Buy Cummins India, target price Rs 448: Emkay Global

Emkay Global has given a buy rating to Cummins India with a 12-month target price of Rs 448. The share price moved up by 1.20 per cent from its previous close of Rs 369.65. The stock’s last traded price is Rs 374.10.

Cummins’ Q4 earnings were significantly lower than the brokerage expectations, dragged down by Rs 1.9 billion of lost revenue due to the lockdown. This had a consequential impact on margins and profitability. The management has refrained from providing any revenue guidance for FY21, on account of the uncertain macroeconomic situation. The brokerage has cut FY21-22E EPS by 29-20 per cent, factoring in the impact of the extended lockdown in Q1FY21 and uncertainties around exports.

Investment Rationale

Based on management commentary, the brokerage believes that HHP exports which are exposed to developed markets will likely recover sooner than LHP exports which have Middle East & North Africa and Europe exposure. In the domestic business, the distribution business should do well at the time when customers defer new purchases, while government infrastructure spending will drive the recovery in the industrial business (especially railways).

In the domestic powergen business, while commercial and residential realty remain a key overhang, data center, hospital and critical application areas should help contain the decline. In the long term, apart from a cyclical recovery, the brokerage expects KKC to benefit from the increasing export opportunities after the CPCB 4+ emission norms in India.


The brokerage is positive on the stock in the long term on prospects of the implementation of new emission norms in 2021-22 and resulting new domestic and export opportunities. With the stock trading at an inexpensive 17.2 times FY22E P/E despite a strong balance sheet (15 per cent+ROE and 3.5-4 per cent FY22E dividend yield).

The brokerage maintains a buy rating, lowering the target price to Rs 448 from Rs 511 earlier, valuing it at 20 times Sep-22 P/E and implying a 21 per cent upside. A further deferral in exports recovery is a key risk to the call.

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 1041.92 crore, down -27.22 per cent from last quarter sales of Rs 1431.54 crore and down -21.27 per cent from last year's same quarter sales of Rs 1323.42 crore. The company reported net profit after tax of Rs 141.25 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 50.99 per cent stake in the company as of March 31, 2020, while FIIs held 7.46 per cent, DIIs 30.37 per cent and public and other 11.18 per cent.