Healthy growth and operational margins

Cummins India’s (Cummins) reported better than expected growth in both domestic and export markets despite headwinds. Company is confident of sustenance of the growth and expects gradual normalisation in the domestic market. Export segment too is expected to gradually tread towards normalisation; however, uncertainty regarding a second wave of the pandemic and resultant lockdown is a risk. Though near-term execution is expected to be volatile, we believe, focus on cashflow, leadership in technology and gradual recovery in export markets augur well for long-term growth. Factoring-in the higher gross margins, we raise FY21E and FY22E EBIDTA by 2.9% and 2.2% respectively, lower other income to keep earnings growth subdued. Given long-term structural growth drivers like change in emission norms to CPCB-IV+ and benign valuation, we maintain BUY with a revised SoTP target price of Rs522 (previously: Rs505).

* Better than expected growth: Driven by pent up demand, both the domestic and export markets witnessed better than expected growth during Q2FY21. Domestic growth outlook is healthy with gradual revival of economic activity while export growth is likely to be volatile given the risk of further lockdown in Europe, etc.

* Led by distribution and HHP powergen, domestic execution was better than expected: High horse power (HHP) segment witnessed strong sequential recovery at 81% QoQ (while it was down 35% YoY) limiting powergen decline. Distribution segment witnessed 74% QoQ growth and 4% YoY decline; management is confident of continuation of this trend.

* Smart rebound in exports and ex-China sentiment to benefit India: Exports grew 18% YoY and 215% QoQ in Q2FY21 to Rs4bn supported by 36% growth in LHP. Additional lockdown in Europe is expected to impact growth; however, we believe the recovery trend is likely to sustain due to sourcing shift from China towards India by most countries.

* Maintain BUY on cashflow and long-term growth: Factoring-in the higher gross margins, we raise our EBIDTA estimates by 2.9% and 2.2% FY21E and FY22E respectively. We factor-in gradual improvement in margins and expect exports to recover in FY22E. We believe long-term growth potential is intact with the introduction of CPCB-IV+ norms. We revise our SoTP-based target price to Rs522 (previously Rs505). Given the strong cashflow and recovery in export trend, we have raised our valuation multiple to 24x for standalone core 1-year forward earnings from 22x previously.

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