2011-12-22 Motilal Oswal_Cummins India

8/3/2019 2011-12-22 Motilal Oswal_Cummins India

1/20

Stock performance (1 year)

Shareholding pattern % (Sep-11)

Y/E March 2011 2012E 2013E

Net Sales (INR b) 40.6 42.7 47.3

EBITDA (INR b) 7.8 7.1 8.7

NP (INR b) 5.9 5.3 6.3

EPS (INR) 21.3 19.1 22.6

EPS Gr. (%) 33.1 -10.6 18.5

BV/Sh. (INR) 64.5 67.5 72.5

P/E (x) 15.3 17.1 14.4

P/BV (x) 5.1 4.8 4.5

EV/EBITDA (x) 10.6 11.6 9.6

EV/Sales (x) 2.0 1.9 1.8

RoE (%) 35.5 28.9 32.3RoCE (%) 35.3 28.7 32.0

Domestic sales moderates; outlook for exports encouragingExpect margin recovery to drive up FY13 earnings; Buy

In our recent meeting, the management sounded cautious due to subdued

demand in the domestic market. However, impact of the slowdown on

Cummins India will be moderate given its diversified business mix .

The outlook for exports remains encouraging. The parent, which has

identified India as a key outsourcing destination, sees good growth in

CY12 and has maintained its CY15 revenue target.

After bottoming out in 3QFY12, we expect margins to pick up in FY13, led

by better product mix and likely correction in raw material prices.

The stock trades at 17x FY12E earnings. We maintain Buy.

Domestic demand muted, but sales unlikely to drop sharply: The demand

environment in the domestic market continues to be muted, though secondary sales

have picked up in recent months. Growth across end-user markets has moderated,

as buyers have postponed capex due to sluggish business environment and high

interest rates. We believe, however, that Cummins India (KKC) will not see a sharp

drop in domestic sales in FY13 even if the slowdown persists, given its diversified

product mix and relatively lower dependence on Infrastructure-related sectors.

Outlook for exports encouraging; parent sees good growth in CY12: Outlook

for export sales remains encouraging. Cummins Inc has maintained its USD30b revenuetarget for CY15, as against USD18b in CY11. It has identified India as a key outsourcing

destination for its global markets. Bulk of KKC's exports is for Power Generation

applications; it supplies K and N series engines of various displacements like 28

liters, 38 liters and 50 liters. HHP engines (with a rating of >500kVA) constitute

~70% of KKC's exports. KKC is also setting up an export-oriented unit of small

gensets (


2/20

Cummins India

22 December 2011 2

Domestic demand muted, but sales unlikely to dropsharplyDiversified sales mix to limit downside; management maintains long-term

guidance

The demand environment in the domestic market continues to be muted, though

secondary sales have picked up in recent months. Growth across end-user

markets has moderated, as buyers have postponed capex due to sluggish

business environment and high interest rates.

We believe, however, that KKC will not see a sharp drop in domestic sales in

FY13 even if the slowdown persists, given its diversified product mix and

relatively lower dependence on Infrastructure-related sectors and large

industries.

Though the management has reduced its domestic sales growth guidance for

FY12 to 5-10%, it maintains its long-term guidance of high-teen growth.

Domestic sales have slowed down

Domestic sales, which accounted for 73% of FY11 revenue, have slowed down considerably

in the last two quarters, largely due to slowdown in the Power Generation segment. Growth

in Commercial Realty, Infrastructure, Banking and Telecom has moderated to 5-6%, while

Auto, Retail/IT and Hospitality continue to perform well, registering 8-10% growth. The

Telecom segment, though small, is now showing a declining trend down 15% YoY against

a growth of 25% earlier.

The Industrials segment also slowed down due to cyclical downturn in the Water Well

Rigs segment (25% of Industrials segment), which is likely to drop by 50% in FY12.

However, other sub-segments like Construction, Mining, Drills and Portable Compressors

should see healthy growth of 10-15%.

but a sharp decline is unlikely; long-tem outlook positive

The management views the moderation in growth during FY12 as a short-term phenomenon.

It has reduced its domestic sales growth guidance for FY12 to 5-10% from 10-15% at the

beginning of the year due to demand slowdown resulting from high interest rates and

rising inflation. However, it maintains its long-term guidance of high-teen (around 20%)

growth.

Domestic sales flat in 1HFY12

7,5

98

7,4

95

7,5

19

7,7

93

6,9

34

7,9

15

6,9

40

5,9

047

,409

5,4

44

5,3

20

4,4

45

4,4

48

4,1

30

15 21 8

6132

8 -5-6

4530

-22

672229

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

Domestic (INR m) Growth (%, YoY)

Source: Company/MOSL

Company has recently

reduced its domestic sales

growth guidance for FY12 to

5-10% from 10-15% earlier,

while maintaining its long-

term guidance of high-teen

(around 20%) growth


3/20

Cummins India

22 December 2011 3

1. Power Generation: Broad-based demand to mitigate risk of decline in sales

In FY11, Power Generation sales grew 29%, despite negative sales growth in the low

horsepower (LHP) Telecom segment. During FY12, this segment saw recovery in gas-

based gensets, with 19MW of gas-based power generation projects under execution.

Demand has been muted in 1HFY12, due to postponement of purchases by customers.

We believe KKCs domestic Power segment sales will continue to witness strong growth

due to broad-based nature of demand. According to Powericas DRHP, the size of the

Indian DG set market (for DG sets rated 15kVA to 2,000kVA) is 153,305 units, with

overall revenue of INR66b (FY10). The size of the domestic market for medium horsepower

(MHP; rated 375kVA to 750kVA) and high horsepower (HHP; rated 750kVA to 2,000kVA)

DG sets is 6,255 units, with overall revenue of INR22b (1/3rd of the total market). While

the domestic DG set industry is likely to grow at a CAGR of 10% over FY10-15, the MHPmarket is likely to post a CAGR of 6.2% and the HHP market a CAGR of 9.8%.

Size of domestic MHP/HHP DG set market

kVA Range Units Revenue (million)

375.1-750 5,220 12,745

750.1-2,000 1,035 7,898

Total 6,255 20,642

Source: Powerica DRHP

In FY10, the MHP segment accounted for 19.4% and the HHP segment for 12% of

Indias total DG set market. Demand continues to be broad-based IT/ITES, Healthcare,

Other Services, and Manufacturing.

Source: Company

Others

25%

Healthcare

12%

IT/ITES

31%

Industries

32%

Indian genset market (375-2,000 kVA) by revenues

7.1

8.0 9

.5 12

.616

.320

. 4 9

.231

.634

.6

23

.6

15.818.3

12.28.4

32.529.6

25.1 23.8

8.4 9.3

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

E

FY13

E

Domestic Sales (INR b) Revenue Grow th (%)

Domestic sales: Expect moderate growth in FY12 and FY13


Demand in 1HFY12 has

weakened, especially in high

HP segment

Demand for nearly

70% of Cummins' powergen

engines comes from a host

of services sectors, led by

IT, ITES and healthcare

industries; will see limited

impact of slowdown in

economy


4/20

Cummins India

22 December 2011 4

Impressive product mix; enjoys 35% market share: KKC enjoys a strong 35%

market share in the domestic diesel engines industry. It has a market share of over 70% in

the HHP segment, 30-40% in the MHP segment and ~15% in the LHP segment. KKC

has maintained leadership despite intense competition and we believe that it can increase

its market share, further. Our belief stems from the following:

New product programs and fit for market solutions: New product programs

and fit for market strategy has helped KKC to increase its market share despite stiff

competition. The company launched many new products and redesigned existing ones

to make them fit for market requirements. It has customized products according to

specific customer and market needs.

New emission norms: All diesel engines used for power generation have to comply

with new emission norms, starting July 2013. The company expects to gain significant

competitive advantage from this due to its superior product development capabilities.

The average realization (and profitability) of such engines is likely to be significantlyhigher.

Strong presence in distribution segment: KKC has a strong presence in the

distribution segment, which has been growing at a good pace. It reported robust

performance across all lines of business with a growth of 14% YoY in FY11. KKC

has achieved significant improvements in profitability across its operations in this

segment through stringent cost control measures. Changing technology, product

platforms, fuels and emission regulations creates new business opportunities for KKC.

It has gained market share in this segment by providing unique solutions to customers.

Meeting rising customer expectations, and creating high service standards have given

KKC a competitive advantage over peers, which will help the company to sustain itsmarket share.

Source: Company

Cummins' powergen range

Cummins' strategy of

introducing innovative

products and strong focus on

distribution has helped the

company grow its market

share over years


5/20

Cummins India

22 December 2011 5

Dominant position across Indian DG set market

Cummins India (KKC) has built a strong presence in the Indian DG set market and commands

over 35% market share. It has ~70% market share in HHP segment (750kVa+), despite

the presence of Caterpillar and Perkins. In the MHP segment (350-750kVa) segment too,

it is the leader, despite intense competition (Kirloskar, Ashok Leyland, Volvo, and manyother global companies).

KKC has partnerships with three original equipment manufacturers (OEMs) in India for the

assembly and distribution of DG sets. While it concentrates on engineering, manufacturing,

sales and servicing, its partners add value through assembly (of engines, generators and

control systems), turnkey solutions and installation.

In a typical DG set, the engine constitutes 50% of total value, the generator 30%, control

systems 10%, and other assemblies 10%. All of KKCs OEM partners source generators

from Cummins Generator Technologies, its associate company. KKC has control over 75-

80% of the value chain of a DG set.

Typical layout of a DG set assembly Partnering with OEMs: KKC'S business model

5 Cs of an Engine: Cylinder block, Cylinder head, Crank shaft, Cam shaft and Connecting rods

Source: Company

Cummins IndiaEngine

Manufacturing

Generator OEMSudhir Gensets

Powerica, JaksonCSS

After Sales ServiceCustomer Customer Customer

LoadControls

Accessories Foundation

Fuel Control

Excitation Control

A.C.

GeneratorDiesel Engine

KKC has 70% market share

in high HP segments, and is

gradually growing in the mid

and low HP segments


6/20

Cummins India

22 December 2011 6

Industrials: Offering products for vast range of applications

Segment

Construction

Mining

Water well rigs

Compressors

Rail

Marine

Oil field

HP Range

50-300 HP

300-3500 HP

60 - 200HP

60-1600HP

240HP-3800HP

50HP-2500HP

100HP-3000HP

Products

Compactors,

Crawlers, Loaders

Excavators, Surface miners,

Dump truck, Dozers

Diesel powered Screw

Compressors

Diesel powered portable Screw

Compressors

Diesel engines, coaches

Ships

Deep drilling rigs, Work Over

Rigs

OEMs

Telcon, L&T-Komatsu, JCB, Hyundai, Volvo, CAT, TIL, TWL, Vectra

(VAE), Dynapac, LiuGong, Schwing Stetter, Wirtgen, L&T Case, Terex

Vectra, Greaves, Escorts, ACE.

BEML, CAT, Telcon, Revathi, L&T- Kansbahal, L&T Komatsu, TWL, Volvo

etc. Euclid-Hitachi, Terex, Liebherr, O&K.

Elgi Equipments, Atlas Copco, Kirloskar Pneumatic, Revathi

Equipments, Doosan

Atlas Copco India, Doosan, Elgi Equipments, Kirloskar Pneumatic

ICF Chennai, RCF Kapurthala, Plasser, Faridabad, BHEL, DLW, Phooltan.

Indian Navy, Coast Guard, Commercial Marine and Fishing Trawlers

Jiva International, John Energy, Ramsharan & Co., BHEL, BPCL


3. Automotives: Management confident of maintaining growth

Automotive segment sales were flat in FY11 due to base effect (in FY10, sales of CNG

engines to the Automotive segment were high because of Commonwealth Games).

However, de-growth in gas engines was offset by growth in diesel engines. KKC expects

to maintain its strong position in this segment, with a wide portfolio of products.

KKC manufactures 8.3-liter C-series engines. It also sources 3.9/5.9-liter B-series engines

from Tata Cummins Phaltan facility, upfits them and sells to auto and powergen users.

Tata Cummins, which can sell only to Tata Motors or to KKC, will have a manufacturing

capacity of 120,000 B-series engines per year (similar capacity as its Jamshedpur plant).

Tata Cummins is also developing an 8.9-liter L-series engine for larger trucks.

KKCs automotive customers include Tata Motors, Ashok Leyland, Asia Motor Works

and Eicher. Globally, Volvo uses Cummins 15-litre engine. This is, however, unlikely to be

launched in India in the near future.

2. Industrial Segment: demand from mining segment looks promising: In FY11,

Industrial sales grew by 27% YoY driven by strong performance in key sectors such as

Construction, Compressor & Mining. The compressor segment reported a growth of 42%

YoY triggered by strong performance of water-well and portable compressor segments.

The construction segment grew by 43% YoY. The mining and rail segments registered a

growth of 26% and 25% YoY. We believe that Bharat Stage III emission norms, which

have been implemented since April 2011 on off-highway wheeled construction equipments,

would provide an opportunity for the Company to consolidate its position in the market.


7/20

Cummins India

22 December 2011 7

Changing emission norms: A wining proposition for Cummins

Diesel generators are increasingly used in rural and urban areas due to power shortage

and increasing commercialization. DG sets are often blamed for high emission of toxic

gases due to poor standards. While it has been made mandatory for vehicle manufacturers

to use advanced diesel engines so that vehicles sold in the cities conform to BS-IV emissionnorms, a large number of DG sets sold are obsolete models and are not BS-III complaint.

All diesel engines used for power generation have to comply with new emission norms,

starting July 2013. KKC expects to gain significant competitive advantage from this due to

its superior product development capabilities. The average realization of such engines is

likely to be significantly higher.

BS-III emission norms (based on EU Stage IIIA) have been implemented since April 2011

for off-highway wheeled construction equipment wheel loaders, skid steer loaders, motor

graders, compactors, pavers and cranes. This would provide an opportunity for KKC to

consolidate its position in the market.

A snapshot of changing emission standards

Market/Application 2010 2011 2012 2013 2014 2015 2016+

U.S. on-highway EPA10 EPA 13 CO2 EPA 16

Europe on-highway Euro VI CO2

Brazil on-highway Euro V Euro IV

China on-highway Euro IV Euro V

India on-highway Euro IV Euro IV Euro

(Major Cities) (Country wide) V

U.S. off-highway Tier 4i Tier 4i Tier 4F

Europe off-highway Stage 3B Stage 4

Source: Copmpany

Higher emission drive content per engine US example

Source: Copmpany

Emission norms set limits to the amount of pollutants that can be released into the environment, by

automobiles, industry, power plants and equipment such as diesel generators. Frequent policy actions

have been taken in various countries to regulate the emissions of 4 pollutants, namely, nitrogen oxides

(NOx), sulfur oxides, particulate matter (PM), carbon monoxide (CO). NOx is a byproduct of combustion

that combines in the atmosphere to create smog. NOx is controlled by reducing the combustion

temperature inside the cylinder. HC and CO are minor constituents of diesel exhaust and are controlled

by improving combustion efficiency. PM is made up of soot particles in diesel exhaust from unburned

carbon and is controlled by optimizing the combustion temperature and improving combustion efficiency.

Companies like Cummins have developed advanced in-cylinder combustion technologies, fuel injection

systems, advanced electronic controls to reduce emission.

On-highway

$0 $2,000 $4,000 $6,000 $8,000

Euro 6

Euro 4 & 5

Euro 3

Off-highway

$0 $2,000 $4,000 $6,000 $8,000

Tier 4 Final

Tier 4

interim

Tier 3


8/20


9/20

Cummins India

22 December 2011 9

13

18

30

2007 2011 2015

Cummins Inc maintains long-term guidance

Cummins Inc: Powergen sales mix Powergen: Cummins Inc maintains target

KKC: Exports to grow at 11% CAGR over FY11-13

Source: Copmpany/MOSL

1.7 2.24.0

5.3 6.17.2

13.1

4.9

10.3 11.112.8

31

17

272626

3336

33

2421

39

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

Exports (INR b) Exports (% of Revenues)

14% CAGR

Sales (USD b)

9.4

14.5

18

2007 2011 2015

EBIT (%)

China

10%

ROW

9%

US &

Canada

23%

Africa

3%

LatinAmerica

& Mexico

11%

India

13%

Europe &

Middle

East

31%

3.13.5

6.2

2007 2011 2015

15% CAGR

Cummins Inc sees

demand across geographies,

led by market growth, new

emission norms across world

and market share gain;outsourcing form low cost

countries to aid margins

KKC's exports have

grown at a CAGR of 17%

over FY05-11; expect to

maintain 10-15% growth

in the long-term; introduction

of new products to

drive growth


10/20

Cummins India

22 December 2011 10

EBITDA margin to remain under pressure in 2HFY12;expect recovery in FY13Better product mix, likely correction in raw material prices to drive margin

expansion

KKCs EBITDA margin has been impacted by three key factors: (1) higher pig

iron prices, (2) declining share of HHP engines in overall sales mix, and

(3) high share of exports. We expect EBITDA margin to decline from 20% in

FY10 to 16.5% in FY12.

We believe that margins will pick up strongly in FY13, led by better product

mix, likely correction in raw material prices and favorable impact of price

increases / cost cutting initiatives.

EBITDA margin to pick up strongly in FY13KKCs EBITDA margin has been impacted by three key factors: (1) higher pig iron

prices, (2) declining share of HHP engines in overall sales mix, and (3) high share of

exports. We believe that adverse revenue mix will persist for the remainder of FY12 due

to moderate growth in HHP power generation engines. We expect EBITDA margin to

decline from 20% in FY10 to 16.5% in FY12. We believe that margins will pick up strongly

in FY13, led by better product mix, likely correction in raw material prices and favorable

impact of price increases / cost cutting initiatives.

EBITDA Margin (%)

13.3

16.1

17.8

17.6

18.1

21.3

19.920.4

22.6

18.1

18.4

13.3

18.7

13.2

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

24,751

12,000

15,500

19,000

22,500

26,000

1-Apr-09

1-Ju

l-09

1-Oct-09

1-Jan-1

0

1-Apr-10

1-Ju

l-10

1-Oct-10

1-Jan-1

1

1-Apr-11

1-Ju

l-11

1-Oct-11

Pig iron (INR/MT)

EBITDA margins impacted by rising input prices/adverse Pig iron prices showing no signs of softening

sales mix

Exports-domestic sales mix RM/Sales


0

3

6

9

12

1QFY0

9

2QFY0

9

3QFY0

9

4QFY0

9

1QFY1

0

2QFY1

0

3QFY1

0

4QFY1

0

1QFY1

1

2QFY1

1

3QFY1

1

4QFY1

1

1QFY1

2

2QFY1

2

0%

12%

24%

36%

48%

Exports (INR b)Domestic Sales (INR b)Exp / Sales (%)

16.1

17.817.618.1

19.9

21.3

20.4

22.6

18.1

18.4

13.3

18.7

13.2

13.3

70.6

64.2

65.7

64.664.1

63.561.7

63.962.062.4

62.8

67.8

63.6

70.0

1QFY0

9

2QFY0

9

3QFY0

9

4QFY0

9

1QFY1

0

2QFY1

0

3QFY1

0

4QFY1

0

1QFY1

1

2QFY1

1

3QFY1

1

4QFY1

1

1QFY1

2

2QFY1

2

EBITDA Margin (%) RM (% of sales)


11/20

Cummins India

22 December 2011 11

Cost cutting programs have helped to sustain margins

KKC has been highly successful in its cost saving programs. Its EBITDA margin improved

after the launch of ACE in FY08. During FY11, it successfully completed ACE-II (launched

in FY08), achieving 96% of targeted savings (INR538m). The TRIMS program, launched

in FY10 with the objective to reduce indirect material cost by 10% per year over threeyears, achieved bottomline savings of INR124m and avoidance savings of INR397m.

Cost cutting programs help sustain margins


0.9 1.4 2.02.9 3.1

5.2 5.8

7.8 7.18.7

18.416.6

19.220.1

15.613.1

15.813.7

11.910.0

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

EBITDA (INR b) EBITDA Margin (%)

309423 572

611751

662

12.6 12.2

14.4

10.512.3

8.3

FY06 FY07 FY08 FY09 FY10 FY11

Material Cost Reduction (INR m)

Material Cost Reduction (% of PBT)


12/20

Cummins India

22 December 2011 12

Balance sheet strong; expect earnings recovery in FY13Estimate PAT CAGR of 3% over FY11-13

We have cut FY13 earnings by 8% and now expect KKC to clock revenue and

PAT CAGR of 8% and 3%, respectively over FY11-13. KKCs balance sheet continues to be strong. Cash and investments together

constitute 46% of its total balance sheet.

RoCE has consistently improved over FY04-11 from 20.5% to 44.5%. Excluding

cash and investments, RoCE is exceptionally high at 74% (up 510bp) as at end-

FY11.

Estimate revenue CAGR of 8%, PAT CAGR of 3% over FY11-13

We expect KKC to clock revenue and PAT CAGR of 8% and 3%, respectively over

FY11-13. EBITDA margin is likely to expand to 18.4% in FY13 after dipping to 16.6% inFY12.

Sales (excluding other operating income) Earnings to recover in FY13


9.4

12

.014.8 18

.6

2

3.5 3

3.5

28

. 4 39

.5

47

.3

42

.7

26.427.9

10.88.3

38.7

-15.0

42.4

25.8

23.512.5

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

Revenues (INR b)

Revenue grow th (% YoY)

0.9

1.1

1.4 1

.8 2.4 2.8

4.1

5.9

5.3 6

.3

1.0

4.4

19.1

6.3

28.0

16.0

54.5

37.8

25.6

2.4

33.1

-3.7

9.9

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

PAT (INR b)

PAT Growth (%)

Balance sheet remains strong

In FY11, KKCs balance sheet increased by 16%, mainly driven by significant increase in

investment in fixed assets and higher working capital requirement. Cash and bank balance

almost doubled from INR559m in FY10 to INR1,037m in FY11. KKC continues to be

virtually debt-free and is cash-rich. Cash and investments together constitute 46% of

KKCs total balance sheet.

Strong balance sheet (INR m)

2011 2010 2011 2010

Common Size (%)

Net worth 17,875 15,440 99 99

Loans 183 87 1 1

Total capital employed 18,058 15,527 100 100

Fixed assets 4,411 3,337 24 21

Investments 7,255 7,329 40 47

Net working capital 5,356 4,301 30 28

Cash and bank 1,037 559 6 4

Total assets 18,058 15,526 100 100



13/20

Cummins India

22 December 2011 13

RoCE has improved to 35%, despite significant capex

KKCs return on capital employed (RoCE) has consistently improved over FY04-11 from

20.5% to 35%. Total asset turnover ratio increased to 4.4x in FY11 from 3.7x in FY10.

KKC is cash-rich, with cash and investments constituting almost half the balance sheet.Excluding cash and investments, its RoCE was high at 74% (up 510bp) as at end-FY11.

Reduction in working capital (as a percentage of sales) continues

Working capital declined from 14.8% of sales in FY10 to 13.2% in FY11, driven by reduction

in inventory days and increase in creditor days. Inventory declined from 52 days in FY10

to 47 days in FY11 while creditors increased from 47 days in FY10 to 55 days in FY11.

Interestingly, working capital requirement has been continuously decreasing over the last8 years.

Continuous decline in working capital as a percentage of sales


1.7 3.4 3.8 4.2 4.2 6.5 4.3 5.4 4.9 5.4

18.4

25.6

22.5

17.915.1

13.611.4 11.3

19.5

28.5

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

NWC ( INR b) NWC (% of Sales)

5349

45

70706566

74

8683

909189

55 5563

52

47

55

64

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

Debtors days Creditors days

RoE and RoCE maintained


6,8

24

7,3

66

7,9

48

9,2

22

11

,191

13

,945

15

,527

18

,058

18

,886

20

,278

13.6

19.523.0

28.3 27.5

33.130.2

35.3

28.732.0

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

Capital Employed ( INR m) RoCE (%)

3,8

04

5,4

86

5,7

03

6,3

08

7,0

47

9,9

29

7,9

38

10

,066

10

,921

12

,917

19.529.7

41.5 38.947.9

61.5 63.468.773.8

16.7

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

Capital employed excl. cash & inv (INR m)

RoCE (%) (excl cash and investments)


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Cummins India

22 December 2011 14

355

181

522

1,0

62

981

623

1,4

40

1,7

50

2,0

00

4.24.1

3.5

2.1

2.9

4.5

2.8

1.2

3.0

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Capex (INR m)

% of sales

Capacity building in full swing; spending USD300m-500m over 3-5 years

High Horsepower Engine Rebuild Center: KKCs facility to rebuild HHP engines

began operations in March 2011.

Parts Distribution Center (PDC): A PDC, which undertakes kitting of parts and

components, and distributes these from a centralized location commenced operationsin 3QFY12.

Unit for manufacture/assembly and upfit of B, C and L series engines: This

facility is likely to commence operations by 1HFY13. It will have an annual capacity

of ~20,000 engines, catering to construction, compressor, marine and fire pump markets.

Power gensets and G-drive manufacturing facility in L/MHP range: This facility

is being set up at the MIDC SEZ in Phaltan and should commence production by the

middle of 2012. It would have a matured annual capacity of 51,000 units by 2015,

mainly for export markets.

Significant capex planned over FY11-13



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Cummins India

22 December 2011 15

2.9 2.9 2.9 2.9 3.3 6.4 8.6 15.0

53.5

43.0

32.432.7

45.1

57.7

72.5 70.4

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

DPS (INR/Share) Dividend Payout (%)

Valuation and viewMaintain Buy with a target price of INR406

Over the years, the stock got re-rated due to significant improvement in

domestic revenue visibility and its parents increasing thrust on outsourcingfrom India.

KKC trades at 17x FY12E earnings, at par with its 5-year average P/E.

Fundamental earnings drivers remain intact and will continue to drive growth.

Buy, with a target price of INR406 (18x FY13E earnings).

KKC trades at 17x FY12E earnings, at par with its 5-year average P/E. Over the years,

the stock has got re-rated, which we believe will be a continuing trend. We assign following

reasons for the same:

Improved earnings visibility: There has been significant improvement in revenue

visibility in the domestic market. Coupled with its parents increasing thrust onoutsourcing from India, this imparts high visibility to KKCs revenues and earnings.

Sustained RoE over the long-term: The company has maintained healthy RoE

since FY04, which we believe is the key reason for re-rating.

Maintaining healthy RoE


High dividend payout: Companies with high growth and high payouts command

higher P/E. KKC has maintained high dividend payout without sacrificing growth and

investments. We believe this trend will continue in future, thereby providing support to

valuations.

Maintaining high dividend payout


Fundamental

earnings drivers remain

intact and will continue to

drive growth. Buy, with a

target price of INR406 (18xFY13E earnings)


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Cummins India

22 December 2011 16

Cummins India P/E band Cummins India P/B band

Indian Engineering Sector: Earnings and Valuation Summary

Company Rating M-Cap CMP TP EPS (INR) P/E EV/EBITDA RoE (%)

USD INR/sh INR/sh FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E

ABB# Neutral 2.4 567 509 3.0 8.0 17.0 190.1 71.2 33.4 136.4 38.1 20.2 2.6 6.8 13.2

BHEL Neutral 10.9 234 301 23.1 26.3 30.1 10.1 8.9 7.8 5.9 5.2 5.1 31.4 28.8 27.3

BGR Energy Neutral 0.2 180 266 44.7 36.4 33.3 4.0 4.9 5.4 2.9 5.0 5.3 38.9 25.2 19.7

Crompton Neutral 1.3 110 138 14.3 8.0 11.2 7.7 13.8 9.8 4.9 7.5 5.4 30.5 14.6 18.0

Cummins Buy 1.7 326 406 21.3 19.1 22.6 15.3 17.1 14.4 10.6 11.6 9.9 35.5 28.9 32.2

L&T Buy 11.5 999 1,306 69.7 75.7 83.5 14.3 13.2 12.0 11.7 11.1 10.4 18.3 17.0 15.7

Siemens## Neutral 4.6 654 743 25.1 29.7 37.0 26.1 22.0 17.7 15.4 12.0 10.1 23.2 24.3 25.9

Thermax Neutral 0.9 395 472 32.0 36.3 39.3 12.3 10.9 10.1 7.4 6.0 6.4 31.9 29.4 26.1

Havells Buy 0.9 383 501 22.0 28.9 35.8 17.4 13.2 10.7 11.6 9.1 7.5 42.0 38.0 33.8

# Year end December; ## Year end September Source: Company/MOSL

15.0

18.0

28.7

6.9

3

10

17

24

31

Dec-0

6

Ju

l-07

Dec-0

7

Jun-0

8

Dec-0

8

Jun-0

9

Dec-0

9

Jun-1

0

Dec-1

0

Jun-1

1

Dec-1

1

P/E (x) Avg(x) Peak(x) Min(x)


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Cummins India

22 December 2011 17

Financials and Valuation

Income Statement (INR Million)

Y/E March 2008 2009 2010 2011 2012E 2013E

Total Revenues 23,507 33,480 28,990 40,612 42,728 47,343

Change (%) 26.4 42.4 -13.4 40.1 5.2 10.8Raw Materials 16,225 22,338 18,003 25,808 27,987 30,442

Staff Cost 1,384 2,130 1,983 2,546 2,801 3,221

Other Expenses 2,828 3,803 3,189 4,466 4,828 4,971

EBITDA 3,069 5,209 5,816 7,792 7,112 8,709

% of Total Revenues 13.1 15.6 20.1 19.2 16.6 18.4

Depreciation 330 456 361 366 392 516

Other Income 1,227 1,070 676 617 700 770

Interest 7 26 21 19 21 24

PBT 3,960 5,798 6,111 8,023 7,399 8,940

Tax 1,153 1,654 1,670 2,114 2,220 2,682

Rate (%) 29.1 28.5 27.3 26.3 30.0 30.0

Adjusted PAT 2,807 4,145 4,440 5,909 5,282 6,258

Extra-ordinary Income (net) 0 192 0 0 514 0

Reported PAT 2,807 4,337 4,440 5,909 5,693 6,258

Change (%) 16.0 54.5 2.4 33.1 -3.7 9.9

Adj. Consolidated PAT 3,246 4,438 4,440 5,909 5,282 6,258

Change (%) 21.2 36.7 0.0 33.1 -10.6 18.5

Balance Sheet (INR Million)

Y/E March 2008 2009 2010 2011 2012E 2013E

Share Capital 396 396 396 396 554 554

Reserves 10,641 13,551 15,214 17,667 18,337 19,728

Net Worth 11,037 13,947 15,610 18,063 18,891 20,283

Loans 288 213 87 183 183 183

Deferred Tax Liability -134 -231 -170 -187 -187 -187Capital Employed 11,191 13,945 15,527 18,058 18,886 20,278

Gross Fixed Assets 6,477 7,414 7,776 9,144 10,894 12,894

Less: Depreciation 3,929 4,324 4,440 4,734 5,126 5,642

Net Fixed Assets 2,549 3,090 3,337 4,411 5,768 7,253

Investments 4,321 3,993 7,329 7,255 7,255 7,255

Curr. Assets 10,729 14,247 12,113 15,767 17,659 19,556

Inventory 3,215 4,680 4,097 5,190 6,438 7,134

Debtors 5,556 6,821 5,229 7,182 8,194 9,080

Cash & Bank Balance 123 323 559 1,037 1,011 407

Loans & Advances 1,935 2,663 2,695 3,297 2,927 3,243Other Assets 24 83 93 98 100 100

Current Liab. & Prov. 5,541 6,494 6,402 9,432 10,538 11,677

Creditors 4,031 4,762 3,768 6,129 6,438 7,134

Other Liabilities 0 0 0 1 2 3

Provisions 1,510 1,732 2,634 3,302 4,097 4,540

Net Current Assets 4,198 6,539 4,301 5,356 4,852 5,365

Application of Funds 11,191 13,945 15,526 18,058 18,886 20,279

E: MOSL Estimates


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Cummins India

22 December 2011 18

Financials and Valuation

Ratios (INR Million)

Y/E March 2008 2009 2010 2011 2012E 2013E

Basic (INR)

Adj EPS 10.1 15.0 16.0 21.3 19.1 22.6Cash EPS 11.3 16.6 17.3 22.6 20.5 24.4

Book Value 39.3 49.5 55.7 64.5 67.5 72.5

DPS 3.3 6.4 8.6 15.0 15.0 15.0

Valuation (x)

P/E 15.3 17.1 14.4

Cash P/E 14.4 15.9 13.3

EV/EBITDA 10.6 11.6 9.6

EV/Sales 2.0 1.9 1.8

Price/Book Value 5.1 4.8 4.5

Dividend Yield (%) 4.6 4.6 4.6

Profitability Ratios (%)

RoE 27.9 33.7 30.5 35.5 28.9 32.3

RoCE 27.5 33.1 30.2 35.3 28.7 32.0

Turnover Ratios

Debtors (Days) 86 74 66 65 70 70

Inventory (Days) 50 51 52 47 55 55

Creditors. (Days) 63 52 47 55 55 55

Asset Turnover (x) 3.6 4.5 3.7 4.3 3.8 3.6

Leverage Ratio

Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0 0.0

Cash Flows Statement (INR Million)

Y/E March 2008 2009 2010 2011 2012E 2013E

PBT before EO Items 3,960 5,798 6,111 8,023 7,399 8,940

Add : Depreciation 330 456 361 366 392 516

Interest 7 26 21 19 21 24

Less : Direct Taxes Paid 1,153 1,654 1,670 2,114 2,220 2,682

(Inc)/Dec in WC (7) (2,341) 2,238 (1,054) 503 (513)

CF from Operations 3,136 2,286 7,059 5,241 6,096 6,285

EO Income 0 192 0 0 514 0

CF from Oper. Incl. EO Items 3,136 2,478 7,059 5,241 6,610 6,285

(Inc)/Dec in FA (1,062) (981) (623) (1,440) (1,750) (2,000)(Pur)/Sale of Investments (1,496) 329 (3,337) 75 0 0

CF from Investments -2,557 -652 -3,960 -1,366 -1,750 -2,000

(Inc)/Dec in Networth (35) 578 59 1,391 (0) (0)

(Inc)/Dec in Debt 263 -75 -126 96 0 0

Less : Interest Paid 7 26 21 19 21 24

Dividend Paid 1,066 2,102 2,775 4,865 4,865 4,865

CF from Fin. Activity (844) (1,625) (2,863) (3,397) (4,886) (4,889)

Inc/Dec of Cash (265) 200 236 478 (27) (604)

Add: Beginning Balance 388 123 323 559 1,037 1,011

Closing Balance 123 323 559 1,037 1,011 406

E: MOSL Estimates


19/20

Motilal Oswal Company Gallery


20/20

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Disclosure of Interest Statement Cummins India

1. Analyst ownership of the stock No2. Group/Directors ownership of the stock No

3. Broking relationship with company covered No

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