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Healthy margins, hope of restructuring emerge

Cummins India (Cummins) has reported better-than-expected margins, healthy growth under powergen supported revenue beat. Management didn’t deny any move towards restructuring of unlisted and listed entities. We believe this is a very positive development which will open up lot more synergies. Growth traction can continue with likely recovery from hospitality and realty segments. Though nearterm execution may be volatile, we believe, focus on cashflow, leadership in technology and gradual recovery in export markets augur well for long-term growth. Factoring in better-than-expected margins, FY21E and FY22E earnings by 31.5% and 10.9%, respectively. Given long term structural growth drivers like change in emission norms to CPCB-IV plus and likely restructuring of business, we maintain BUY with a revised SoTP-based target price of Rs783 (previously: Rs613)

* Revival of growth under powergen, construction and exports: HHP powergen witnessed YoY growth post 5 quarters of YoY decline, construction segment grew 102% YoY and exports grew marginally by 1% YoY. Domestic growth outlook is healthy with a gradual revival of economic activity and segments like hospitality and realty may recover from the current slump. Mining has gained traction and railways is also expected to return to normalcy gradually.

* Focus on cost control and favourable mix supported margins: Cummins was able to control cost efficiently, this in addition to favourable mix supported better-thanexpected margins. Commodity prices have recently increased and this is expected to impact the overall gross margins going forward.

* Stable exports with an optimistic outlook: Exports witnessed marginal 1% YoY growth despite lockdown in some European markets. We believe the worst is behind and the growth trajectory may revive going forward. Shift towards India from China by most countries for sourcing will also aid in fuelling growth.

* Maintain BUY on cashflow and long-term growth: Factoring in better-thanexpected margins, we raise our earnings estimates by 31.5% and 10.9% for FY21E and FY22E, respectively, and introduce FY23E estimates. We believe long-term growth potential is intact with the introduction of CPCB-IV+ norms. We revise our SoTP-based target price to Rs783 (previously: Rs613). Given the strong cashflow, stable margins and synergy benefits from restructuring, we have raise our valuation to 28X for standalone core Sep’22 earnings. Structural improvements in investments towards infrastructure and export recovery are rerating catalysts.

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