Over the next five years, management indicated of new trend lines viz. infrastructure spend by the government, Emissionized Products, Alternate fuels, Digitization and Connectivity. The company is fully geared up for launching new CPCB IV+ products which are expected to be launched in India by 2020-21. We expect CIL to deliver earnings CAGR of 4% over FY19-21E. The stock is currently trading at 23x/20x FY20/21E and we maintain Hold rating with TP of Rs619 (22x FY21E).
Lowering earnings estimate and TP; maintaining Buy on cheap valuations:We cut our earnings estimate by 13%/11% for FY20/21 to factor in (a) the pressure on margins, given intense competition in the domestic business and (b) the weak exports outlook. We scale down our TP to INR695 as we assign a target multiple of 24x FY21E EPS. At CMP, the stock trades at FY20/21E P/E of 24x/21x. We maintain Buy given cheap valuations.
Disappointing quarter, full year guidance cut Cummins India (KKC) reported one of its weakest quarterly performance with flat sales and ~490bps YoY dip in EBITDA margin in Q1FY20. While domestic sales up 16% YoY, exports fell sharp 26%YoY at Rs3.3 bn (much lower than earlier guidance). With weak Q1FY20 performance and expectations of further weakness, KKC management has lowered its overall revenue guidance with reducing domestic revenue growth guidance from 10-15% YoY to 8-10% and de-growth of 12-15% in exports (earlier guided for flat to marginal decline) for FY20. Powergen and Distribution business is holding up well but the industrial part of the business has been weak due to slowdown in the construction and mining end-market. Construction segment was affected largely due to financial crunch and monsoon effect. During the quarter export markets like Middle east, Africa and Asia (excluding China) have seen decline of 25-30%. KKC is seeing weak demand from exports markets amid uncertain global growth and volatile forex markets. We have cut EPS estimates by 13% each for FY20/21E, factoring weak demand outlook. The stock is currently trading at 25x/22x FY20/21E. We have downgraded the stock to Hold from Accumulate with revised TP of Rs619 (22xFY21E).
CIL continues to benefit from improving government spend on infrastructure while weak global cues may continue to put pressure on the overall margins of the company. Currently, CIL is trading at a P/E of 23x and 21x on FY20E and FY21E EPS. Our Target of Rs792 implies 24x on FY21 EPS and revise our rating to Hold from Accumulate.
We revise down our earnings estimate for FY20/FY21 by 8.5%/10.8% on theback of higher mix of low margin domestic businesses and lower exports whichimpact EBITDA margin by 118 bps/142 bps than our earlier estimate. We maintain‘HOLD’ rating on Cummins by valuing it at 26x FY21E earnings for a target price of Rs. 844. Key upside risk to our call is exports growth and key downside risk is adverse product mix which could dent margins further. Unveiling of new emission norms in India for gensets could assure in pricing power to players with technologies and competitive intensity could be higher which now is unclear and we are yet to price in the same in estimates.
We have increased FY20/FY21 sales estimates by 2%/3% to factor in the strong traction from domestic industrial segment. Margins are expected to remain flat in FY20 as regular price hikes & cost rationalization measures to offset for lower contribution from the high margin exports business. We assign ‘ADD’ rating with TP of Rs832 at 23x FY21E EPS. We expect KKC to deliver sales/EBITDA/PAT CAGR of 13%/14%/16% respectively over FY19-21E with average ROE of 20%+.
We cut our earnings estimate by 8%/6% for FY20/21E to factor in (a) pressure on margins, given the intense competition and inability to take price hikes, and (b) muted exports outlook. We maintain Buy with a TP of INR910 (28x FY21E EPS, in line with its 10-year average multiple).
he company has guided for domestic revenue growth of 10-15% YoY for FY20. KKC expects good growth in HHP segment mainly driven by data center, commercial realty, manufacturing etc. KKC is seeing weak demand from exports markets amid uncertain global growth and volatile forex markets. We have modelled 10%/11% Revenue/PAT CAGR over next two years (FY19-21E). The stock is currently trading at 27/23x FY20/21E. We maintain our Accumulate rating on the stock with TP of Rs841 (26xFY21E).