Cummins India Ltd- Initiating Coverage Report...

Cummins India Ltd- Initiating Coverage BUY

Date: 30th September, 2011Stock information

Sector: Diesel EnginesCMP `415.0Target Price: `517.0 Upside Potential: 24.6%

Cummins India Ltd (CIL) is a wholly owned subsidiary of USA based Cummins Inc.Established in 1962, Cummins India Ltd manufactures a variety of Engines operating ondiesel, natural gas and dual fuel in their currently operational 5 plants at Kothrud (Pune),Nagar road (Pune), Loni, Daman and Pirangut (Pune). Cummins India Ltd is amongst thelargest exporters of engineering products in India.

Leading Diesel Engine Manufacturer in India: CIL is a market leader of diesel andBSE Code 532784NSE Code CUMMINSINDBloomberg KKC@IN Reuters CUMM.BOMkt cap (Rs. bn) 115Equity shares(mn) 277 Face Value(`) 252Weeks H/L 575.1/405 Sensex 16437 7

Leading Diesel Engine Manufacturer in India: CIL is a market leader of diesel andGas fuel power systems, leading through its technology, unmatched expertise and anunwavering commitment to serve its customers in power generation segment.Cummins India Ltd (CIL) sells its engines to its dedicated OEMs including Jaksons, SudhirGensets and Powerica Partner P. across various sectors including Manufacturing,Construction, IT/ITES, Realty, Retail, Textiles, Telecom and Pharma

CIL’s Industrial engine unit provides competitive advantage: CIL markets diesel &i i th f 40 t 2 700HP t i t f bil d t ti i tSensex 16437.7

Nifty 4943.3

Shareholding as on 30th June 2011 (%)Promoters 51.0Mutual Funds/UTI 14.3 FIs/ Banks 6.7FIIs 11 9

gas engines in the range of 40 to 2,700HP to a variety of mobile and stationary equipmentsused in various applications like construction, mining, compressor, fire & industrial pumps,rail, marine, oilfield and defense which are customized according to applications to fullyintegrate with the equipment design and to ensures optimum performance.

Automotive business provides engines as per high standard emission norms: CILsupports OEMs in transitioning to the new emission norms with the right product andtechnology by offering end-to-end solutions to the truck and bus market segments byFIIs 11.9

Bodies Corporate 6.4Public 9.2Any Others: 0.5

25700

Cummins Ind.SENSEX (,000) [R.H.S.]

gy y g g yproviding quality diesel and natural gas engines besides introducing state-of-the-art highpressure common rail fuel systems and electronically controlled ISB 6.7 engine that iscapable of supporting emission norms beyond Euro V.

Phaltan megasie expansion to fuel Cummins future Growth Engine: CIL’smanagement believes that it is poised to achieve doubling of revenue in the next 4 Yearsand will exceed 40% return on average net assets and 16% PBIT. To fulfill this objective thecompany is investing in its 300 acre megasie in Phaltan Maharashtra (which will see nearly

10

15

20

25

200

300

400

500

600

700

Thou

sand

s

company is investing in its 300-acre megasie in Phaltan , Maharashtra (which will see nearly10 facilities from one location in coming few years) which was inaugurated on January 2011and has launched its first 3 expansion projects.

Valuation & Recommendation:Cummins India Ltd is currently trading at P/E Multiple of 18.1x on FY12E EPS of `22.6 andat 15.1x on FY13E EPS of `27.2. CIL’s average P/E over last 6 years stood at 17x.Considering the current industry trend and CIL’s historical P/E, we have valued the company

0

5

0

100

200

28‐Sep‐10 28‐Sep‐11

Revenue EBITDA EBITDA Margins PAT Net Margins (%) EPS P/E EV/EBITDA ROE(` mn) (` mn) (%) (` mn)

FY10 28448 7 5273 0 18 5% 4438 7 15 6% 16 0 22 9 13 7 28 4%

based on P/E multiple of 19x on FY13E (i.e. March 2013) EPS of `27.2 and recommend‘BUY’ with a price target of `517 / share (24.6% Upside) which is strongly supportedby CIL’s dominance in 15-3000 KVA range diesel engines, strong distribution network, highquality product portfolio and presence of its products across diversified industries.

Analyst: Amit Anwani – [email protected] +91-22-30287987

KC Research Reports are also available on Reuters, Thomson publishers, myiris.com and Bloomberg KCSL <GO>

FY10 28448.7 5273.0 18.5% 4438.7 15.6% 16.0 22.9 13.7 28.4%FY11 39454.5 6634.8 16.8% 5909.9 15.0% 21.3 19.2 17.0 32.7%FY12E 45372.7 7186.1 15.8% 6277.1 13.8% 22.6 18.1 15.2 28.5%FY13E 54447.21 8702.7 16.0% 7531.5 13.8% 27.2 15.1 12.4 28.0%

Cummins India Ltd- Initiating Coverage

Power Generation Business to lead Cummins India’s Domestic growth :

Cummins Power Generation India is the leading manufacturer and market leader of diesel andGas fuel power systems due to its technology leadership, unmatched expertise and anunwavering commitment to serve its customers. The company has been successfully able tog p y ymeet the power requirements right from design to execution and operations to service supportfor wide range of individual and institutional customers. Cummins India Ltd (CIL) sells itsengines in the power generation business largely through its dedicated OEMs (OriginalEquipment Manufacturers) Jaksons, Sudhir Gensets and Powerica Partner P, which assemble thediesel genets with the Cummins engine.The company has over 25,000 MW of installed captive power across various sectors includingInfrastructure Manufacturing Construction IT/ITES Realty Retail Textiles FoodInfrastructure, Manufacturing, Construction, IT/ITES, Realty, Retail, Textiles, FoodProcessing, Telecom and Pharma.

Diesel Gensets (7.5 -160 KVA): The Commercial Low Horse Power (LHP) business is engaged inthe manufacture of water cooled engines and Generator Sets (Gensets) in the range of 7.5 to160 kVA which includes the X, S and B series. The 160-2000 KVA High Horse Power (HHP)range includes C, N14, V28, K and QSK series. The Exports Business manufactures and offersgensets in the range of 7 5 to 62 5 kVA and G drives in the range of 30 to 125 kVA for marketsgensets in the range of 7.5 to 62.5 kVA, and G drives in the range of 30 to 125 kVA for marketsspanning from Africa, parts of Europe, West Asia and Asia.

CIL has three state-of-the-art plants at Pirangut (Kasar, Amboli) and Daman in India and as apart of its expansion, it is setting up a new state-of-the-art facility at Cummins’ megasie atPhaltan in Maharashtra.

CIL’s Power Generation Business Sales (`Mn) and Growth :

10514 7

13581.1

15173.5

18784.3

24.0%

29.2%

23.8%

20%

25%

30%

35%

12000

14000

16000

18000

20000Power Generation Business Unit Y‐o‐Y (%) Change

10189.3 10113.2 10514.7

‐0.7%

4.0%

11.7%

0%

5%

10%

15%

2000

4000

6000

8000

10000

12000

Source: Company, ACE Equity, KC Research

‐5%0

FY08 FY09 FY10 FY11 FY12E FY13E


Indian Power Industry; Demand‐ Supply Scenario :

78577

84 6% 81 6%

96.2%100%

120%

70000

80000

90000

Target (MW) Achievement (MW) % of Target Achieved

India Power Summary as per 5‐Year Plans by Planning Commission of India

13003500 7040 9264

12499

19666 22245

30538

40245 41110

2250 4520 457910202

1422621401

1642319015

21180

50000

84.6%

64.3%64.2%

49.4%

81.6%

72.3%

53.8%

47.2%51.5%

63.6%

20%

40%

60%

80%

10000

20000

30000

40000

50000

60000

12 1 113 8%

16.6% 16%

18%

120

140 Deficit (MW) Availability (MW) % Deficit (R.H.S.)

Peak Demand

13001100

2250

0%0

I ‐ (51‐56) II ‐ (56‐61) III ‐ (61‐66) IV ‐ (69‐74) V ‐ (74‐79) VI ‐ (80‐85)VII ‐ (85‐90)VIII ‐ (92‐97)IX ‐ (97‐02) X ‐ (02‐07) XI ‐ (07‐12)

71.547 75.066 77.652 81.792 86.818 90.793 96.785 104.009 107.286

9.945 9.508 10.254 11.46313.897

18.073 13.02415.157 12.151

12.2%11.2%

11.7%12.3%

13.8%

11.9%

12.7%

10.2%

2%

4%

6%

8%

10%

12%

14%

20

40

60

80

100

Thou

sand

s

0%0

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

9 9% 11 1%10.1%

12.0%

800

900 Deficit (MU) Availability (MU) % Deficit (R.H.S.)

India Energy Requirement

Source: CEA, Power Scenario at Glance, January 2011

497.9 519.4 548.1 578.8 624.5 666.0 691.0 746.6582.2

48.1 39.9 43.3 52.766.1

73.3 86.0 84.0

56.0

8.8%7.1% 7.3%

8.4%9.6%

9.9% 11.1%8.8%

2.0%

4.0%

6.0%

8.0%

10.0%

100

200

300

400

500

600

700

800

Thou

sand

s


0.0%0

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11



Sector Hydro (MW) Thermal (MW) Nuclear (MW) Renewable Energy (MW) Total (MW)Coal Gas Diesel Total

State 27257 47477 4077.1 602.6 52156.7 0 2822.3 82236Private 1425 12481.4 6677 597.1 19755.5 0 13964.7 35145.2Central 8685.4 32420 6702.2 0 39122.2 4560 0 52367.6

India’s Current Power sector Installed Capacity by type of Energy Source:

Total 37367.4 92378.4 17456.3 1199.7 111034.4 4560 16787 169748.8

Due to inadequate supply and poor distribution infrastructure, the per capita consumption ofpower in India remains relatively low compared to other major economies. Any increase in percapita consumption of electricity in India necessitates an increase in the accessibility of electricityin smaller towns and rural India which will provide tremendous growth opportunities for CIL’spower generation business unit in terms of creation of a huge demand for Diesel engines and


Indian Diesel Genset (Generator Sets) Market Outlook:

The overall Indian generator set market for medium horsepower (MHP) and high horsepower(HHP) class generator sets, rated from 375 kVA to 750 kVA and from 750 kVA to 2,000kVA, respectively, is expected to grow at a CAGR of 6.2% and 9.8% in unit and revenue

power generation business unit in terms of creation of a huge demand for Diesel engines andgensets in the range of 750 to 3000 kVA range.

Indian Genset Market by unit shipments and Revenue between FY10 to FY15E :

, p y, p gterms, respectively, from FY10 to FY15.

Further, it is expected that growing industrialization and increasing demand for power, will leadto an increased demand for MHP and HHP diesel generator sets. Such growth in demand will beat a faster pace than the supply of high quality diesel gensets in the market.

5220

7150

1035

1300

160000

200000

240000750.1‐2000 kVA 375.1‐750 kVA 15‐375 kVA

20.9

12.1

80.0

100.0

120.0750.1‐2000 kVA 375.1‐750 kVA 15‐375 kVA

147050

208300

40000

80000

120000

44.9

74.0

12.7

7.9

20.0

40.0

60.0


0

FY10 (Units) FY15E (Units)

0.0

FY15E Rev. (Rs.bn) FY15E Rev. (Rs.bn)

Source: Powerica P DRHP, Frost & Sullivan Report


1832

FY10‐ Indian Genset market (MHP & HHP) Units by End User Seg.

1832

FY10‐ Indian Genset market (MHP & HHP) Units by End User Seg.

2021

1376

1026

1832 2021

1376

1026

1832

Large Industries IT/ ITES Healthcare Others Large Industries IT/ ITES Healthcare Others

35.0Indian Genset Market Revenue (` Bn)


5 86.2

7.17.9

8.69.5

10.411.2

12.1

15.0

20.0

25.0

30.0

10.0 11.3 12.1 12.7 14.4 15.4 17.4 19.0 20.95.8

0.0

5.0

10.0

FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY15E

750 2000 KVA 375 750 KVA750‐2000 KVA 375‐750 KVA

The Indian genset market for 15-2000 kVA gensets is expected to increase from 153305 units inFY10 to 216750 units in FY15E at the CAGR of 7.2%. In FY15, it is estimated that out of the totaldiesel genset (15 to 2000 kVA) market of 216,750 units, HHP and MHP diesel generator sets willcomprise 1,300 units and 7,150 units, respectively.



In terms of revenue, the diesel generator set market for diesel generator sets rated from 15 kVA to2,000 kVA, is expected to grow at a CAGR of 10.3% from `65.5 billion in the FY10 to `106.9 billionby FY15E.


80%90%

100%

Cummins India Ltd ‐ India Genset Unit shipment Market share by each category

Cummins India Ltd in Indian Genset market :‐

90%100%

Cummins India Ltd‐ India Genset Revenue Market share by each category

50.80% 56%

49.20% 44%

85.4%

20%30%40%50%60%70%80%

53.40% 54.10%

14 5%

46.60% 45.90%

28.3%

20%30%40%50%60%70%80%

14.6%0%

10%

375‐750kVA 375‐750kVA 375‐750kVA

Others Cummins India Ltd

14.5%

0%10%

375‐750kVA 375‐750kVA 375‐750kVA Others Cummins India Ltd

Market Drivers for the Generator Set Industry in India:


y

High Peak Demand Power Shortage: India faces a high peak demand power shortage andshortage of grid-generated power is a major source of demand for generator set sales in India.

Investments in Large Projects: In India, investments are expected to increase in manyBrownfield and Greenfield projects in large and medium scale industries, which require back-uppower to ensure smooth operations for such projects India also has plans to invest heavily topower to ensure smooth operations for such projects. India also has plans to invest heavily toimprove infrastructure facilities by developing roads, airports, ports, warehouses, and SEZsacross the country, which requires back-up power.

Investment in construction: Construction of commercial IT/ITES parks, commercial andresidential space will result in a corresponding increase in construction activities in the region. Asa standard feature, generator set backup power is installed in most of these buildings and the

t th i t ti i t d t i t t l i thi t Ipresent growth in construction is expected to increase generator set sales in this segment. Inaddition, such construction activities will require large amounts of back-up power thereby drivinggenerator set sales in India.

Backup Power for Critical Facilities: Institutions like; hospitals, clinics, hotels, commercialoffice buildings and airports are mandated to install back-up power for critical equipment such aselevators, critical medical equipment in the event of a grid power failure. And hence, any growth


in these facilities will lead to an increase in the demand for diesel Gensets.


Challenges to the Generator Set Industry in India:

High Diesel Prices: The overall cost of power from standby diesel generator sets isapproximately `12.0 to `14.0 per kWh, which is approximately three times higher than the costof grid-generated power, which may impact demand for new diesel generator sets.

Alternative Back-up Power Sources: Alternative back-up power sources, such as UPS andinverters, have begun to erode diesel generator set sales, especially at the lowest kVAranges, such as 15-25 kVA. A number of firms are also working towards providing wind andsolar power solutions for telecom end-users, which are the greatest end-user segment of dieselgenerator sets due to which sales of new diesel generator sets may suffer.

Low Cost Imports from China: Low-cost imports from China, especially in the 15-75 kVArange, continue to apply pricing pressure to domestic manufacturers and erode profit margins.This trend is likely to continue as several new entrants to the diesel generator market areexpected to be supplied through long term supply contracts from Chinese-basedmanufacturers.

Expected Changes in Emissions Norms: Emissions norms in India are constantly beingExpected Changes in Emissions Norms: Emissions norms in India are constantly beingtightened to keep in line with international standards, in particular the European Union's. Newpollution control norms are expected in 2013, which are likely to require major designupgrades of existing diesel engines, entailing substantial new investment and technologytransfer agreements.

Shortage of Diesel Engines: Diesel engines are utilized in a variety of applications outside ofth di l t t i d t h t bil f i t i li tithe diesel generator set industry, such as automobiles, farm equipment, marine applicationsand mining equipment. As demand for these applications is anticipated to grow, this will placesupply constraints on the number of diesel engines available. Even if diesel engines areimported, a number of suppliers will encounter after-sales service difficulties for imported unitsdue to the lack of infrastructure in India for imported units.

Price Competition from Unorganized Sector: The diesel generator set market in India alsoconsists of a large unorganized sector, which includes a number of small-scale suppliers. Thesebrands are well entrenched in their respective regional pockets and may offer competition tolarger organized suppliers, consequently preventing market penetration.



Industrial Engine Business serving quality engines across industries :

Cummins Industrial Engine Business markets diesel and gas engines in the range of 40 to2,700HP. These engines power a variety of mobile and stationary equipment used in variousapplications like construction, mining, compressor, fire & industrial pumps, rail, marine, oilfieldand defense Engines are customized according to application and are offered withand defense. Engines are customized according to application and are offered withcooling, exhaust and air intake systems to fully integrate with the equipment design whichensures optimum performance. Industrial Engine business has grown in high horsepowersegment in rail (AC-AC DEMU), power car, 4&8 wheeler overhead equipments cars, new rigpackages powered by 14 liter and 19 liter engines.

Industrial Business Unit Sales (` Mn) and Growth:

3643.24384.7

5621.15902.2

6805.927.0%

20.4%

28.2%

15 3% 15%

20%

25%

30%

4000 0

5000.0

6000.0

7000.0

8000.0Industrial Business Unit Y‐o‐Y (%) Change

3224.113.0%

5.0%

15.3%

0%

5%

10%

15%

0.0

1000.0

2000.0

3000.0

4000.0


Location Operation Area Built‐UpKothrud, pune Engine Mfg. ‐ N14 /NT, K19, V28, K38/50, Quantum Series 51439 m sqNagar road, Pune " C" Series Assembly 5492 msqLoni B' Upfit, Industrial 1579 msq

Key Growth Drivers for Industrial Engine Business :

Power & Mining Sector Growth: The demand-supply gap in the power sector and growth inthe Steel & Cement sector will fuel the demand for Mining of Coal, Iron Ore, Lignite which willnot only increase the demand for mining equipments like electronic engines but will alsoimprove business prospects for Shunting and Freight Locomotives.

CIL is well positioned to offer its complete range of quantum series (electronic) engines inmining & other segments, to support OEM’s in various new application launches, to enhance the


value proposition in terms of cost efficiency and faster deliveries. The company is also workingon delivery lead time improvement through Customer Focused Six Sigma (CFSS) projects.


Water well rig & Compression Market: The high pressure water well drill rig market(though cyclical) showed significant increase in demand last year mainly due to deficient andirregular monsoon around the country. Government directive to use clean fuel in all majorcities of India in a phased manner is leading to an increased demand for Gas compressionpackages. Cummins India Ltd has strengthened its position in this segment by offeringcompetitive products which have higher fuel efficiency with the lowest life cycle cost and hascompetitive products which have higher fuel efficiency with the lowest life cycle cost and hasbagged major orders from leading Gas Compression package manufacturers.

Indian Navy: There is a consistent and structured demand for diesel engines (DG Sets) fromIndian Navy and the coastguard in High Horse power range. Re-fits of old vessels by IndianNavy also offers opportunities for Cummins engines.

Growing opportunities in Defense: Cummins India Ltd is strategically capturing the newopportunities in defense by partnering with key strategic OEM’s and grow business withdomestic and global construction equipment manufacturers like Telcon (Tata-HitachiJV), Hyundai, JCB, Liugong, Wirtgen, Metso, Schwing, Stetter and other OEM’s expanding orestablishing manufacturing base in India. Cummins India is also supporting domestic OEM’sexport initiatives by leveraging Cummins International distribution network/ Channel.

C8.3/ QSC8.3B5.9/ QSB5.9

B3.9B3.3

A SeriesHorsepower Range

Cummins India Ltd‐ Industrial Engine Product Portfolio ( Horsepower range‐wise)

QSK45K38

QST30QSK23QSK19QSX15

QSM11/ M11C8.3/ QSC8.3

EngineType

0 500 1000 1500 2000 2500 3000 3500

QSK78QSK60

K50QSK45

Horsepower



Particulars Construction Mining Water Well Rigs Portable Compressions50 HP to 300 HP Diesel powered Construction Machinery, Earthmoving Equipments & Material Handling Equipments such as Crawler Excavators, Wheel

Diesel powered earthmoving equipments used in Mining eg. Dumpers, Excavators/Shovels, Dozers, Loaders, Graders, Surface Miners, Blast Hole Rigs and other

Market Definition

,Loaders, Backhoe Loaders, Compactors, Motor Graders, Dozers, Fork lift trucks, Cranes etc.

, gsupport eqpt. Like Water Sprinklers, Tyre Handlers, Coal Haulers, Pipe Layer, Cranes, FE Loaders etc. Includes OEM

Diesel powered Screw Compressors (450 ‐1400 cfm/150 ‐ 500 psi) for Water Well Rigs.

Diesel engine powered Portable Screw Compressors (180 – 600 cfm /100 ‐ 300 psi)

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 LiuGong,

Domestic : BEML, CAT, Telcon, Revathi, L&T‐ Kansbahal, L&T Komatsu, TWL, Volvo etc. Elgi Equipments, Atlas Atlas Copco India Ltd., Doosan,

Key OEMs in the Market

Greaves, Escorts, ACE LiuGong, Schwing Stetter, Wirtgen, L&T Case, Terex Vectra, Greaves, Escorts.

Komatsu, TWL, Volvo etc.Global : Komatsu, Euclid‐Hitachi, Unit Rig / Terex, Liebherr, O&K etc.

Elgi Equipments, Atlas Copco, Kirloskar Pneumatic, Revathi Equipments, Doosan

Atlas Copco India Ltd., Doosan, Elgi Equipments Ltd., Kirloskar Pneumatic Company Ltd.

DGBR, Major contractors like L&T ECC, Punj Lloyd, Jaiprakash, HCC, Gammon, etc* – Marble & granite customers like R K Marbles, J K Marbles GEM Granites etc * –

Coal India subsidiaries, SECL, NLC, TISCO SAIL HCL HZL KIOCL NMDC

Private Water Well Drilling Rig owners, Rig manufacturers, Central Ground Water Board / DGS&D, State Agencies like Public Health Engg Dept

DGBR / Major Construction Contractors ‐ L&T‐ECC/Punj Lloyd/Gammon India/ Jaiprakash Major Mining / Steel Customers ‐Coal India Ltd. / TISCO / EMTA / HZL / SAIL Cement – ACC / Gujarat Ambuja / Grasim Major

Major Customers

Marbles, GEM Granites, etc. –Cement customers like ACC, Ambuja Cement, Lafarge, Ultratech, Shree Cement, etc

TISCO, SAIL, HCL, HZL, KIOCL, NMDC, Cement Industries & Private contractors like EMTA, G S Atwal etc.

Public Health Engg Dept, Water supply and Sewerage Board, Ground and minor irrigation department.

Gujarat Ambuja / Grasim Major Marble and Granite customers ‐ R K Marbles, GEM granites, Pokarna Granites

Construction Product Portfolio

Compactors, Skid Steer Loader, Crawler Excavators,

Excavators, Surface Miner, Dump Truck, Dozer, Dump Trucks‐ 35T, 50/60T, 100T, 120T, 190TT, 240T. Water Well Drill Rigs Portable Compressors

Particulars Rail Marine Pump Oil FieldParticulars Rail Marine Pump Oil Field

Market Definition

Diesel Engines / Value Packages for self propelled rail vehicles, locomotives, track maintenance machines and power cars.

Main Propulsion Diesel Engines for powering Bollard Pull Tugs, Barges, Ferries, Pilot Launches, Fishing Trawlers. Auxiliary DG sets for Warships, Frigates, Fast Attack Vessels, Patrol

Engine Driven pumps for emergency duty and continuosduty, Blast Furnace and Cooling Tower.

Diesel Engines for Oil field Equipment like AC‐SCR Drill Rigs, Work over Rigs, Cementing Units, Mud Pumps, COD Pumps, Gas Engines for pump application (for transportation of crude oil)

h i h l

GRSE, Goa Shipyard, Sesa Goa, ABG Shipyard, Bharati Shipyard, b k i l k h h &

Key OEMs in the Market

ICF Chennai, RCF Kapurthala, Plasser Faridabad, BHEL Bhopal & Jhansi, SAN Bangalore, DLW, Phooltas…

Tebma, Mazagon Docks, Chowgule & Co., Dempo Shipping, Vipul Shipyard, West Coast Shipyard, Cochin Shipyard

Kirloskar Brothers, Mather & Platt Pumps, Voltas, WPIL, Beacon Wier, Flowmore, Punj Llyod

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

Indian Railways, Steel, Cement, Thermal Power, Fertilizer plants,

Indian Navy, Coast Guard, IWAI, ONGC, Barge Owners, Fishing Trawler owners, Shipping

Refineries, Multipurpose Chemical Terminals, Ports , Steel Majors (TISCO, Jindal, Bhushan, SAIL), Power Plants (NTPC,NPCIL, TATA Power,


Major Customers Port Trusts etc. companies PGCIL) ONGC, Oil India Limited

Construction Product Portfolio

Track Maintenance, Power car, HHP DEMU, Shunting Loco, Overhead Equipment inspection card

Naval ships, Iron Ore Barge, INS Tarangini, FAC‐ Fast Attack Craft, Fishing Trawlers Irrigation Pump,

Hydro Frac unit, Electric driven Drill Rig (AC‐SCR Onshore Rig, Mechanical Mobile Rigs


Automotive Business Unit :The Automotive Business of Cummins India Limited caters to the growing commercial vehiclesegment in India with its range of engine platforms and related technologies alongside parts,services and components. The Automotive Business together with Tata Cummins Ltd, thatoperates large scale manufacturing facilities at Jamshedpur and Phaltan, near Pune makes CILthe largest independent automotive engine manufacturer in India. The Company is afrontrunner in developing emission technologies that promise a clean and safe environment.Clean, efficient, dependable and durable, diesel and natural gas engines are backed by genuineCummins parts and service network across India.

CIL offers both diesel and natural gas engines besides introducing state of the art highpressure common rail fuel systems and electronically controlled ISB 6.7 engine that arecapable of supporting emission norms beyond Euro V. In 2010, as India transitioned to BS IVnorms in 13 metros and BS III in the rest of country, the company’s preparedness forredesigning B series engines to meet more stringent BS III norms not only helped itscustomers in smooth transitions to new norms but also testified Cummins leadership indeveloping clean and green technology.

The business’s expertise in offering end-to-end solutions to the truck and bus marketsegments, lies in its ability to knit together diesel and gas engines with related technologiesincluding filtration, exhaust, turbo, fuel, lube oil and coolant systems.For its on highway applications, the Automotive Business markets the B series, ISLe and ISBeengines under the diesel range, and C series, Stoic and L series engines as part of its lean burnnatural Gas portfolio.

Cummins automotive business successfully demonstrated the CNG hybrid technology iny y gyconjunction with Tata Motors for the buses that were supplied to Delhi Transport Corporation(DTC) for commonwealth games 2010. The CNG hybrid technology offer substantialimprovement in fuel economy while reducing emissions.

4628.0 200%45005000

Automotive Business Unit Y‐o‐Y (%) Change

Automotive Business Unit Sales (` In Mn) and Growth Trend:

1747.3

1153.2

2644.7 2451.1

3750.2152.0%

‐34.0%

129.3%

‐7.3%

53.0%

23.4%0%

50%

100%

150%

50010001500200025003000350040004500


34.0%

‐50%0500



Distribution Business Unit :

The Distribution business unit of Cummins India Ltd provides superior and excellentServices, Value packages, customized solutions and products that enable the uptime of itscustomers. CIL has a strong All India footprint with 570 employees, 44 dealerships 212 dealerbranch offices and more then 2000 trained engineers and technicians with 40 years ofbranch offices and more then 2000 trained engineers and technicians with 40 years ofexperiences supporting more than 2 lac engines+ engines and more than 70 thousandCustomers. DBU (Distribution Business Unit) serves diversified markets like Mining, Oil &Gas, Marine, compressor, Agriculture, Automotive, Power Gen, Railway, Defense.

Cummins India Ltd inaugurated a state of the art High Horse Power (HHP) Engine RebuildCentre at the Cummins Mega site in Phaltan for its line of HHP mechanical & electronic enginesto cater to the growing demand In order to improve the service network efficiency increaseto cater to the growing demand. In order to improve the service network efficiency, increasepenetration and deliver superior services, CIL initiated network restructuring project.

HHP rebuild centre : This centre rebuild mechanical and electronic engines from 19 litres up to60 litres and repairs all Cummins engines helping distribution business meet the requirementsof the company’s rapidly increasing customer base.

ReCon: This plant is state of the art remanufacturing facility at Phaltan for parts and enginesupto 19 litres in size. This allows CIL’s distribution business to serve its customers with costeffective parts and engines that offer similar warranty as a new part or engine.

Esteemed customers in DBU includes:Coal India, Lafarge Cement, Indian Oil, ONGC, PEPSI, IBM, ACC, ESCORTS, RelianceInfocomm, Microsoft, Nestle, NTPC, SAIL, COCA COLA, Indian Railway, SAHARA, HUL<Infocomm, Microsoft, Nestle, NTPC, SAIL, COCA COLA, Indian Railway, SAHARA, HULBSNL, ASAHI Glass, Hero Honda, Convergys, Accenture, TATA Steel.

8759.3

10617.225.5%

24.0%25%

30%

10000

12000Distribution Business Unit Y‐o‐Y (%) Change

DBU Sales (` Mn) and Growth Trend:

4419.35303.2

6574.77551.1

8759.3

20.0%

14.9%

16.0%

21.2%

5%

10%

15%

20%

2000

4000

6000

8000


0%0



Key Growth Opportunities for Distribution Business:

Mining: Total mining increased at the CAGR of 7.68% during the 2000 to 2009 period.Coal mining Increased at 6.91%, Iron ore at the rate of 12.14% and limestone at the rateof 6.24% during the same period Growth in coal production in India is expected to be at8% CAGR for next five years.

Power Generation: Total installed capacity of power at the end of Feb 2010 stands at 158GW with ormal power deficit and peak power deficit at 10.1% and 12.6% respectively. Innext two years, it is expected that Indian power industry will add 40 GW of additionalcapacity thereby providing the opportunity for distribution.

Railway: Indian railways has planned to add 2 9 lakh wagons over 5000 dieselRailway: Indian railways has planned to add 2.9 lakh wagons, over 5000 diesellocomotives, over 4000 electric locomotives and 50,000 coaches in the next decade whichwill require large amount of gensets & engines and efficient distribution and customersupport for delivery.

Oil & Gas: Natural Gas exploration picking up to find a non renewable substitute fuel(ONGC added 83 mt of oil and gas reserves in FY10) from KG basin. The natural Gas

fpipelines are also reaching to southern and eastern states of India opening up a wholenew market for the distribution of Gensets.

Mining

DBU’s sustained dependability model for customer support: Key Customer Segments for DBU:Source: ministry of Mines, Railway, Oil and Gas

39%

10%

3% 5%

g

Oil & Gas

Defence

Marine

Railways

Const & PumpProduct

2%2%3%3%

5%

2%2%3%

21%Water well rigs+ Compre

Realty/ Resi

Mfg Agro

Mfg (Pharma Chem & Discret)

Mfg Textile

Dependability

Customer


Telecom/ IT/ ITES

Auto

People CustomerSupport


Exports:CIL’s export business is mainly driven largely by the global Power Generation demand whichhas seen a smart recovery after the recession. While it is not yet at its best ever levels, thedemand scenario appears to be promising as global economic conditions continue to beunpredictable in some key pockets of the international markets. The company’s exportb i i d ib 25% i FY12E d FY13E Th i l i

15%90%

100%

Exports Sales Domestic Sales

business is expected to contribute ~25% in FY12E and FY13E. The company is also setting upthe facility to manufacture power generator sets and G-drives in LHP and MHP range atPhaltan which is expected to be operational in mid-2012 and would have a matured capacityof 51000 units by 2015, mainly for export market.

71% 73%61%

85%74% 74% 75%

29% 27%39%

26% 26% 25%

30%

40%

50%

60%

70%

80%

90%

0%

10%

20%

FY07 FY08 FY09 FY10 FY11 FY12E FY13E

12830.0

10250.0

11787.5

13611.8

76.2%

136.7%

100%

150%

12000

14000

16000Exports Y‐o‐Y (%) Change

CIL’s Export Sale (` in Mn):

7280.0

4330.0

20.9%

‐66.3%

15.0%15.5%

‐50%

0%

50%

2000

4000

6000

8000

10000


‐100%0



CIL’s management believes that it is poised to achieve doubling of revenue in coming 4 Yearsand will exceed 40% return on average net assets and 16% PBIT. To fulfill this objective thecompany is investing in its 300-acre megasie in Phaltan , Maharashtra (will see nearly 10facilities from one location in coming few years) which was inaugurated on January 2011 and

Phaltan megasie Expansion:

facilities from one location in coming few years) which was inaugurated on January 2011 andhas launched its first 3 expansion projects.

High horsepower rebuild centre: The company is starting this facility which rebuildsmechanical and electronic engines from 19 liters up to 60 liters and repairs all Cumminsengines to help distribution business to meet the requirements.

TATA Cummins India Ltd: The project is expansion of JV between Tata and Cummins IndiaTATA Cummins India Ltd: The project is expansion of JV between Tata and Cummins Indiaknown as Tata Cummins India Ltd (TCIL), for manufacturing B series and ISB electronicengines built to cater surging commercial vehicle, power generation and industrial market.

Recon: Recon manufacturing facilities manufactures parts and engines up to 19 liters in sizewhich will allow CIL’s distribution business to serve its customers with cost effective parts andengines that offers similar warranty as new part or engines .

Common parts distribution centre: Common parts distribution centre (PDC) will serve allCummins businesses in India. It aims to improve supply chain efficiency in aftermarket partsdistribution and warehouse operations and will also offer optimum warehouse space to allbusinesses with improvement in inventory management.

A unit for manufacturing / assembly and upfit of B, C, and L series engines is also being setA unit for manufacturing / assembly and upfit of B, C, and L series engines is also being setup at megasie and expected to commence operations by H2FY12 with annual capacity of20000 engines to the requirement of engines in construction, compressor marine and firepump markets .

A facility for the manufacture of power generator sets and G-drives in the low and mediumhorse power range is also being set up on the MIDC SEZ in Phaltan (Maharashtra), expectedto commence operations from H2FY12 and would have a matured annual capacity of 51000to commence operations from H2FY12 and would have a matured annual capacity of 51000units by FY15 mainly for export market.

Cummins India Ltd has invested ~ `550 mn in Phaltan megasie in CY10, and is expected toinvest ~ `930 mn in CY11 and ~ `1300- `1400 mn in CY12.



Cummins India Ltd Background:

Cummins India Ltd (CIL) is a wholly owned subsidiary of USA based Cummins Inc. Established in1962, Cummins India Ltd manufactures a variety of Engines operating on diesel, natural gas anddual fuel in their currently operational 5 plants at Kothrud (Pune), Nagar road(Pune), Loni, Daman and Pirangut (Pune). Cummins India Ltd is amongst the largest exportersof engineering products in India. CIL manufactures over 18000 engines per annum and providesinnovative solutions across industrial, power generation and automotive applications.

India Organization Snapshot:

Cummins India LtdCummins Owned Operations: Engine Business

AutomotiveCummins India Ltd

Cummins Sales and Services (India) Ltd. (now merged with Cummins India Ltd)

Cummins Research and Technology India Ltd.

Cummins Exhaust India Ltd

Cummins Generator Technologies India Ltd

Cummins Turbo Technologies Ltd

Automotive

Industrial

Power Generation Business

Component Businesses

Filtration

Exhuast

Lubricants

i ib i iJoint Ventures:

Tata Cummins Ltd

KPIT Cummins Infosystems Ltd

Flee guard Filters Pvt. ltd

Valvoline Cummins Ltd

Distribution Business

1 PDC

5 Zonal Offices

21 Area Officers

75 Dealers

212 Dealer sites

Shared services/ CBS/ R&D Centre/Shared services/ CBS/ R&D Centre/ IPO/ Internal Audit

29% 27%15%

26% 26% 25%90%100%

Exports Distribution Business Unit Automotive Business Unit

Industrial Business Unit Power Generation Business Unit

Segment-wise % contribution in CIL’s Sales::

39% 38% 31% 37% 34% 33% 35%

12% 12%11%

15% 14% 13% 13%

3% 7%3%

9%6% 8% 9%

17% 16%

16%

23%19% 19% 20%

39%

10%20%30%40%50%60%70%80%


0%



Valuations and Recommendations:Cummins India Ltd is currently trading at P/E Multiple of 18.1x on FY12E EPS of `22.6 and at15.1x at FY13E EPS of `27.2. CIL’s average P/E over last 6 years stood at 17x. Considering thecurrent industry trend and CIL’s historical P/E, we have valued the company based on P/Emultiple of 19x on FY13E EPS of `27.2, and we recommend ‘BUY’ with a price target of `517/

600

700 P/E Band250000 EV/ EBITDA Band

share which is strongly supported by CIL’s dominance in 15-3000 KVA range dieselengines, strong distribution network, high quality product portfolio and presence of its productsacross diversified industries with strong customer relationship and support.

200

300

400

500

Price

8x

13x

100000

150000

200000

EV

6x

12x

18x

0

10019x

23x0

50000 24x

400

500

600

700

Price

2

P/ BV Band

120000

140000

160000

180000

200000

MCAP

Mcap / Sales Band

0

100

200

300

2x

4x

6x

8x

0

20000

40000

60000

80000

100000 1x

2x

3x

4x



Financial Analysis:

30.0%

EBITDA Margin/ Operating Profit Margin (%)Net Profit Margin (%)

31 1%32.7%

35%

ROE(%)ROE(%)

15.8%13.2%

14.4%

18.5%

16.8% 15.8% 16.0%

13.0%12.0%

13.1%15.6%

15.0% 13.8% 13.8%

10.0%

15.0%

20.0%

25.0%

26.0% 25.4%

31.1%

28.4%28.5%

28.0%

10%

15%

20%

25%

30%

0.0%

5.0%


0%

5%

10%


18%

20%

10000

12000

LME Copper Prices (US $/ tn)

Cummins India Ltd EBITDA Margin (%)

18%

20%

140

160

India Wholesale Index Pig Iron (Rs/ tonne)

Cummins India Ltd EBITDA Margin (%)

Cummins India Ltd EBITDA Margin Trend Vs. Copper & Pig Iron Prices Movement :

6%

8%

10%

12%

14%

16%

4000

6000

8000

10000

6%

8%

10%

12%

14%

16%

60

80

100

120

0%

2%

4%

6%

0

2000

4000

0%

2%

4%

6%

0

20

40


Note: Copper and Pig Iron form ~60%-65% of Cummins India Ltd’s total raw material cost:


DESCRIPTION FY08 FY09 FY10 FY11 FY12E FY13ENet Sales 23307.8 33042.8 28448.7 39454.5 45372.7 54447.2Increase/Decrease in Stock of finished goods & WIP 35.2 ‐99.9 197.0 ‐482.8 ‐150.0 ‐375.0Raw Material Consumed 14942.9 21697.7 16795.2 24044.7 27892.3 33586.5Purchase of Goods for resale 1246.9 748.6 1033.4 2245.9 2409.7 2891.6Employee Cost 1384.2 2129.6 1952.6 2546.2 2891.6 3470.0

Income Statement (` in Mn)

p yOperating and other expenses 2277.7 3371.3 2925.9 3849.1 4433.8 5320.6Technical Fees & Royalties 359.4 431.8 274.6 620.8 713.9 856.6Less: cost of plant & machinary manufactured ‐7.8 ‐8.7 ‐3.0 ‐4.2 ‐4.8 ‐5.8Total Expenditure 20238.6 28270.4 23175.7 32819.7 38186.5 45744.5Operating Profit (Excl OI) 3069.2 4772.4 5273.0 6634.8 7186.1 8702.7EBITDA Margin/ Operating Profit Margin (%) 13.2% 14.4% 18.5% 16.8% 15.8% 16.0%Other Income 1227.1 1507.5 1217.5 1774.3 1789.7 1880.3Operating Profit 4296.3 6279.9 6490.5 8409.1 8975.9 10583.0Interest Expense 6 7 26 1 20 5 19 0 22 0 22 0Interest Expense 6.7 26.1 20.5 19.0 22.0 22.0PBDT 4289.7 6253.8 6470.0 8390.1 8953.8 10561.0Depreciation 329.6 455.6 360.8 366.4 380.5 416.7Profit Before Taxation & Exceptional Items 3960.0 5798.2 6109.2 8023.7 8573.3 10144.3Exceptional Income / Expenses 0.0 192.0 0.0 0.0 0.0 0.0Profit Before Tax 3960.0 5990.2 6109.2 8023.7 8573.3 10144.3Provision for Tax 1153.1 1653.6 1670.5 2113.8 2296.2 2612.8Profit After Tax 2806.9 4336.6 4438.7 5909.9 6277.1 7531.5Net Profit Margin (%) 12.0% 13.1% 15.6% 15.0% 13.8% 13.8%d dAdjusted EPS 10.1 15.6 16.0 21.3 22.6 27.2

DESCRIPTION FY08 FY09 FY10 FY11 FY12E FY13ESOURCES OF FUNDS:Share Capital 396.0 396.0 396.0 396.0 554.4 554.4Total Reserves & Surpluses 10640.9 13550.5 15214.0 17666.7 21468.8 26378.8Shareholder's Funds 11036.9 13946.5 15610.0 18062.4 22023.2 26933.2

d

Balance Sheet (` in Mn):

Secured Loans 287.2 228.7 86.2 182.6 182.6 182.6Unsecured Loans 0.9 0.4 0.1 0.0 1.0 1.0Total Debts 288.1 229.1 86.3 182.6 183.6 183.6Total Liabilities 11324.9 14175.6 15696.3 18245.0 22206.8 27116.8APPLICATION OF FUNDS:Net Block 2240.9 2510.2 2944.5 3563.6 4146.9 4834.2Capital Work in Progress 307.6 580.1 392.2 846.9 829.4 966.8Investments 4321.5 3992.7 7329.2 7254.5 8705.4 9575.9Inventories 3214.6 4679.8 4096.7 5189.6 5508.8 7373.7Sundry Debtors 5504.5 6821.0 5229.0 7181.6 7078.5 10033.6Cash and Bank 123.0 323.2 559.3 1037.1 4444.0 5453.4Other Current Assets 24.1 83.2 92.7 98.5 96.4 115.7Loans and Advances 1934.7 2663.2 2694.9 3297.2 2891.6 3470.0Total Current Assets 10800.8 14570.4 12672.6 16803.9 20019.4 26446.3Less: Current Liabilities and ProvisionsCurrent Liabilities 5021.3 5976.7 5177.7 7108.7 7982.1 10391.0Provisions 1458.3 1731.7 2634.2 3302.5 2495.8 2995.0Total Current Liabilities 6479 7 7708 3 7811 9 10411 2 10477 9 13385 9


Total Current Liabilities 6479.7 7708.3 7811.9 10411.2 10477.9 13385.9Net Current Assets 4321.2 6862.1 4860.6 6392.6 9541.5 13060.3Deferred taxation (net asset/ liabilities) 133.8 230.5 169.8 187.4 ‐1016.4 ‐1320.6Total Assets 11324.9 14175.6 15696.3 18245.0 22206.8 27116.8


DESCRIPTION FY08 FY09 FY10 FY11 FY12E FY13ENet Profit Before Tax 3960.0 5990.2 6109.2 8023.7 8573.3 10144.3Adjustments ‐139.2 94.5 ‐236.7 ‐210.6 ‐281.1 ‐280.2Trade & Other receivables (Sundry Debtors) ‐1346.7 ‐1157.2 1567.6 ‐1970.4 103.0 ‐2955.0Inventories ‐400.2 ‐729.8 583.1 ‐1092.9 ‐319.2 ‐1864.8Loans & Advances 435 5 546 9 53 0 552 6 384 2 547 9

Cash Flow Statement (` in Mn)

Loans & Advances ‐435.5 ‐546.9 ‐53.0 ‐552.6 384.2 ‐547.9Other Current Assets 0.0 0.0 ‐0.8 ‐5.8 78.7 0.0Trade & Other payables (Current Liabilities) 2011.2 410.9 ‐780.0 1925.4 0.0 0.0Provisions 0.0 0.0 119.5 244.0 66.6 2908.0Changes In working Capital ‐171.2 ‐2022.9 1436.4 ‐1452.2 313.3 ‐2459.8Cash Flow after changes in Working Capital 3649.6 4061.9 7308.9 6360.9 8605.6 7404.4Tax Paid(net of Refunds) ‐1206.1 ‐1850.4 ‐1549.5 ‐2181.2 ‐2255.1 ‐2598.8Cash From Operating Activities 2443.5 2211.5 5759.5 4179.7 6350.5 4805.6Purchase of Fixed Assets ‐1034 6 ‐908 2 ‐664 5 ‐1485 8 ‐189 0 ‐1104 0Purchase of Fixed Assets 1034.6 908.2 664.5 1485.8 189.0 1104.0Sale of Fixed Assets 6.1 12.4 46.4 6.6 17.5 ‐137.5Purchase of Investment ‐14725.5 ‐17091.9 ‐17146.5 ‐23466.4 0.0 0.0Sale of Investments 13261.7 17504.4 13806.3 23541.5 ‐1450.9 ‐870.5Dividend Income 424.6 240.8 567.1 504.7 577.6 606.5Interest received 49.3 46.1 22.9 111.1 102.3 107.4Other Investment Activities 0.0 300.0 0.0 0.0 0.0 0.0Cash Flow from Investing Activities ‐2018.4 103.7 ‐3368.3 ‐788.3 ‐942.4 ‐1398.1Increase / (Decrease) in Loan Funds ‐0.3 ‐31.6 ‐17.0 0.0 0.0 0.0Short Term Loans 263.1 ‐75.2 ‐125.7 96.2 0.9 ‐0.1Equity Dividend Paid ‐924.4 ‐2098.6 ‐1991.8 ‐2990.8 ‐1980.0 ‐2376.0interest Paid ‐6.7 ‐26.1 ‐20.5 ‐19.0 ‐22.0 ‐22.0Cash from Financing Activities ‐690.5 ‐2231.4 ‐2155.1 ‐2913.6 ‐2001.1 ‐2398.1Net Cash Inflow / Outflow ‐265.5 83.8 236.1 477.8 3406.9 1009.4Opening Cash & Cash Equivalents 388.5 239.4 323.2 559.3 1037.1 4444.0Closing Cash & Cash Equivalent 123.0 323.2 559.3 1037.1 4444.0 5453.4

Key Financial Ratios: FY08 FY09 FY10 FY11 FY12E FY13EOperating Margin (%) 13.2% 14.4% 18.5% 16.8% 15.8% 16.0%Net Margin (%) 12.0% 13.1% 15.6% 15.0% 13.8% 13.8%Debt/ Equity (x) 0.03 0.02 0.01 0.01 0.01 0.01ROA (%) 24.8% 30.6% 28.3% 32.4% 28.3% 27.8%

( )

Key Financial Ratios:

ROE (%) 25.4% 31.1% 28.4% 32.7% 28.5% 28.0%EV/ EBITDA (x) 12.6 14.7 5.5 13.7 17.1 15.3EV/ Sales (x) 1.9 0.8 2.5 2.9 2.4 2.0P/ E (x) 22.4 8.5 22.9 19.3 18.2 15.2P/BV (x) 4.1 1.9 4.7 7.5 5.2 4.2Adj. EPS (Rs.) 10.1 15.6 16.0 21.3 22.6 27.2


Toll Free: 1800 220 370 SMS : “KC RESEARCH” to 58888 Email : [email protected]

CONTACT US :

Bibhash Asar Research Head & [email protected] 022-33026066 Senior Economist

INSTITUTIONAL RESEARCH :INSTITUTIONAL RESEARCH :Research Analyst Sector Allocation E-mail Direct Nos.Amit Anwani Construction , Realty [email protected] 022 - 30287987

& Capital goods

F&O AND TECHNICAL RESEARCH :Research Analyst Sector Allocation E-mail Direct Nos.Jaldeep S. Vaishnav F&O Analyst [email protected] 022 - 30284401Muralidhar Shenoy Senior Analyst [email protected] 022 - 30288158Kapil Vasania Analyst [email protected] 022 - 30288160Nemish Shah Analyst [email protected] 022 - 30288159

Cummins India Ltd- Initiating Coverage Report...

Documents

Transcript of Cummins India Ltd- Initiating Coverage Report...