc. KKC is seeing weak demand from exports markets amid uncertain global growth and volatile forex markets. We have modelled 10%/11% Revenue/PAT CAGR over next two years (FY19-21E). The stock is currently trading at 27/23x FY20/21E. We maintain our Accumulate rating on the stock with TP of Rs841 (26xFY21E).
Change in product mix impacts margin:
Q4FY19 sales were up 9% YoY at Rs13.4 bn (PLe Rs14 bn). Domestic sales in Q4FY19 was up 22% YoY at Rs9.9 bn. However, exports fell by 17% YoY at Rs3.2 bn. EBITDA margin contracted 120bps YoY to 12.8% due to 70bps YoY dip in gross margin. This was due to change in product mix with higher share of lower range engines. Hence EBITDA was flat YoY at Rs1.7 bn. Finance cost was up 32% YoY at Rs 45mn. Tax rate for the quarter was higher at 32.4% compared to 22.8% in Q4FY18. Hence PAT for the quarter came to Rs1.4 bn, down 13% YoY. FY19 sales were up 11% YoY at Rs56.6 bn, EBITDA margin came in at 15.3% against 14.4% in FY18. Adjusted PAT was down 4% YoY at Rs7.2 bn. Domestic sales for FY19 stood at Rs38.7 bn, up 15% YoY. Exports grew by 5% YoY at Rs16.52bn.
KKC continues to launch new products mainly in the domestic powergen segment to address the rising competitive intensity. The company has plans to strengthen entire product range by doing small capex. KKC also continues to focus on profitability, optimizing operational cost and market share improvement.
Positive trends in domestic markets, exports market volatile:
The domestic economy continues to grow largely in areas which are positively benefited through continuing government investments in Infrastructure. KKC is seeing traction from data center, commercial realty and manufacturing. Rental business is also seeing an upward trend. KKC remains positive on the medium‐to‐long term outlook for domestic sales as the underlying demand conditions remain positive. Power gen business grew 19% in FY19 and is expected to maintain the momentum. Outlook for Industrial business –Compressors would grow at 40-45%, Construction would be flat, Railways would grow 10-12%, Mining would grow at 30% and Marine expecting significant growth.
In export market, a clear trend is yet to emerge on account of prevailing uncertainties in various economies through the world. KKC believes there are varying degrees of recovery taking place in the global economy, commodity markets and geographies. This trend, however, is likely to only play out in the medium term.
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