Upload
others
View
0
Download
0
Embed Size (px)
Citation preview
CD Equisearch Pvt Ltd July 13, 2015
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
Cummins India Ltd (CIL)
No. of shares (crore) 27.72
Mkt cap (Rs crs) 26333
Current price (10/07/2015) 950
Price target (Rs)
760
52 week H/L (Rs.) 990/584
Book Value (Rs.) (fv:5) 104
P/BV (16e/17e)
8.5/7.8
P/E (16e/17e) 36.8/33.3
EPS growth (FY15/16e/17e) 16.0/2.9/10.3
ROE (FY15/FY16e/FY17e) 25.5/23.9/24.3
Beta 0.7
Daily volume (avg. weekly) 143470
BSE Code 500480
NSE Code CUMMINSIND
Bloomberg KKC IN
Reuters CUMM.BO
Shareholding pattern % Promoters 51.0
MFs / Banks / FIs 17.3
Foreign 18.3
Non-Promoter Corp. 3.6
Public & others 9.7
Total 100.0
As on Mar 31, 2015
Recommendation
REDUCE
Analyst
KISHAN GUPTA, CFA, FRM
Phone: + 91 (33) 4488 0043
E- mail: [email protected]
(Figires in Rs crs)
FY13 FY14 FY15 FY16e FY17e
Income from operations 4589.38 3976.67 4405.80 4832.06 5360.49
Other Income 268.31 177.71 286.58 197.80 207.15
EBITDA (other income included) 1103.19 874.44 1021.63 985.43 1105.04
Net Profit after EO item 641.59 600.22 695.98 716.30 789.78
EPS (Rs) 23.15 21.65 25.11 25.84 28.49
EPS growth (%) 24.1 -6.4 16.0 2.9 10.3
Highlights
� CIL had an unusual last quarter for its operating margin plummeted to the
lowest level in fourteen quarters triggered by margin squeeze in CPCB II
compliant gensets as well as export of high hp engines. After raising prices
of CPCP II compliant wares in the first half (to cover the high input costs),
the company rationalized prices in the second half to shield market share.
To make matters worse it outdid its peers in hiking prices only to roll back
some of the rise later, fearing dramatic loss in market share. Save Q2FY15,
operating profit has barely grown in other three quarters of last fiscal (in
fact it shrunk by 4.2% in Q3FY15) reflecting the misery of domestic power
generation and industrial sectors.
� Acceleration in CIL's exports (up some 44%) last fiscal year helped
somewhat mollify scare of 4% fall in domestic revenues. Exports, whose
revenue share peaked to 40%, got a bump up from robust demand of lhp
gensets from Africa, Asia and Middle East. Poor dispatches of high hp
engines though remain a sore point. None of the domestic businesses
showed traction with revenues of flagship power generation business
sliding by 6%. Both its industrial and auto businesses have failed to show
any signs of coming out of abyss.
� For the fiscal, income from operations advanced by 10.8% and operating
profit by measly 5.5%. Had it not been for the profit on sale of long term
investments of Rs 82.63 crs and increased dividends from Valvoline
Cummins, net profit would have grown by just 9% compared to headline
31%. OPM for full year plunged to 16.7%, the lowest level in last six years.
� But the year saw CIL launch new products. Most notably, its power
generation business unveiled CPCB II compliant prime power and stand-by
ratings across engine platforms. Its industrial business developed the
QSK60 engine for a commercial marine main propulsion application. It also
partnered with the Indian Railway Organization for Alternate Fuels
(IROAF) to introduce compressed natural gas-fuelled diesel electrical
multiple unit (DEMU). No less worth mentioning is roll out of power
generation products for telecom market in Africa and rest of Asia.
� The stock currently trades at 36.8x FY16e EPS of Rs 25.84 and 33.3x FY17e
EPS of Rs 28.49. We project earnings to grow annually (average) by a
shockingly 6.5% over the next two years. Even positive surprises in
earnings leave little headroom for appreciation in stock price. We therefore
assign "reduce" rating on the stock with price target of Rs 760 (previous
target: Rs 618) based on 27x FY17e earnings (average five year ttm P/E: 27).
2
2
CD Equisearch Pvt Ltd
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
Outlook & Recommendation
Export growth plateaued
Record shipments from CIL's low horsepower generator set at the SEZ in Megasite last fiscal helped overcome the stagnation
in its export revenues; exports grew by just 2.2% in the two years ending fiscal 2013. Much of the increase could be attributed
to extension of its product range including mobile and telecom application products. Others include launch of new products
and expansion of distributor base in Africa, South America, Middle East and South Pacific. Particularly, demand was strong in
Africa, where robust laying of cellular networks has propelled shipments of gensets.
But all is not rosy. Off take of high hp engines continues to remain weak not
least due to feeble powergen market globally. Mining activity has also failed
to take off not least for the meltdown in global commodity prices. As a
result, stacking up orders on a high base of last year would be a mammoth
task - we estimate CIL's exports to rise by just 8% in current fiscal (50%
probability) compared to 44% last fiscal (see chart). Yet few new initiatives
could help shore up orders. It has started exporting components to various
Cummins engine manufacturing facilities and to China UK and USA Fuel
System manufacturing locations. Its low hp genset plant at SEZ recently
became CE (Conformité Européenne) certified, indicating its capability to
ship to European Union member states.
Powering domestic markets
CIL's lackluster domestic off take in last few years has swooned investors - its last fiscal's revenue was 9% smaller than what
it was four years ago. Most of its domestic businesses have suffered: power gen 22% smaller; industrial 8%; auto 53% (see
chart). Had it not been for the 21% advance in distribution business, the revenue count would have shrunk by over 16%.
Little wonder sluggishness in domestic economic activity would explain much of that business sclerosis.
But conditions could turn for the better. CIL has been able to win back some
of the lost market share in CPCB II products last quarter by rationalizing
prices. Backup power requirement would surge with GOI's renewed push
on industry and infrastructure growth. Industrial segment is not behind not
least for government's impetus on loosening mining laws and boosting local
defence manufacturing. Demand could rise for rail track maintenance
machines (result of renewed focus on gauge conversion) and for diesel
electric multiple units (higher spend on last mile connectivity). Its
distribution business would get a push from the recently concluded CRM
system in all its dealership across India; the company realizes need to prop
up dealer base for below 160 kva engines.
Record capex
By some measure CIL's appetite of piling up fixed assets shows no signs of satiating: total capex in last three years to fiscal
2015 was 47% higher than the total in the seven preceding years (see chart). Bulk of the total investments of nearly Rs 1040
crs in last three years has gone into India Office Campus (total investment for phase I of IOC: Rs 683 crs); the company
completed the second tower of IOC last fiscal. It plans to spend at least Rs 500 crs in the current year some of which would go
in phase II of IOC (investment: Rs 272 crs).
3
3
CD Equisearch Pvt Ltd
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
[ [ [
[
Source: Cummins India
[
Other projects in the pipeline include the Cummins Technical Center India (CTCI), the largest research and development
center for Cummins globally, and the Global Analytics Center (GAC), a knowledge processing hub for supporting business
processes across different regions. Also on the anvil are two world class training centers, one for the general employee
training and the other as a technical training center to support its distribution business. The latter will have the capacity to
train more than half a thousand engineers and 300 customers on special programs on controls, alternators etc. Besides, plans
are afoot to unveil by September this year a residential campus facility for employees of the Company near Megasite,
Phaltan.
Launches
To spur flagging domestic power gen sales, CIL lined up an army of new products last fiscal. Most remarkably, CPCB II
compliant 42 prime power and 15 stand-by ratings across engine platforms were launched. It also revealed the indigenized
‘fit-for-market’ series of the QSK50 generator for the 1750 kVA to 1975 kVA segment. . Its industrial business developed the
QSK60 engine for a commercial marine main propulsion application. It also partnered with the Indian Railway Organization
for Alternate Fuels (IROAF) to introduce compressed natural gas-fuelled diesel electrical multiple unit (DEMU). To gain firm
foothold in thriving telecom markets of Africa and other Asian markets new products were unveiled.
Financials & valuation
Dramatic shift of fortunes of CIL's export business helped turn the tide. Income from operations as a result rose by 10.8%, the
second highest absolute addition in last four years. Revenue share of domestic business continues to plummet -from nearly
three-fourths in FY11 to three-fifths now- not least due to abysmal off take of power gen and industrial businesses; power
gen revenues declined annually (average) by 5.9%, while the industrial business dipped by 2% in last four years.
4
4
CD Equisearch Pvt Ltd
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
[
Yet turnaround is in sight if recent pick up in domestic industrial activity is anything to go by. As a result, we expect CIL's
domestic revenues to rise by 11% (with no more than 50% probability) in the current year. But gain in overall operating
margins would be hard to come by (see chart). Assiduous attempts are being made to undo the harm done by steep pricing
(15-20% increase) of CPCB II compliant gensets - most prominent was loss in market share - by cutting prices, hiking local
content and launching some new products.
Despite positive sound bites of Cummins Inc on the toughening emission standards in Japan, Mexico, Russia, India , China
and others, growing exports in teens on the current base would be a tall order. Consequently, profit after tax would barely
grow this year. Fixed asset turnover would slide for most of its forthcoming additions to fixed assets (IOC; training centers;
residential campus etc) would not add much to top line in medium term. But thanks to technological prowess, it would
continue to generate industry-beating return on capital.
The stock currently trades at 36.8x FY16e EPS of Rs 25.84 and 33.3x FY17e EPS of Rs 28.49. The re-rating of the stock in last
one year or so has more to do with reducing equity risk premium in general. CIL's earnings have climbed 16% last fiscal
precipitated by sturdy jump in dividend income from Cummins Valvoline (otherwise earning would have grown by just
9%). We project average annual earnings to grow by a shockingly 6.5% over the next two years. Even positive surprises in
earnings leave little headroom for appreciation in stock price. We therefore assign "reduce" rating on the stock with price
target of Rs 760 (previous target: Rs 618) based on 27x FY17e earnings (average five year ttm P/E: 27). (For more info, refer to
our report dated Aug 6, 2014)
5
5
CD Equisearch Pvt Ltd
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
Cross Sectional Analysis
Company Equity* CMP Mcap*
Op.
inc. Profit* OPM** NPM**
Int
cov. ROE**
Mcap
/ OI P/BV P/E EV/EBITDA
Cummins 55 950 26333 4406 696 16.7 15.8 188.5 25.5 6.0 9.1 37.8 27.7
Greaves Cot 49 128 3117 1698 122 11.7 7.2 74.4 14.8 1.8 3.8 25.6 13.8
Kirloskar Oil 29 281 4070 2507 143 9.9 5.7 1028.2 11.0 1.6 3.0 28.4 13.2
* Figures in Rs crs; P/E on TTM basis ** in %
Risks & Concerns
Increased competition
Post implementation of CPCB II norms last fiscal year, prices of generator sets were increased in the domestic market to account
for rise in input costs. But due to steep rise in its generator set prices, Cummins suffered loss of market share and margin
pressure last fiscal. Expansion of local footprint of global OEMs in generator sets and M&HCV segments has also increased
competition for incumbents.
Auto sector woes
Sharp comeback in the domestic medium and commercial vehicle (MHCV) sales - volumes grew 16% in FY15 after a fall of 25%
in FY15 -has done little to galvanize sales mainly due to tepidity in local mining activity; its auto sales (domestic) slipped to Rs
110 crs last fiscal from Rs 130 crs a year ago.
6
6
CD Equisearch Pvt Ltd
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
Financials
Quarterly Results Figures in Rs crs
Q4FY15 Q4FY14 % chg. FY15 FY14 % chg.
Income from operations 1133.51 971.62 16.7 4405.80 3976.67 10.8
Other Income 66.09 31.45 110.1 286.58 177.71 61.3
Total Income 1199.60 1003.07 19.6 4692.38 4154.38 13.0
Total Expenditure 957.60 800.69 19.6 3670.75 3279.94 11.9
PBIDT 242.00 202.38 19.6 1021.63 874.44 16.8
Interest 0.95 1.06 -10.4 4.52 4.18 8.1
Depreciation 19.08 14.58 30.9 79.72 52.75 51.1
PBT 221.97 186.74 18.9 937.39 817.51 14.7
Tax 31.53 44.95 -29.9 151.54 217.49 -30.3
PAT 190.44 141.79 34.3 785.85 600.02 31.0
Extraordinary Item - - - 89.87 -0.20
-
45035.0
Adjusted Net Profit 190.44 141.79 34.3 695.98 600.22 16.0
EPS (F.V. 2) 6.87 5.12 34.3 25.11 21.65 16.0
Income Statement Figures in Rs crs
FY13 FY14 FY15 FY16e FY17e
Income from operations 4589.38 3976.67 4405.80 4832.06 5360.49
Growth (%) 11.5 -13.4 10.8 9.7 10.9
Other Income 268.31 177.71 286.58 197.80 207.15
Total Income 4857.69 4154.38 4692.38 5029.86 5567.65
Total Expenditure 3754.50 3279.94 3670.75 4044.44 4462.61
EBITDA 1103.19 874.44 1021.63 985.43 1105.04
Interest 4.61 4.18 4.52 4.75 4.98
EBDT 1098.58 870.26 1017.11 980.68 1100.05
Depreciation 47.25 52.75 79.72 96.76 116.74
Tax 287.22 217.49 151.54 167.63 193.53
Reported PAT 764.11 600.02 785.85 716.30 789.78
Extraordinary item 122.52 -0.20 89.87 - -
Adjusted Net Profit 641.59 600.22 695.98 716.30 789.78
EPS (Rs.) 23.15 21.65 25.11 25.84 28.49
7
7
CD Equisearch Pvt Ltd
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
[
Balance Sheet Figures in Rs crs
FY13 FY14 FY15 FY16e FY17e
SOURCES OF FUNDS
Share Capital 55.44 55.44 55.44 55.44 55.44
Reserves 2331.29 2509.71 2831.08 3046.92 3336.25
Total Shareholders Funds 2386.73 2565.15 2886.52 3102.36 3391.69
Long term debt - - - - -
Total Liabilities 2386.73 2565.15 2886.52 3102.36 3391.69
APPLICATION OF FUNDS
Gross Block 1041.47 1511.98 1883.01 2333.01 2733.01
Less: Accumulated Depreciation 548.04 592.83 649.05 745.81 862.55
Net Block 493.43 919.15 1233.96 1587.20 1870.46
Capital Work in Progress 120.79 95.76 170.61 100.00 70.00
Investments 627.56 495.35 465.04 252.22 307.22
Current Assets, Loans & Advances
Inventory 530.35 551.34 682.26 750.49 825.53
Sundry Debtors 854.99 782.03 935.54 1029.09 1152.59
Cash and Bank 354.65 86.49 79.86 90.58 99.88
Loans and Advances 215.22 154.66 291.11 302.97 310.09
Total CA & LA 1955.21 1574.52 1988.77 2173.14 2388.09
Current liabilities 752.80 670.78 833.66 893.23 981.27
Provisions 348.82 353.01 393.67 436.61 446.12
Total Current Liabilities 1101.62 1023.79 1227.33 1329.84 1427.38
Net Current Assets 853.59 550.73 761.44 843.30 960.71
Net Deferred Tax -32.78 -46.51 -63.08 -82.19 -92.19
Other Assets (Net of liabilities) 324.14 550.67 318.55 401.83 275.48
Total Assets 2386.73 2565.15 2886.52 3102.36 3391.69
8
8
CD Equisearch Pvt Ltd
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
Cash Flow Statement Figures in Rs crs
FY13 FY14 FY15 FY16e FY17e
Net Income (a) 764.11 600.02 785.85 716.30 789.78
Non cash exp. (b) -135.07 -57.49 -168.70 -12.09 -2.17
Depreciation 47.25 52.75 79.72 96.76 116.74
Deferred taxes & others 39.73 13.73 -24.38 19.11 10.00
Profit / loss on sale of assets / inv -135.59 -16.52 -106.48 0.00 0.00
Interest income -17.60 -47.35 -21.73 -27.97 -27.45
Dividends -68.86 -60.10 -95.83 -99.99 -101.46
Change in working capital & others (c ) -104.86 -184.51 -120.69 -89.89 -101.77
Inventory 37.26 -20.99 -130.92 -68.23 -75.05
Debtors -176.65 72.96 -153.51 -93.55 -123.49
Loans & advances -90.89 -147.44 -6.51 -12.25 -7.12
Current & long term liabilities 88.97 -80.97 160.99 59.57 88.04
Provisions 36.45 -8.07 9.26 24.57 15.85
Operating cash flow (a+b+c) 524.18 358.02 496.46 614.31 685.84
Capex (Net) -214.78 -467.83 -330.36 -477.67 -250.00
JV investments & Others (Net) 63.55 - 84.64 -6.50 -
Other Investments (Net) 30.18 148.93 44.91 219.32 -55.00
Interest income 13.54 54.22 23.50 28.36 27.45
Dividend income 68.86 60.10 95.83 99.99 101.46
Bank Deposits -139.99 259.81 25.20 - -
Investing cash flow (d) -178.64 55.23 -56.28 -136.50 -176.09
Net borrowings - - - - -
Dividends paid -354.39 -421.61 -421.60 -467.09 -500.46
Financing cash flow (e) -354.39 -421.61 -421.60 -467.09 -500.46
Net change (a+b+c+d+e) -8.85 -8.36 18.58 10.72 9.29
9
9
CD Equisearch Pvt Ltd
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
[
Key Financial Ratios
FY13 FY14 FY15 FY16e FY17e
Growth Ratios (%)
Revenue 11.5 -13.4 10.8 9.7 10.9
EBIDTA 22.9 -10.8 6.5 5.8 12.1
Net Profit 24.1 -6.4 16.0 2.9 10.3
EPS 24.1 -6.4 16.0 2.9 10.3
Margins (%)
Operating Profit Margin 18.2 17.5 16.7 16.3 16.8
Gross Profit Margin 21.3 21.9 21.0 20.3 20.5
Net Profit Margin 14.0 15.1 15.8 14.8 14.7
Return (%)
ROCE 34.6 24.4 29.0 24.0 24.4
RONW 29.0 24.2 25.5 23.9 24.3
Valuations
Market Cap / Sales 3.0 4.2 5.5 5.4 4.9
EV/EBIDTA 13.1 18.3 25.6 26.2 23.4
P/E 21.5 27.5 34.9 36.8 33.3
P/BV 5.8 6.4 8.4 8.5 7.8
Other Ratios
Interest Coverage 202.5 196.6 188.5 187.2 198.3
Debt-Equity Ratio - - - - -
Current Ratio 1.8 1.5 1.6 1.6 1.7
Turnover Ratios
Fixed Asset Turnover 9.6 5.6 4.1 3.4 3.1
Total Asset Turnover 2.1 1.6 1.6 1.6 1.7
Debtors Turnover 6.0 4.9 5.1 4.9 4.9
Inventory Turnover 6.8 6.1 6.0 5.6 5.7
Creditors Turnover 7.0 6.3 6.7 6.3 6.3
Working Capital Turnover 5.9 5.7 6.7 6.0 5.9
WC Ratios
Debtors Days 61.0 75.1 71.1 74.2 74.3
Inventory Days 53.4 60.2 61.3 64.7 64.5
Creditors Days 51.8 57.6 54.6 58.1 57.9
Cash Conversion Cycle 62.5 77.8 77.9 80.7 80.8
Cash Flows (Rs crs)
Operating Cash Flow 524.2 358.0 496.5 614.3 685.8
FCFE 485.5 413.3 440.2 477.8 564.7
10
10
CD Equisearch Pvt Ltd
Equities Derivatives Commodities Distribution of Mutual Funds Distribution of Life Insurance
Disclosure& Disclaimer CD Equisearch Private Limited (hereinafter referred to as ‘CD Equi’) is a Member registered with National Stock Exchange of India Limited,
Bombay Stock Exchange Limited and Metropolitan Stock Exchange of India Limited (Formerly known as MCX Stock Exchange Limited). CD
Equi is also registered as Depository Participant with CDSL and AMFI registered Mutual Fund Advisor. The associates of CD Equi are
engaged in activities relating to NBFC-ND - Financing and Investment, Commodity Broking, Real Estate, etc.
CD Equi has applied for registration under SEBI (Research Analysts) Regulations, 2014. Further, CD Equi hereby declares that –
• No disciplinary action has been taken against CD Equi by any of the regulatory authorities.
• CD Equi/its associates/research analysts do not have any financial interest/beneficial interest of more than one percent/material
conflict of interest in the subject company(s).
• CD Equi/its associates/research analysts have not received any compensation from the subject company(s) during the past twelve
months.
• CD Equi/its research analysts has not served as an officer, director or employee of company covered by analysts and has not been
engaged in market making activity of the company covered by analysts.
This document is solely for the personal information of the recipient and must not be singularly used as the basis of any investment decision.
Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such
investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to
in this document (including the merits and risks involved) and should consult their own advisors to determine the merits and risks of such
an investment.
Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading
volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals.
The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources
believed to be true but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for
general guidance only. CD Equi or any of its affiliates/group companies shall not be in any way responsible for any loss or damage that may
arise to any person from any inadvertent error in the information contained in this report. CD Equi has not independently verified all the
information contained within this document. Accordingly, we cannot testify nor make any representation or warranty, express or implied, to
the accuracy, contents or data contained within this document.
While, CD Equi endeavors to update on a reasonable basis the information discussed in this material, there may be regulatory compliance or
other reasons that prevent us from doing so.
This document is being supplied to you solely for your information and its contents, information or data may not be reproduced,
redistributed or passed on, directly or indirectly. Neither, CD Equi nor its directors, employees or affiliates shall be liable for any loss or
damage that may arise from or in connection with the use of this information.
CD Equisearch Private Limited (CIN: U67120WB1995PTC071521)
Registered Office: 37, Shakespeare Sarani, 1st Floor, Kolkata – 700 017; Phone: +91(33) 4488 0000; Fax: +91(33) 2289 2557; Corporate Office: 10,
Vasawani Mansion, 2nd Floor, Dinshaw Wachha Road, Churchgate, Mumbai – 400 020; Phone: +91(22) 2283 0652/0653; Fax: +91(22) 2283, 2276
Website: www.cdequi.com; Email: [email protected]
SEBI Regn No.: NSE-CM: INB230781137, NSE-FO: INF230781137, NSE-CD: INE230781135, BSE-CM: INB010781133, BSE-FO: INF010781133,
MCX-SX-CM: INB-260781134, MCX-SX-FO: INF260781134, MCX-SX-CD: INE260781137, DP: IN-DP-CDSL-180-2002