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Cummins India: Gains factored in

Ram Prasad Sahu / Mumbai 28 Aug 15 | 10:25 PM

The Cummins India stock saw a 16% spurt since the start of the month on strong June quarter results, led by good show both in the domestic and exports segments. It was one of the few companies in the industrial sector to have posted good numbers. Post the good show, the company has increased its annual sales guidance on the back of higher genset demand due to power deficit in Africa region, higher outsourcing from India and some pre-buying in Nigeria due to increase in import duties.

While overall revenues posted a strong 26% year-on-year growth, it was exports that stole the show. Exports which form 40% of sales grew a strong 36% year-on-year. Even on a sequential basis, higher sales in the low and medium horse power (LHP & MHP) gensets helped post growth of 20-46% in the respective segments. While share of the LHP sales grew from 28% in FY15 to 35% in the June quarter that of the MHPs grew from 20% to 28%. While overall sales over the FY15-17 period is expected to post a 20% annual growth, exports in the same period will grow faster at 26%, according Credit Suisse.

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Domestic business too has seen robust growth of 17% year-on-year. The company gained on back of business improvement as well as market share gains. In the domestic power generation business growth rates (31-65%) were the strongest across the genset range boosted by price cuts.

However, while the company gained share, margins at 16.6%, down 60 basis points were weak. This was both on account of lower prices as well as adverse product mix. The company sold more of low horse power gensets which fetch lower margins. The company expects to get back part of the margins through cost cuts, lower raw material costs and localisation initiatives.

While the June quarter numbers were strong, given the stock run up and valuations of 31 times FY17 earnings, the prospects for further price uptick is limited. Further, analysts at Kotak say the external environment will get challenging for the powergen business given improving power supply situation, solar-led battery sets and higher competition.

About half of the analysts tracking the stock have a buy with a consensus target price of Rs 1,093. Given the current price of Rs 1,103, investors should look at a more reasonable entry point into the stock.

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