06 november 2020 initiating coverage cummins - ic... · and filtration products from cummins inc....

06 November 2020 Initiating Coverage

Cummins

HSIE Research is also available on Bloomberg ERH HDF & Thomson Reuters

All energised Looking at its history, Cummins India Ltd (CIL) seems like a passable

investment opportunity, on the back of RoE contractions (resulted in multiple

de-rating over last few years), export underperformance (limited rerating), and

CG perception on sister concerns’ manufacturing in India. But the past is not

always a cue to what the future holds. At CIL’s heart lies the core technology

engine, as the regulatory norms on CEV BSIV/CPCB IV+ will give it a distinct

competitive advantage. And despite concerns of newer technology induction

through CTIL, domestic distribution will be mainly through CIL. Some of the

newer technologies like alternate fuels, telematics, and electric engines will

support valuation rerating both due to (1) competitive advantage, margin/RoE

expansion and (2) gaining traction in export markets. We rate CIL as a BUY

with a TP of Rs 540 (SOTP).

2QFY21—the quarter of recovery: CIL delivered a strong performance during 2QFY21 with recovery in both domestic (2x) and exports (3x)

revenue QoQ. The change in the mix and customised value addition in

highly critical data centre offerings helped get slightly better pricing. This

led to the EBITDA margin expansion of 484 bps YoY to 16.5% and towards a

normalised margin historically. APAT declined 7.5% YoY to Rs 1,695 mn.

A higher share of HHP and exports boost margins: CIL’s revenue mix had low LHP and Infrastructure business and a higher share of better margin

HHP and Exports. This caused the EBITDA margin expansion. Whilst LHP’s

share in PowerGen is material, and the segment is fiercely competitive, CIL

intends to upgrade this portfolio with more electronics, which would be

fuel-efficient, low on emissions, and silent in operation. It would help the

company gain market share at better pricing. CIL’s moat lies in the tech

advantage from parent’s $1bn annual R&D. The base tech from the parent

can be customised with lower domestic R&D spends in India and sold as

new age products. Competition might take longer to upgrade to CBCB IV+

compliant engines and lead to CIL further consolidating market share.

Exports markets recovering, CIL well-positioned to gain market share: CIL competes with CTIL for the exports pie. But in the past few years, CIL has

seen saturation coming in due to tepid demand and increasing competition.

We believe that the growth runway is in place now with new products

meeting most of the stringent pollution emissions compliance. CIL boasts

that CPCB IV+ compliance pitched its product in line with or slightly better

than the prevailing emission norms globally and, hence, should help gain

market share. The export products have better margins and hence would aid

profitability. It will take 2-3 years for new lines to gain global traction.

Return ratios to expand, all-round cyclical recovery: We expect key segments—Infra, Data Centers, Healthcare, Residential to see strong cyclical

recovery. This shall coincide with lagged recovery in commercial real estate,

hospitality & exports. Growth pick-up with better pricing should lead to

RoE expansion from 12.1% in FY21E to 16.8% in FY23E (15.6%- FY20).

Standalone Financial summary (Rs mn) 2QFY21 2QFY20 YoY (%) 1QFY21 QoQ (%) FY20 FY21E FY22E FY23E

Net Revenues 11,602 13,084 (11.3) 4,982 132.9 51,577 44,083 50,447 57,210

EBITDA 1,913 1,525 25.5 29 6,496.9 5,863 5,436 6,908 8,592

APAT 1,695 1,833 (7.5) 170 896.8 6,492 5,056 6,114 7,515

Diluted EPS (Rs) 6.1 6.6 (7.5) 0.6 896.8 23.4 18.2 22.1 27.1

P/E (x)

18.9 24.2 20.0 16.3

EV/EBIDTA (x)

19.6 21.2 16.4 13.1

RoE (%)

15.6 12.1 14.3 16.8

Source: Company, HSIE Research

BUY

CMP (as on 5 Nov 2020) Rs 454

Target Price Rs 540

NIFTY 11,120

KEY STOCK DATA

Bloomberg code KKC IN

No. of Shares (mn) 277

MCap (Rs bn) / ($ mn) 126/1,700

6m avg traded value (Rs mn) 625

52 Week high / low Rs 653/280

STOCK PERFORMANCE (%)

3M 6M 12M

Absolute (%) 10.7 23.9 (16.9)

Relative (%) 0.9 (7.5) (19.6)

SHAREHOLDING PATTERN (%)

Mar-20 Sep-20

Promoters 51.00% 51.00%

FIs & Local MFs 30.36% 31.29%

FPIs 7.46% 8.17%

Public & Others 11.18% 11.54%

Pledged Shares - -

Source : BSE

Parikshit D Kandpal, CFA

[email protected]

+91-22-6171-7317

Rohan Rustagi

[email protected]

+91-22-3021-7355

Chintan Parikh

[email protected]

+91-22-3021-7330

Page | 2

Cummins: Initiating Coverage

Quarterly Financials Snapshot – Standalone

Year to March (Rs mn) 2QFY21 2QFY20 % YoY 1QFY21 % QoQ 1HFY21 1HFY20 % YoY

Revenues 11,602 13,084 (11.3) 4,982 132.9 16,584 26,515 (37.5)

Raw material 7,187 8,513 (15.6) 2,927 145.5 10,114 17,375 (41.8)

Staff costs 1,189 1,407 (15.5) 1,150 3.5 2,339 2,783 (16.0)

Other operating expenses 1,312 1,639 (19.9) 876 49.8 2,189 3,318 (34.0)

Total expenditure 9,689 11,560 (16.2) 4,953 95.6 14,642 23,476 (37.6)

EBITDA 1,913 1,525 25.5 29 6,496.9 1,942 3,039 (36.1)

Depreciation 327 293 11.5 303 7.8 630 584 7.9

EBIT 1,586 1,232 28.8 (274) - 1,312 2,455 (46.5)

Interest 40 55 (27.2) 43 (6.7) 83 107 (22.2)

Other income 580 926 (37.4) 666 (13.0) 1,246 1,695 (26.5)

Extraordinary income/ (loss) (239) - - 355.6 - 116.5 - -

Profit Before Tax 1,887 2,102 (10.2) 705 167.8 2,591 4,043 (35.9)

Tax 431 269 60.1 179 141.1 610 795 (23.2)

Reported Profit 1,456 1,833 (20.6) 526 176.9 1,981 3,248 (39.0)

Adjusted profit 1,695 1,833 (7.5) 170 896.8 1,865 3,248 (42.6)


Margin Analysis

As % of net revenues 2QFY21 2QFY20 bps

YoY 1QFY21

bps

QoQ 1HFY21 1HFY20

bps

YoY

Raw material 61.9 65.1 (311.9) 58.8 319.2 61.0 65.5 (454.2)

Staff expenses 10.3 10.8 (50.5) 23.1 (1,282.2) 14.1 10.5 360.7

Other operating expenses 11.3 12.5 (121.4) 17.6 (627.7) 13.2 12.5 68.4

EBITDA margin 16.5 11.7 483.8 0.6 1,590.7 11.7 11.5 25.1

Tax rate (%) 22.9 12.8 1,004.4 25.4 (253.5) 23.5 19.7 389.0

Net profit margin 14.6 14.0 59.8 3.4 1,119.4 11.2 12.2 (100.6)


The gross margin increase was driven by:

o Favourable mix: higher share of HHP products and exports, lower

construction industry sales. This led to the positive impact of 250bps.

o Cost reduction efforts and lower input costs: 100bps impact.

o Pricing and forex impact: marginally positive impact.

While the mix is not likely to be as favourable as in 2QFY21, some of the cost

rationalisation initiatives will sustain, going forward. For example, the impact of

reduced headcount reduction will carry forward. However, this will be partially

offset by incentives that need to be rolled out in 2HFY21, which were rolled back

earlier to retain talent.

2QFY21 Earnings Concall Takeaways

Segmental recovery trends: Following the steep drop in demand and disruption in the supply chain in 1QFY21 marked by nationwide lockdown, 2QFY21

witnessed a significant improvement in economic activities. Cummins has

witnessed a recovery in the domestic business to 80% of the pre-COVID level.

This is led by a recovery in distribution, followed by a gradual uptick in

construction and mining segments. PowerGen segment is also seeing demand

from HHP, and some of the leading segments include Data Centres, Healthcare,

Pharma and Real Estate. It remains cautiously optimistic amidst MoM recovery

in key end-markets. The next 6-12 months will be turbulent, and the company is

not giving any guidance. However, over the medium term, growth drivers

remain intact on the back of its largest service network as well as its technology

leadership.

Distribution has recovered the fastest as more products are added, followed by

exports. PowerGen is the third in line, followed by Industrial. Within domestic

CIL delivered strong

performance during

2QFY21 with recovery in

both domestic (2x) and

exports (3x) revenue QoQ,

driven by pent-up demand

It is currently operating at

~80% of pre-COVID levels

The change in the mix and

customised value addition

in highly critical data

center end user markets

helped get slightly better

pricing. This led to

EBITDA margin expansion

of 484 bps YoY to 16.5%

APAT declined 7.5% YoY

to Rs 1,695 mn (+177%

QoQ)

Raw material costs to inch

up gradually to ~63-65%

range as revenue mix

normalises

Page | 3


PowerGen, Data Centres, Health and Pharma sub-segments are seeing good

progress. Some pockets within commercial/residential real estate and industrial

also see a gradual uptick, even as Hospitality (Malls/Hotels) is the slowest in

terms of recovery. Large infrastructure projects are amongst the lagging sectors;

CIL is optimistic of the normalised demand recovery as pent-up demand fizzles

out.

Exports: Export business grew 18% YoY due to pent-up demand and early signs of demand recovery in a few export markets. There had been some momentum

build-up in Asia Pacific, Europe and Latin America, but the recent surge in

COVID numbers across these geographies has cast a shadow of uncertainty.

Exports are expected to range-bound in the range of Rs 2.8-3.5bn as their markets

are weak. 3Q is generally weaker than 2Q for exports as inventory correction

happens in companies following Dec YE fiscal and festive season, and that is

made up for in 4Q. So, overall, a flattish 2HFY21 is expected.

Pricing pressure due to domestic Genset overcapacity, telecom driving export growth: PowerGen business could continue to experience pricing pressure,

especially in the LHP market. CIL will continue to enjoy premium vs

competitors. On the exports side, the biggest segment that is seeing positive

growth is Telecom/5G in Asia mainly. The Philippines and Malaysia have seen

faster 5G roll-out. Africa and MENA regions are seeing geopolitical issues

coupled with low oil prices. Europe and Latin America have seen demand pick

up, but again there is uncertainty around the second wave of COVID.

MEIS export incentive scheme: For CIL, a large part of the export revenue qualifies for MEIS scheme benefits. It derived ~3.7% net sales as export

incentives. Lower tax revenues have led the government to cap MEIS incentives

at Rs 20mn for every exporter in 3QFY21. Hence, CIL has made a provision of Rs

130mn in this regard. Remission of Duties or Taxes on Export Product (RoDTEP)

will replace MEIS starting 1 January 2021.

Railways segment: Trains and metros were largely shut until Oct-20 due to COVID. So, there was no procurement of power-cars and other major products

that CIL sells.

Related party transactions: CIL procures various after-treatment, turbochargers and filtration products from Cummins Inc. and other sister concerns in India.

These transactions are done at an arm’s length transfer pricing basis in a fair

manner. Market pricing is higher than the transfer price basis.

New product development: 10-12 new products could be introduced over the next couple of years, and most of them could be used for exports. Every month

new products are introduced, and obsolete products ousted. The tech is getting

changed from mechanical to electric engines.

CEV BSIV/CPCB-4: India is one of the lagging products markets for the rest of the world. Hence, there are opportunities to add value in leading product tech

and later supply lagging markets. BSIV tech can be upgraded to BSVI as and

when required. Manufacturing is concentrated in 3-4 major countries – India, US,

China and Japan. It is then assembled in other countries, to tailor to local needs.

Debtors have come down sequentially. It had gone up last quarter due to idle machinery at customers’ end and, hence, delayed the release of money. There has

been no change in credit policy.

Capex: No guidance, but CIL has significantly cut back on its Capex cycle. Big cycles of Capex have been done with, so it will now be mostly towards product

development.

2QFY21 Sales break-up:

Geography-wise: Rs 7.4bn

domestic, Rs 4bn exports

Domestic sales break-up: Rs

2.6/1.7/1.7bn –

PowerGen/Industrial/Distrib

ution

Exports sales break-up: Rs

2.1/1.6bn – HHP/LHP

Industrial sales break-up:

Compressor - Rs 280mn,

Construction – Rs 450mn,

Mining – Rs 230mn, Rail –

Rs 530mn & Marine – Rs

200mn

PowerGen break-up:

LHP – Rs 300mn,

Mid-range – Rs 670mn,

Heavy-duty – Rs 550mn and

HHP – Rs 1,070mn

China exports: Cummins

India sells a wide range of

products to China. But data

centres and telecom infra

industries form the bulk of the

end-user industries

On royalty & R&D: royalty

and technical fees is only

charged by Cummins Inc only

when a new technology is

imported/absorbed. On top of

that CIL does its own R&D to

develop the base technology

imported to serve local

markets. R&D goes into

customisation, fine-tuning &

localisation, manufacturing

locally, etc

Page | 4


Quarterly trends in charts

Quarterly revenue trend (Rs bn)


Domestic vs Exports split and EBITDA %


2QFY21 Domestic Split (%) 1HFY21 Domestic Split (%)

Source: Company Source: Company

Overall revenue growth

had been flattish even pre-

COVID over FY19 and

FY20 due to economic

headwinds

The declining share of

exports has been the reason

for decline in margins,

apart from high

competitive intensity and

sluggish demand outlook

in both domestic and

export markets

Share of exports to

normalise to ~25-27% from

35% in 2QFY21

8.8 10.3 10.5 10.1 10.1 9.7 10.8

8.0

3.7

7.6

4.5 4.6 4.5

3.3 3.3 3.4 3.7

2.6

1.3

4.0

13.3 14.9 15.0

13.4 13.4 13.1 14.5

10.5

5.0

11.6

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1Q

FY

19

2Q

FY

19

3Q

FY

19

4Q

FY

19

1Q

FY

20

2Q

FY

20

3Q

FY

20

4Q

FY

20

1Q

FY

21

2Q

FY

21

Domestic Exports Total

66% 69% 70% 75% 75% 74% 75% 76% 75% 65%

34% 31% 30% 25% 25% 26% 25% 24% 25% 35%

16.2 16.9 15.1

12.8 11.3 11.7

14.8

6.3

0.6

16.5

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

1Q

FY

19

2Q

FY

19

3Q

FY

19

4Q

FY

19

1Q

FY

20

2Q

FY

20

3Q

FY

20

4Q

FY

20

1Q

FY

21

2Q

FY

21

Domestic Exports EBIDTA % - RHS

PowerGen,

35%

Industrial,

23%

Distribution

, 43%

PowerGen,

32%

Industrial,

23%

Distribution

, 45%

Page | 5


2QFY21 Domestic PowerGen Split (%) 1HFY21 Domestic PowerGen Split (%)

Source: Company Source: Company Calculations

2QFY21 Exports Split (%) 2QFY21 Domestic Industrial Split (%)

Source: Company Source: Company

Few of the Other Key Issues

Efforts to protect EBITDA margin amidst unfavourable operating environment: While the recovery across market segments has gradually ramped

up to 80%, the focus is on cost curtailment until the time economic growth

remains elusive. Cummins has a concept called ‘Rings of Defence’, where it has

identified every line item of cost, and efforts are underway to bring down both

fixed and variable costs, starting with a leaner workforce.

Electronification of engines: As emission norms become even tighter, mechanical pumps will be eventually phased out by electronic pumps. These

pumps have a CPU for electronic fuel injection and other minute controls.

Engines based on this technology will have higher margins, and Cummins has

incurred much investment in this regard, which makes it better-placed than

competitors. With overall R&D expenditure of USD 1bn for the group, Cummins

India incurred Rs 1.9bn during CY19.

The monetisation of real estate: The company believes it has an overall yield of >7% for its real estate assets not deployed for manufacturing, which is higher

than FD returns. However, the company acknowledges that a manufacturing

company has no business in dealing with RE. It is in this position, as at the start

of the decade it anticipated double-digit growth for years to come and build

capacity before demand and is now having to lease out excess land.

Underperformance in low HP segment due to higher pricing: Competition is higher in this segment as companies with spare capacity or inventory, like those

supplying to tractors, can get rid of inventory by bringing down prices. Again,

Cummins believes that with more electronification of engines, this competition

will go down.

Low kVa ,

12%

Mid Range,

26%

Heavy

Duty, 21%

HHP, 41%

Low kVa ,

12%

Mid Range,

25%

Heavy

Duty, 19%

HHP, 44%

HHP, 58%

LHP, 42%

Marine /

Miscelleneous

, 12%

Mining, 14%

Construction,

27%

Compressor,

16%

Railways,

13%

Page | 6


Business Units

The Engine Business manufactures engines from 60 HP for low, medium and heavy-duty on-highway commercial vehicle markets and off-highway

commercial equipment industry spanning Construction and compressor.

The Power Systems Business designs and manufactures high horsepower engines from 700 HP to 4,500 HP for marine, railways, defence and mining

applications as well as power generation systems, comprising integrated

generator sets in the range of 7.5 kVA to 3,750 kVA, including transfer switches,

paralleling switchgear, and controls for use in standby, prime and continuous

rated systems.

The Distribution Business provides products, packages, services and solutions for uptime of Cummins equipment. Through its countrywide network of over

120 dealership branch offices and 450 service touchpoints, the business provides

parts, new and rebuilt engines, batteries, services and customer support solutions

to products manufactured by Cummins. This network offers a strong team of

more than 3,500 company trained engineers and technicians who handle service

events of 5,25,000 engines on the field, serving over 2,00,000 customers across

various markets in India, Nepal and Bhutan in off-highway segments.

FY20 Management Discussion & Analysis Highlights

PowerGen

The Power Generation business has achieved volumes of nearly 22,000 generator sets in FY 2019-20, providing nearly 4,000 MW of back-up power to customers

across India.

Enhanced digital controls technology introducing Master Less Load Demand (MLD) feature with High- Horsepower Genset controllers has been developed for

the ease of customers.

In low horsepower, a 40kVA product with a reduced footprint (~15%) and height (~3%) has been developed – optimising the total cost of ownership of the product

for the customers.

Appointment of eight new dealerships across the country.

The first 95L product sale and installation were successfully executed in the Indian market for the fertiliser manufacturing plants of a prestigious public

sector entity.

Industrial

Railways, Mining, Marine, O&G pumps, and Construction.

Industrial projects business across rail, mining, marine, oil & gas, pumps and defence segments witnessed healthy growth in FY 2019-20.

The rail segment reported strong growth in FY 2019-20 on the back of integrated solutions in the Diesel Electric Tower Car segment and offerings in the Power Car

segment.

The Construction segment reported de-growth in FY 2019-20 due to decline in demand from earthmoving equipment and road machinery industry.

Developed QSN14 engine for multi-purpose tamping machines application, which is used for maintenance of railway tracks.

Developed and delivered power cars equipped with Remote Monitoring System (RMS). RMS would help the Railways in real-time monitoring of the condition of

the power car DA sets.

Formed in 1962, the largest

entity of Cummins in

India, Cummins India

Limited is the country’s

leading manufacturer of

diesel and natural gas

engines. One of the seven

legal entities of the

Cummins Group in India,

Cummins India Limited

comprises three business

units - Engine, Power

Systems, and Distribution

Rapid urbanization,

infrastructure development

and need for power

assurance for all will

continue to drive the

demand for power back-up

solutions

Government’s significant

emphasis on key segments

data centre, healthcare,

infrastructure and

commercial realty

Page | 7


Supplied its VTA28 engine to Central Railways for powering the locomotive (ZDM-3) of the narrow-gauge heritage train, which operates in the Kangra valley

terrain between Kalka and Shimla.

Successfully entered into the high tonnage dump truck market by supplying QSK50 and QSK60 engines for indigenously manufactured dump trucks.

Begun supplying power packs for stone crusher application, thus entering into a new market segment.

There is growing acceptance from key Off-Highway partners in India for Cummins new 4- and 6-cylinder engine offerings.

Supported the production plans of Indian Railways with record shipments of power car (327 sets) and DETC (137 sets) to various rail factories along with

installation and commissioning (I&C) of 910 engines.

Secured the order from a major shipyard in the country for supply of 800 kWe DG sets for Indian Navy Survey Vessels (4 shipsets).

Looking to leverage the growth in the electrical equipment market by exploring new opportunities in EMUs, MEMUs, train sets and auxiliary power for

locomotives.

Aims to maintain market leadership in the compression gas engines market with product improvements and further grow the market share in the City Gas

Distribution market. Plans to expand its presence in the fishing boat market.

Continues to invest in new technologies in the mining segment for higher capacity equipment and emission regulations.

Distribution

Focus on sub-segments like Data Centres, IT/ITES, Pharma, etc. where customers’ willingness to pay is high.

Witnessed growth in New Engines business by focusing on the Distributor OEMs and reintroducing Gas engines as a product for Automotive Bus segment.

Focused on increasing engagement with OEMs and supplied customised batteries to OEMs for the first time.

To bolster growth, CIL introduced new products such as clutches, coolants, DEF and batteries for E-rickshaw for the On-Highway market.

Exports

Low Horsepower Power Generation business witnessed sluggish growth in the markets and increased competitive pressure.

Company has launched KTA19-G4; 18.9 Litre displacement 6-cylinder Diesel Engine for specific Power Generation markets with ratings of 550kVA/500k.

CIL launched Low kVA products that are RoHS (Restriction of Hazardous Substances) compliant for Europe and other markets.

Successfully shipped newly launched KTA19 G-drive to Africa & Middle East markets. The product delivers an efficient solution and enhanced derating

performance through a simple mechanical design for PowerGen customers.

Recently showcased QSB7 Fit for Market (FFM) Genset at the Middle East Energy Show, Dubai. The product offers a fully integrated system with compact footprint

allowing lower shipping and logistics cost.

CIL is experiencing high demand from Data Centre market and is well-positioned to meet the same.

Committed to strengthen

its position as technology

leader and partner with

major equipment

manufacturers for their

new product launches for

the BSIV CEV

(Construction Equipment

vehicle) and CEMM

(Construction,

Earthmoving, Material

Handling and Mining

Equipment) emission

norms changes

Shipped prototype engines,

for the upcoming BS IV

emission norms in Off-

highway segment, to

multiple OEMs and for

multiple applications

Page | 8


Cummins’ presence in India

Source: Company AGM Presentation

Subsidiary company: Cummins Sales & Services Private Limited

Associate companies: Valvoline Cummins Private Limited (50%) and Cummins Generator Technologies India Private Limited (48.5%).

Other sister concerns: Cummins Technologies India Pvt Ltd (CTIL), Fleetguard Filters Pvt Ltd and Tata Cummins Pvt Ltd.

CIL’s growth strategy

Source: Company AGM Presentation

Cummins India Facilities:

5 factories,

1 parts distribution center,

450+ service touch points

DG sets Generator

Original Equipment

Manufacturers (GOEMs) –

Sudhir, Jacksons, Greaves

Power, Mahindra

Powersol, TMTL/Eicher,

JCB

End-to-end manufacturers

- Kirloskar Oil Engines

Limited, Ashok Leyland

Limited, Greaves Cotton

Limited, VE Commercial

Vehicles Limited,

Mahindra Powerol Ltd.,

Cummins India Ltd., and

Caterpillar Inc

Page | 9


Yearly trends in charts

Yearly revenue trend (Rs bn)


Revenue split (%)


Margins and return ratios (%)


Product launches during

the FY20 include – 40KVA

Genset, KTA 19 engines

and RoHS compliant low

KVA products

Cummins India serves

customers globally as well

as feeds into other group

factories

The PowerGen segment has

been going through a

softening cycle since the

peak of FY2019, and will

soften further. Exports too

are facing headwinds

Distribution business

continues to grow and will

be the first to recover from

COVID, as service and

repair requirements are

higher in absence of fresh

Capex for clients

Margins as well as return

ratios have been trending

lower over the past five

years due to slowing

growth in both domestic

and export markets.

68% 64% 67% 66% 57% 61% 64%67% 69% 73% 72% 72% 72%

26% 28% 28% 31% 39% 35% 32%31% 29%

25% 26% 26% 26%

6% 8% 5% 3% 4% 4% 4% 3% 2% 2% 2% 2% 2%

0%

20%

40%

60%

80%

100%

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

E

FY

22

E

FY

23

E

Domestic (A) Exports (B) Other Operating Revenue (C )

21.1

27.3

22.620.3

16.9 17.8

15.6

12.1

14.316.8

21.3 22.619.9 19.3

18.019.3

14.212.1

16.220.3

15.916.7 16.5 15.8

14.415.3

11.412.3

13.715.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

E

FY

22

E

FY

23

E

RoE % (LHS) Core RoCE % (LHS) EBIDTA % (RHS)

Page | 10


Other Income as % of Total Income


Healthy FCFE and High Dividend Payout

INR Mn FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

CFO 4,979 6,918 7,456 6,344 5,500 5,990 4,265 7,450 6,507

(-) Capex (3,304) (4,899) (2,315) (905) (2,734) (2,366) (850) (1,300) (1,550)

(-) Interest (13) (9) (90) (100) (121) (154) (172) (181) (190)

(+) Non-operating & EO items 2,229 1,431 1,147 1,634 1,367 1,847 1,370 894 1,064

(+) Net debt increase - - 2,508 8 576 1,726 - - -

FCFE 3,892 3,441 8,705 6,981 4,588 7,042 4,613 6,863 5,831

EBIDTA 7,351 7,751 8,018 7,325 8,641 5,863 5,436 6,908 8,592

FCFE/EBIDTA 52.94 44.40 108.57 95.30 53.10 120.12 84.86 99.35 67.86

Dividend Payout 3,604 4,669 4,663 4,639 5,641 5,681 4,435 4,712 4,990

Dividend Payout % RPAT 45.86 61.90 63.48 65.57 78.07 90.13 92.08 77.08 66.40

Dividend Yield (%) 3.2 3.2 3.2 3.4 3.9 3.2 3.7 3.9 4.1


Domestic Split (Rs bn) Exports Split (Rs bn)

Source: Company, HSIE Research Source: Company, HSIE Research

Other income’s share in

total income has risen over

the years due to income

from real estate, dividend

income, FDs and liquid

MFs

Healthy CFO and

moderate capex

requirements have allowed

the company to maintain

high dividend payout

ratios.

2.91%

4.31%

4.36%

6.11%

4.58%

3.94%

4.30%

4.92%

6.04% 5.69%

5.17%

5.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

E

FY

22

E

FY

23

E

14.0 13.3 16.8

10.8 10.3 12.3 14.0 13.8 15.9 14.6 12.2 13.8

15.8

5.5 5.4 5.1

5.2 5.1 5.5

6.9 7.6 9.4 9.8

8.3 9.5

11.0 7.4 7.6

8.9

9.9 9.8 10.7

11.7 12.4

13.5 13.4

11.4 13.1

14.2 26.9 26.3

30.8

25.9 25.2 28.5

32.6 33.8

38.8 37.8

31.9

36.4

41.0

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

E

FY

22

E

FY

23

E

PowerGen IndustrialDistribution Domestic (A)

7.7 8.5 6.9 7.4 7.8 8.0 7.3 6.2 7.1 8.1

3.8

8.2 8.9 7.7 6.7 7.3

4.8 4.1

4.7 5.3

0.5

0.6 0.7 0.9 1.2 1.2

0.8 0.7

0.8 0.9 12.0

17.2 16.6 16.0 15.7 16.5

12.9 11.4

13.1

15.2

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21

E

FY

22

E

FY

23

E

HHP LHP Spares Exports (B)

Page | 11


Outlook and Valuation

We initiate Cummins with a BUY and SOTP of 540.

We have adopted SOTP based valuation methodology to arrive at CIL fair valuation. Standalone CIL is valued at 20x Dec-22E EPS this is 20% discount to

long term average multiple of 25x. For arriving at the core EPS for standalone

business we have excluded (1) rental income (2) dividend from JV. The PBT of

core CIL includes long term recurring treasury income net of interest expense.

Post taxation of 25.17% we come to core EPS for the CIL standalone business. We

have valued CIL standalone at Rs 401/sh.

For the Valvoline Cummins JV we have projected the FY21/22/23E profit and for CIL share of 50% in the JV we have ascribed 20x Dec-22E EPS valuation in line

with other listed lubricants companies. For 50% stake we have valued CIL stake

at Rs 65/sh.

Cummins generator business is valued in line with CIL multiple at 20x Dec-22EPS. For CIL share of 48.5% we have valued the stake at Rs 34/sh.

Rental income we have assumed (net operating income) NOI at 80% of rental and ascribed a cap rate of 10% (vs 7.5% of listed REITs, due to single standalone

property). We value the assets at Rs 41/sh.

Based on the valuation of Standalone and JV/Rentals we arrive at Rs 540/sh SOTP for CIL. (implied P/E of 19.1x consolidated Dec-22E profits).

Valuation summary

Entity Valuation

Methodology

Mulitple

(x)

Stake

(%)

Core

EPS

(Rs/sh)

Core EPS

- CIL

Share

(Rs)

Value/Share

(Rs) Comment

Cummins India

Standalone P/E 20 100 20.0 20.0 401

At 25% discount to

long term average

PE of 25x

Valvoline

Cummins JV P/E 20 50 6.5 3.3 65

In line with

lubricants target PE

Cummins

Generator

Technologies

P/E 20 48.5 3.5 1.7 34 Inline with CIL

multiple

Rental Income

Captive Cap Rate

100

41

NOI at 80% of rental

and 10% cap rate

SOTP - (Rs/Sh)

540

Source: HSIE Research

Cummins India Standalone PE Band

Source: Company

-

5

10

15

20

25

30

35

40

45

Ap

r-1

1

Oct

-11

Ap

r-1

2

Oct

-12

Ap

r-1

3

Oct

-13

Ap

r-1

4

Oct

-14

Ap

r-1

5

Oct

-15

Ap

r-1

6

Oct

-16

Ap

r-1

7

Oct

-17

Ap

r-1

8

Oct

-18

Ap

r-1

9

Oct

-19

Ap

r-2

0

Oct

-20

PER 10 year avg +1 SD -1 SD

Page | 12


Key assumptions & estimates Sector Revenues

(Rs mn) FY20 FY21E FY22E FY23E Comments

Distribution & others 13,616 11,424 13,138 14,189

Distribution business on CIL installed base is relatively well

placed in pandemic. Any deferrals on capex will lead to higher

demand for opex and spare parts of existing CIL installation.

Whilst the competition was struggling to service client

installations CIL through use of tech was able to create value

add

% growth/(de-growth) 1.2 (16.1) 15.0 8.0 Higher growth over FY21-23E on lower FY20 base which was

partly impacted by lockdown

% Revenue 26.4 25.9 26.0 24.8 25-26% contribution to revenue mix

Industrial 9,750 8,288 9,531 10,960

Construction ordering has picked up significantly FYTD21, High

speed rail orders, metro , NHAI etc. With unlocks Railways run

frequency shall also increase alongside Metro. Mining

privatization and Coal India own expansion augurs well. Marine

and defence may also see uptick over next 2-3yrs. Good

monsoon should also help compressors sale. Stricter emission

CEV BSIV/CPCB IV+ norms also a catalyst

% growth/(de-growth) 3.9 (15.0) 15.0 15.0 Higher growth over FY21-23E on lower FY20 base which was

partly impacted by lockdown

% Revenue 18.9 18.8 18.9 19.2

Power 14,340 12,189 13,774 15,840

While hospitals, Data centers, Pharma and Telecom 5G are key

drivers in the mid to long term, gradual recovery is also

happening in residential and commercial real estate. Hospitality

may see late cycle recovery. CPCB IV+ norms shall aid growth of

new product lines with electric engine at better pricing power

% growth/(de-growth) (9.9) (15.0) 13.0 15.0

% Revenue 27.8 27.7 27.3 27.7

Total domestic

revenues 37,706 31,901 36,442 40,988

% growth/(de-growth) (2.7) (15.4) 14.2 12.5

% Revenue 73.1 72.4 72.2 71.6

Exports 12,910 11,361 13,065 15,155

Exports have been muted due to heightened competitive

intensity in the LHP segment, country specific issues and lower

crude prices. With the newer product line with stringent

emissions compliance, CIL may stand to gain back lost market

share. With new KTA19/QSK50 engines products wallet share to

parents requirement will also increased Exports in mix

% growth/(de-growth) (21.9) (12.0) 15.0 16.0

% Revenue 25.0 25.8 25.9 26.5

Other operating income 961 822 940 1,066

Total net revenues 51,577 44,083 50,447 57,210

FY22E is more of FY20 levels and FY23 may be better at FY19

levels. Overall growth directionally will be a derivative of

cyclical growth rebound, IIP pick up, Real estate recovery and

new cleaner tech on CPCB IV+ with better pricing and growth

opportunity

% growth/(de-growth) (8.9) (14.5) 14.4 13.4

Source: HSIE Research

Page | 13


Key Risks

PowerGen - The domestic PowerGen market is highly competitive with local players expanding the current portfolio and international players gaining market

share. This may lead to an increase in competitive intensity.

Industrials – Railways modernisation from diesel to electric will transform demand for power generation product. Head on Generation will lead to a

reduction in the power cars requirement from 2 to 1. Short to medium distance

intercity transport will gradually get shifted to mainline electric multiple units

(MEMU) from diesel-electric multiple units (DEMU). Mining segment’s 100%

FDI may result in increased imports by private operators. Construction demand

may be muted in the near term or demand may be lower on the transition from

current mechanical highly polluting platform to cleaner emissions electric

platforms.

Distribution – Environment concerns may lead to opposition/ban of polluting PowerGen sets. Better grid availability may result in lower utilisation and

servicing needs of the installed base. Railways focus on electrification and

adoption of head-on Generation may result in lower utilisation and serving needs

of diesel power cars. Competition from global OEMs and multichannel spare

parts suppliers may result in increased competitive intensity.

Exports – Economic slowdown, rising geopolitical tensions, increased protectionism, and currency fluctuations may result in volatile exports demand.

Lower crude prices may impact demand in the Middle East and Africa. Stringent

emissions norms in countries like China may result in lower demand for HHP

PowerGen engines and will require investments in new engines. Global OEMs, as

well as genset assemblers, are driving increased competition in exports markets.

Page | 14


Financials Standalone Income Statement Year ending March (Rs mn) FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Net Revenues 47,088 50,773 50,825 56,590 51,577 44,083 50,447 57,210

Growth (%) 6.9 7.8 0.1 11.3 (8.9) (14.5) 14.4 13.4

Material Expenses 29,622 32,745 32,581 36,135 33,679 28,336 32,377 36,774

Employee Expenses 4,156 4,334 4,979 5,458 5,602 4,942 4,913 4,909

Other Operating Expenses 5,559 5,677 5,940 6,356 6,434 5,369 6,248 6,935

EBIDTA 7,751 8,018 7,325 8,641 5,863 5,436 6,908 8,592

EBIDTA (%) 16.5 15.8 14.4 15.3 11.4 12.3 13.7 15.0

EBIDTA Growth (%) 5.4 3.4 (8.7) 18.0 (32.2) (7.3) 27.1 24.4

Depreciation 810 848 938 1,103 1,187 1,246 1,308 1,374

EBIT 6,941 7,170 6,387 7,538 4,676 4,190 5,600 7,218

Other Income (Incl. EO Items) 2,259 2,080 2,836 2,928 3,127 2,419 2,751 3,014

Interest 96 168 148 162 203 172 181 190

PBT 9,104 9,082 9,074 10,304 7,601 6,437 8,170 10,043

Tax 1,561 1,736 2,000 3,078 1,297 1,620 2,056 2,528

RPAT 7,543 7,346 7,075 7,226 6,303 4,817 6,114 7,515

EO items (net of tax) - - 551 - (189) (239) - -

APAT 7,543 7,346 6,524 7,226 6,492 5,056 6,114 7,515

APAT Growth (%) (4.0) (2.6) (11.2) 10.8 (10.2) (22.1) 20.9 22.9

EPS 27.2 26.5 23.5 26.1 23.4 18.2 22.1 27.1

EPS Growth (%) (4.0) (2.6) (11.2) 10.8 (10.2) (22.1) 20.9 22.9


Standalone Balance Sheet As at March (Rs mn) FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

SOURCES OF FUNDS

Share Capital 554 554 554 554 554 554 554 554

Reserves 34,259 36,867 39,306 40,750 41,195 41,577 42,978 45,504

Total Shareholders Funds 34,813 37,421 39,861 41,305 41,750 42,131 43,533 46,058

Minority Interest

Long Term Debt - - - - - - - -

Short Term Debt 0 2,508 2,515 3,092 4,854 4,854 4,854 4,854

Total Debt 0 2,508 2,515 3,092 4,854 4,854 4,854 4,854

Other Non Current Liabilities 1,021 887 734 1,015 1,439 1,439 1,439 1,439

Deferred Taxes (604) 24 299 988 800 800 800 800

TOTAL SOURCES OF FUNDS 35,230 40,840 43,409 46,399 48,843 49,225 50,626 53,151

APPLICATION OF FUNDS

Net Block 12,818 12,240 12,828 12,823 12,258 12,208 12,558 13,098

CWIP 5,192 4,631 380 1,585 800 850 900 950

Intangible Assets 75 82 54 25 19 8 - -

Other Non Current Assets 374 3,052 7,738 7,706 10,792 10,792 10,792 10,792

Total Non-current Assets 18,460 20,006 20,999 22,139 23,869 23,858 24,250 24,840

Inventories 6,003 5,621 5,375 6,254 5,729 6,211 5,322 6,045

Debtors 9,381 9,557 13,263 12,727 11,316 11,260 10,851 12,305

Cash & bank balances 4,235 8,447 9,769 9,807 12,353 12,247 14,181 14,794

ST Loans & Advances 1,287 1,287 1,287 - - - - -

Other Assets 4,808 5,493 4,621 7,610 6,274 6,337 6,780 7,255

Total Current Assets 25,713 30,403 34,314 36,397 35,672 36,054 37,134 40,399

Creditors 7,170 7,470 9,819 9,846 8,652 8,540 8,427 9,571

Other Current Liabilities & Provns 1,773 2,099 2,084 2,291 2,046 2,046 2,046 2,046

Total Current Liabilities 8,943 9,568 11,903 12,137 10,698 10,585 10,473 11,617

Net Current Assets 16,770 20,835 22,410 24,260 24,974 25,469 26,661 28,782

Misc Expenses & Others

(102) (285) (471)

TOTAL APPLICATION OF FUNDS 35,230 40,841 43,409 46,399 48,843 49,225 50,626 53,151


Page | 15


Standalone Cash Flow Year ending March (Rs mn) FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

PBT 9,104 9,082 9,084 10,304 7,601 6,437 8,170 10,043

Non-operating & EO items (1,431) (1,147) (1,634) (1,367) (1,847) (1,370) (894) (1,064)

Interest expenses 96 168 148 162 203 172 181 190

Depreciation 810 848 938 1,103 1,187 1,246 1,308 1,374

Working Capital Change 33 371 (370) (2,341) 144 (600) 741 (1,508)

Tax paid (1,694) (1,867) (1,823) (2,361) (1,297) (1,620) (2,056) (2,528)

OPERATING CASH FLOW ( a ) 6,918 7,456 6,344 5,500 5,990 4,265 7,450 6,507

Capex (4,899) (2,315) (905) (2,734) (2,366) (850) (1,300) (1,550)

Free cash flow (FCF) 2,019 5,141 5,440 2,766 3,623 3,415 6,150 4,957

Investments 1,339 (3,655) (1,518) 670 (1,163) 1,000 - -

Non operating income 1,439 1,110 1,095 2,233 1,395 1,163 677 836

INVESTING CASH FLOW ( b ) (2,121) (4,860) (1,327) 169 (2,135) 1,313 (623) (714)

Share capital Issuance 0 - - - - - - -

Debt Issuance - 2,508 8 576 1,726 - - -

Dividend Payment (4,669) (4,663) (4,639) (5,641) (5,681) (4,435) (4,712) (4,990)

Others - - - (40)

Interest expenses (9) (90) (100) (121) (154) (172) (181) (190)

FINANCING CASH FLOW ( c ) (4,677) (2,245) (4,731) (5,226) (4,109) (4,607) (4,893) (5,179)

NET CASH FLOW (a+b+c) 120 350 285 443 (254) 971 1,934 613

Key Ratios

FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

PROFITABILITY (%)

GPM 37.1 35.5 35.9 36.1 34.7 35.7 35.8 35.7

EBITDA Margin 16.5 15.8 14.4 15.3 11.4 12.3 13.7 15.0

EBIT Margin 14.7 14.1 12.6 13.3 9.1 9.5 11.1 12.6

APAT Margin 16.0 14.5 12.8 12.8 12.6 11.5 12.1 13.1

RoE 22.6 20.3 16.9 17.8 15.6 12.1 14.3 16.8

Core RoCE 19.9 19.3 18.0 19.3 14.2 12.1 16.2 20.3

RoCE 22.8 20.0 16.1 16.9 14.6 11.1 13.1 15.4

EFFICIENCY

Tax Rate (%) 17.1 19.1 22.0 29.9 17.1 25.2 25.2 25.2

Asset Turnover (x) 2.5 2.6 2.6 2.7 2.4 2.2 2.4 2.5

Inventory (days) 47 40 39 40 41 51 39 39

Debtors (days) 73 69 95 82 80 93 79 79

Other Current Assets (days) 47 49 42 49 44 52 49 46

Payables (days) 56 54 71 64 61 71 61 61

Other Current Liab (days) 14 15 15 15 14 17 15 13

Net Working Capital Cycle (Days) 97 89 91 93 89 109 90 89

Debt/EBITDA (x) 0.0 0.3 0.3 0.4 0.8 0.9 0.7 0.6

Net D/E -0.1 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2

Interest Coverage 72.5 42.7 43.1 46.5 23.1 24.3 31.0 38.0

PER SHARE DATA

EPS (Rs/sh) 27.2 26.5 23.5 26.1 23.4 18.2 22.1 27.1

CEPS (Rs/sh) 30.1 29.6 26.9 30.0 27.7 22.7 26.8 32.1

DPS (Rs/sh) 14.0 14.0 15.0 17.0 14.0 16.0 17.0 18.0

BV (Rs/sh) 125.6 135.0 143.8 149.0 150.6 152.0 157.0 166.2

VALUATION

P/E 16.2 16.7 18.8 17.0 18.9 24.2 20.0 16.3

P/BV 3.5 3.3 3.1 3.0 2.9 2.9 2.8 2.7

EV/EBITDA 15.3 14.5 15.7 13.4 19.6 21.2 16.4 13.1

OCF/EV (%) 5.8 6.4 5.5 4.7 5.2 3.7 6.6 5.8

FCF/EV (%) 1.7 4.4 4.7 2.4 3.2 3.0 5.4 4.4

FCFE/Market Cap (%) 1.6 6.2 4.4 2.7 4.4 2.8 5.0 4.0

Dividend Yield (%) 3.2 3.2 3.4 3.8 3.2 3.6 3.8 4.1


Page | 16


Rating Criteria

BUY: >+15% return potential

ADD: +5% to +15% return potential

REDUCE: -10% to +5% return potential

SELL: > 10% Downside return potential

RECOMMENDATION HISTORY

200

300

400

500

600

No

v-1

9

Dec

-19

Jan

-20

Feb

-20

Ma

r-2

0

Ap

r-2

0

Ma

y-2

0

Jun

-20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Cummins TPDate CMP Reco Target

6-Nov-20 454 BUY 540

Page | 17


HDFC securities

Institutional Equities

Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park,

Senapati Bapat Marg, Lower Parel,Mumbai - 400 013

Board : +91-22-6171 7330 www.hdfcsec.com

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publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in

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Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC

Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication

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Any holding in stock –No

HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475.

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