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Government’s capital expenditure plans to drive demand recovery

In pursuit of making India a $5 Trillion economy, the government of India, during its Union Budget of 2021 announced various capital expenditure initiatives in an attempt to revive the economy. Sectors like construction, railways, roadways, shipping and ports, etc. were allotted hefty budgets. Cummins caters to the power generation needs of all these sectors and we expect demand to recover as execution picks up in the post pandemic scenario.

Rich technology base presents opportunity for marketshare growth in an ever-tightening regulatory environment

With the BS VI emission norms being adopted for all vehicles, India is now gearing to adopt the BS IV Construction Equipment Vehicle (CEV) / Central Pollution Control Board (CPCB) IV emission norms for non-highway power generation products. Cummins, through its parent has access to the latest technologies in diesel, gas, electric as well as hydrogen power generation assets. We expect the company to capitalize on this and improve its market share both, domestically as well as internationally.

Introduction of new technologiesto support margin expansion in long term

Cummins has a lot of exciting products for when mainstream diesel/gas power generation assets phase out. The company has operational technologies in battery, hydrogen fuel cell as well as hydrogen production. The company has developed end-to-end zero emission solutions which are seamlessly integrated to work together at the highest level of efficiency.

OUTLOOK & VALUATION

We have forecasted a revenue growth of 7.7% CAGR over FY20-24E where we expect revenue for FY24E at Rs. 6,988 Cr, EBITDA at Rs. 1,154 Cr at an EBITDA margin of 16.5% and Net Income at Rs. 1,151. We estimate FY24E EPS at Rs. 41.5 and assign a PE multiple of 27x to arrive at a target price of Rs. 1,080, which is an upside of ~32% from yesterday’s closing price of Rs. 814. We initiate coverage on Cummins India Ltd. with a BUY rating, over an investment horizon of 24-30 months

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