22 December 2011 Update | Sector: Capital Goods

Cummins India
BSE SENSEX S&P CNX

15,685

4,693

CMP: INR326

TP: INR406

Buy

Domestic sales moderates; outlook for exports encouraging
Expect margin recovery to drive up FY13 earnings; Buy

Bloomberg Equity Shares (m) 52-Week Range (INR) 1,6,12 Rel. Perf. (%) M.Cap. (INR b) M.Cap. (USD b)

KKC IN 277.2 571/322 -1/-21/-18 90.4 1.7

 

In our recent meeting, the management sounded cautious due to subdued demand in the domestic market. However, impact of the slowdown on Cummins India will be moderate given its diversified business mix . The outlook for exports remains encouraging. The parent, which has identified India as a key outsourcing destination, sees good growth in CY12 and has maintained its CY15 revenue target. After bottoming out in 3QFY12, we expect margins to pick up in FY13, led by better product mix and likely correction in raw material prices. The stock trades at 17x FY12E earnings. We maintain Buy.

Y/E March

2011 2012E 2013E 47.3 8.7 6.3 22.6 18.5 72.5 14.4 4.5 9.6 1.8 32.3 32.0

Net Sales (INR b) 40.6 42.7 EBITDA (INR b) 7.8 7.1 NP (INR b) 5.9 5.3 EPS (INR) 21.3 19.1 EPS Gr. (%) 33.1 -10.6 BV/Sh. (INR) 64.5 67.5 P/E (x) 15.3 17.1 P/BV (x) 5.1 4.8 EV/EBITDA (x) 10.6 11.6 EV/Sales (x) 2.0 1.9 RoE (%) 35.5 28.9 RoCE (%) 35.3 28.7

Domestic demand muted, but sales unlikely to drop sharply: The demand environment in the domestic market continues to be muted, though secondary sales have picked up in recent months. Growth across end-user markets has moderated, as buyers have postponed capex due to sluggish business environment and high interest rates. We believe, however, that Cummins India (KKC) will not see a sharp drop in domestic sales in FY13 even if the slowdown persists, given its diversified product mix and relatively lower dependence on Infrastructure-related sectors. Outlook for exports encouraging; parent sees good growth in CY12: Outlook for export sales remains encouraging. Cummins Inc has maintained its USD30b revenue target for CY15, as against USD18b in CY11. It has identified India as a key outsourcing destination for its global markets. Bulk of KKC's exports is for Power Generation applications; it supplies K and N series engines of various displacements like 28 liters, 38 liters and 50 liters. HHP engines (with a rating of >500kVA) constitute ~70% of KKC's exports. KKC is also setting up an export-oriented unit of small gensets (<200kVA), with an eventual capacity of 40,000 units per annum. The plant will start production by FY14 and provide significant upside to exports. EBITDA margin to remain under pressure in 2HFY12; expect recovery in FY13: KKC's EBITDA margin has been impacted by three key factors: (1) higher pig iron prices, (2) declining share of HHP engines in overall sales mix, and (3) high share of exports. We believe that adverse revenue mix will persist for the remainder of FY12 due to moderate growth in HHP power generation engines. We expect EBITDA margin to decline from 20% in FY10 to 16.5% in FY12. We believe that margins will pick up in FY13, led by better product mix, likely correction in raw material prices and favorable impact of price increases / cost cutting initiatives. Valuation and view: We have cut FY13 earnings by 8% and now expect KKC to clock revenue and PAT CAGR of 8% and 3%, respectively over FY11-13. EBITDA margin is likely to expand to 18.4% in FY13 after dipping to 16.6% in FY12. The stock trades at 17x FY12E earnings, at par with its 5-year average P/E. Over the years, the stock got re-rated due to significant improvement in domestic revenue visibility and its parent's increasing thrust on outsourcing from India. Fundamental earnings drivers remain intact and will continue to drive KKC's growth in the long term. We maintain Buy, with a target price of INR406 (18x FY13E earnings).

Shareholding pattern % (Sep-11)
Others, 15.7

Foreign, 11.4

Domestic Inst,21.9

Promoter 51.0

Stock performance (1 year)
Cummins India Sensex - Rebased 600 525 450 375 300 Dec-10 Apr-11 Aug-11 Dec-11

Dhirendra Tiwari (Dhirendra.Tiwari@MotilalOswal.com); Tel: +91 22 3029 5127 Deepak Narnolia (Deepak.Narnolia@MotilalOswal.com); Tel: +91 22 3029 5126

Cummins India

Domestic demand muted, but sales unlikely to drop sharply
Diversified sales mix to limit downside; management maintains long-term guidance

The demand environment in the domestic market continues to be muted, though secondary sales have picked up in recent months. Growth across end-user markets has moderated, as buyers have postponed capex due to sluggish business environment and high interest rates. We believe, however, that KKC will not see a sharp drop in domestic sales in FY13 even if the slowdown persists, given its diversified product mix and relatively lower dependence on Infrastructure-related sectors and large industries. Though the management has reduced its domestic sales growth guidance for FY12 to 5-10%, it maintains its long-term guidance of high-teen growth.

Company has recently reduced its domestic sales growth guidance for FY12 to 5-10% from 10-15% earlier, while maintaining its longterm guidance of high-teen (around 20%) growth

Domestic sales have slowed down… Domestic sales, which accounted for 73% of FY11 revenue, have slowed down considerably in the last two quarters, largely due to slowdown in the Power Generation segment. Growth in Commercial Realty, Infrastructure, Banking and Telecom has moderated to 5-6%, while Auto, Retail/IT and Hospitality continue to perform well, registering 8-10% growth. The Telecom segment, though small, is now showing a declining trend – down 15% YoY against a growth of 25% earlier. The Industrials segment also slowed down due to cyclical downturn in the Water Well Rigs segment (25% of Industrials segment), which is likely to drop by 50% in FY12. However, other sub-segments like Construction, Mining, Drills and Portable Compressors should see healthy growth of 10-15%. …but a sharp decline is unlikely; long-tem outlook positive The management views the moderation in growth during FY12 as a short-term phenomenon. It has reduced its domestic sales growth guidance for FY12 to 5-10% from 10-15% at the beginning of the year due to demand slowdown resulting from high interest rates and rising inflation. However, it maintains its long-term guidance of high-teen (around 20%) growth.
Domestic sales flat in 1HFY12
Domestic (INR m) 5,320 5,444 7,598 Grow th (%, YoY) 7,915 7,793

4,448

4,130

4,445

7,409

6,940

61 15 1QFY09 21 2QFY09 8 3QFY09 4QFY09

29

67 22 -22 30

5,904

45 -6

6,934

32

7,495 8 1QFY12

-5 2QFY12

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

Source: Company/MOSL 22 December 2011

4QFY11

7,519

2

led by IT. Other Services.2 23. rated 750kVA to 2.8%.2% and the HHP market a CAGR of 9. the MHP market is likely to post a CAGR of 6.0 15.1-2. with 19MW of gas-based power generation projects under execution.898 20.4 FY12E FY09 FY10 FY11 FY04 FY05 FY06 FY07 FY08 Source: Company/MOSL Demand in 1HFY12 has weakened.255 Revenue (million) 12. the size of the Indian DG set market (for DG sets rated 15kVA to 2. especially in high HP segment 1.6 25. Power Generation sales grew 29%. Power Generation: Broad-based demand to mitigate risk of decline in sales In FY11. During FY12. due to postponement of purchases by customers. We believe KKC’s domestic Power segment sales will continue to witness strong growth due to broad-based nature of demand. ITES and healthcare industries. will see limited impact of slowdown in economy Indian genset market (375-2.255 units.000 kVA) by revenues Others 25% Healthcare 12% IT/ITES 31% Industries 32% Source: Company 22 December 2011 3 .000kVA) is 153.8 31.6 8.5 12. Demand continues to be broad-based – IT/ITES.3 8.000 Total Units 5.4% and the HHP segment for 12% of India’s total DG set market.3 FY13E Revenue Grow th (%) 8.000kVA) DG sets is 6. with overall revenue of INR66b (FY10).1-750 750. The size of the domestic market for medium horsepower (MHP.220 1.035 6.2 9.5 29. Demand for nearly 70% of Cummins' powergen engines comes from a host of services sectors. this segment saw recovery in gasbased gensets.745 7. While the domestic DG set industry is likely to grow at a CAGR of 10% over FY10-15.4 16. with overall revenue of INR22b (1/3rd of the total market). Healthcare.642 Source: Powerica DRHP In FY10. the MHP segment accounted for 19.6 34.3 20.4 7.6 9.Cummins India Domestic sales: Expect moderate growth in FY12 and FY13 Domestic Sales (INR b) 32. Size of domestic MHP/HHP DG set market kVA Range 375. despite negative sales growth in the low horsepower (LHP) Telecom segment. Demand has been muted in 1HFY12.6 29. and Manufacturing. According to Powerica’s DRHP.1 12.8 23.1 18. rated 375kVA to 750kVA) and high horsepower (HHP.305 units.

which has been growing at a good pace. Our belief stems from the following: Cummins' strategy of introducing innovative products and strong focus on distribution has helped the company grow its market share over years  New product programs and ‘fit for market’ solutions: New product programs and ‘fit for market’ strategy has helped KKC to increase its market share despite stiff competition. which will help the company to sustain its market share. It has a market share of over 70% in the HHP segment. It reported robust performance across all lines of business with a growth of 14% YoY in FY11. 30-40% in the MHP segment and ~15% in the LHP segment. further.Cummins India Impressive product mix. and creating high service standards have given KKC a competitive advantage over peers. KKC has maintained leadership despite intense competition and we believe that it can increase its market share. Cummins' powergen range Source: Company 22 December 2011 4 . KKC has achieved significant improvements in profitability across its operations in this segment through stringent cost control measures. It has gained market share in this segment by providing unique solutions to customers. The company launched many new products and redesigned existing ones to make them fit for market requirements.  New emission norms: All diesel engines used for power generation have to comply with new emission norms. Meeting rising customer expectations. The average realization (and profitability) of such engines is likely to be significantly higher. The company expects to gain significant competitive advantage from this due to its superior product development capabilities. Changing technology.  Strong presence in distribution segment: KKC has a strong presence in the distribution segment. starting July 2013. product platforms. It has customized products according to specific customer and market needs. enjoys 35% market share: KKC enjoys a strong 35% market share in the domestic diesel engines industry. fuels and emission regulations creates new business opportunities for KKC.

Cummins India KKC has 70% market share in high HP segments. While it concentrates on engineering. Volvo. despite the presence of Caterpillar and Perkins.C. KKC has partnerships with three original equipment manufacturers (OEMs) in India for the assembly and distribution of DG sets. Cylinder head. manufacturing. In a typical DG set. It has ~70% market share in HHP segment (750kVa+). the generator 30%. its partners add value through assembly (of engines. sales and servicing. the engine constitutes 50% of total value. Typical layout of a DG set assembly Excitation Control Partnering with OEMs: KKC'S business model Cummins India Engine Manufacturing Sudhir Gensets Powerica. and other assemblies 10%. All of KKC’s OEM partners source generators from Cummins Generator Technologies. despite intense competition (Kirloskar. In the MHP segment (350-750kVa) segment too. control systems 10%. Cam shaft and Connecting rods Source: Company 22 December 2011 5 . Generator Controls Load Generator OEM CSS Fuel Control Accessories Foundation Customer Customer Customer After Sales Service 5 Cs of an Engine: Cylinder block. KKC has control over 7580% of the value chain of a DG set. Crank shaft. and many other global companies). its associate company. Ashok Leyland. generators and control systems). it is the leader. turnkey solutions and installation. and is gradually growing in the mid and low HP segments Dominant position across Indian DG set market Cummins India (KKC) has built a strong presence in the Indian DG set market and commands over 35% market share. Jakson Diesel Engine A.

Faridabad. Elgi Equipments. Dozers Diesel powered Screw Compressors Diesel powered portable Screw Compressors Diesel engines. KKC expects to maintain its strong position in this segment. L&T Case. Doosan. Industrial Segment: demand from mining segment looks promising: In FY11.3-liter C-series engines. KKC’s automotive customers include Tata Motors. Vectra (VAE).9-liter B-series engines from Tata Cummins’ Phaltan facility. It also sources 3. The compressor segment reported a growth of 42% YoY triggered by strong performance of water-well and portable compressor segments.. which can sell only to Tata Motors or to KKC. BHEL. Coast Guard.000 B-series engines per year (similar capacity as its Jamshedpur plant). Loaders Excavators. Phooltan. would provide an opportunity for the Company to consolidate its position in the market. Terex. Atlas Copco. CAT. Asia Motor Works and Eicher. Hyundai. Work Over Rigs OEMs Telcon. L&T-Komatsu. We believe that Bharat Stage III emission norms. ACE. Ashok Leyland. Elgi Equipments. Globally. Volvo uses Cummins’ 15-litre engine. Industrials: Offering products for vast range of applications Segment Construction HP Range 50-300 HP Products Compactors. Kirloskar Pneumatic. DLW. CAT. Wirtgen. L&T Komatsu. Ramsharan & Co. Crawlers. BPCL Source: Company/MOSL Mining Water well rigs Compressors Rail Marine Oil field 300-3500 HP 60 . Plasser. which have been implemented since April 2011 on off-highway wheeled construction equipments. BHEL. Automotives: Management confident of maintaining growth Automotive segment sales were flat in FY11 due to base effect (in FY10. JCB. Kirloskar Pneumatic ICF Chennai.Kansbahal. Doosan Atlas Copco India. John Energy. Surface miners. coaches Ships Deep drilling rigs. Dynapac. LiuGong. Volvo etc. Terex Vectra. Escorts. TWL. Indian Navy. However. unlikely to be launched in India in the near future. will have a manufacturing capacity of 120. however. upfits them and sells to auto and powergen users. Liebherr. This is.9-liter L-series engine for larger trucks. 22 December 2011 6 . The construction segment grew by 43% YoY. sales of CNG engines to the Automotive segment were high because of Commonwealth Games). Schwing Stetter. Telcon. Volvo. O&K. with a wide portfolio of products. Industrial sales grew by 27% YoY driven by strong performance in key sectors such as Construction. KKC manufactures 8. de-growth in gas engines was offset by growth in diesel engines. BEML. Euclid-Hitachi. Revathi Equipments.9/5. The mining and rail segments registered a growth of 26% and 25% YoY.Cummins India 2. TIL. Tata Cummins. Compressor & Mining. RCF Kapurthala. TWL. Commercial Marine and Fishing Trawlers Jiva International. Tata Cummins is also developing an 8. Greaves.200HP 60-1600HP 240HP-3800HP 50HP-2500HP 100HP-3000HP 3. Revathi. L&T. Dump truck.

DG sets are often blamed for high emission of toxic gases due to poor standards. motor graders. pavers and cranes.Cummins India Changing emission norms: A wining proposition for Cummins Diesel generators are increasingly used in rural and urban areas due to power shortage and increasing commercialization. All diesel engines used for power generation have to comply with new emission norms. KKC expects to gain significant competitive advantage from this due to its superior product development capabilities. PM is made up of soot particles in diesel exhaust from unburned carbon and is controlled by optimizing the combustion temperature and improving combustion efficiency.000 $4. a large number of DG sets sold are obsolete models and are not BS-III complaint. This would provide an opportunity for KKC to consolidate its position in the market. power plants and equipment such as diesel generators. off-highway Europe off-highway 2010 EPA10 Euro V Euro IV Euro IV (Major Cities) Tier 4i Stage 3B Tier 4i Tier 4F Stage 4 Source: Copmpany 2011 2012 2013 EPA 13 2014 CO2 Euro VI 2015 2016+ EPA 16 CO2 Euro IV Euro V Euro IV Euro (Country wide) V Higher emission drive content per engine – US example On-highw ay Euro 3 Tier 3 Off-highw ay Euro 4 & 5 Tier 4 interim Euro 6 Tier 4 Final $0 $2. The average realization of such engines is likely to be significantly higher. Frequent policy actions have been taken in various countries to regulate the emissions of 4 pollutants. starting July 2013. BS-III emission norms (based on EU Stage IIIA) have been implemented since April 2011 for off-highway wheeled construction equipment – wheel loaders. HC and CO are minor constituents of diesel exhaust and are controlled by improving combustion efficiency. particulate matter (PM).000 $8.000 Source: Copmpany Emission norms set limits to the amount of pollutants that can be released into the environment.S. by automobiles.000 $8. nitrogen oxides (NOx). skid steer loaders. NOx is controlled by reducing the combustion temperature inside the cylinder.000 $6. sulfur oxides. advanced electronic controls to reduce emission. industry. NOx is a byproduct of combustion that combines in the atmosphere to create smog. on-highway Europe on-highway Brazil on-highway China on-highway India on-highway U.000 $0 $2. 22 December 2011 7 . compactors.000 $6.000 $4. While it has been made mandatory for vehicle manufacturers to use advanced diesel engines so that vehicles sold in the cities conform to BS-IV emission norms. Companies like Cummins have developed advanced in-cylinder combustion technologies. namely. carbon monoxide (CO). fuel injection systems.S. A snapshot of changing emission standards Market/Application U.

940 3. which will provide significant upside to exports. KKC’s exports bounced back in FY11. as against USD18b in CY11.160 2. 38 liters and 50 liters.450 3. It is also setting up an export-oriented unit of small gensets (<200kVA). Despite the global slowdown. The eventual capacity will be 40. New products may include engines for industrial applications. In a new development. Cummins Inc has identified India as a key outsourcing destination for its global markets.780 940 -79 720 -72 840 -35 1. We believe that new product addition will be a key growth driver. the outlook for export sales remains encouraging.000 units by FY14 and provide further fillip to exports. It is spending INR1.5b to set up a new factory in the SEZ part of the Phaltan mega-site (Pune) for this product. as against USD18b in CY11.760 2. with over 100% growth. It supplies K and N series engines of various displacements like 28 liters. Cummins Inc has maintained its USD30b revenue target for CY15. KKC meets 7-8% of its parent’s global powergen engine sales. Cummins Inc has maintained its USD30b revenue target for CY15. After a sharp decline in FY10.700 1QFY12 2722 3. YoY) 130 69 40 -68 2. It has identified India as a key outsourcing destination.050 2. Despite the global slowdown. Exports grow by 19% YoY in 1HFY12 Exports (INR m) Grow th (%. KKC meets 7-8% of its parent’s global powergen engine sales.146 2QFY12 48 26 14 283 Powergen engines constitute bulk of KKC's exports.650 2. Power generation applications constitute the bulk of KKC’s exports.820 2. parent sees good growth in CY12 New product addition to be key growth driver    Though there was a lull in 3QFY12.Cummins India Outlook for exports encouraging. KKC's exports grew by over 100% in FY11. KKC will also supply <200kVa DG sets to meet its parent’s global requirement. After a sharp decline in FY10 due to global slowdown. This augurs well for KKC. largely to its parent 215 113 60 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 Source: Copmpany/MOSL 4QFY11 22 December 2011 8 . apart from power generation applications. and gensets to its parent.

2 4.9 FY12E FY13E FY08 FY09 FY10 FY11 FY06 FY07 Source: Copmpany/MOSL 22 December 2011 9 . expect to maintain 10-15% growth in the long-term.Cummins India Cummins Inc maintains long-term guidance Cummins Inc sees demand across geographies.7 FY03 2.5 18 13 9.1 17 10. led by market growth.0 FY05 5.2 FY04 4.2 15% CAGR Latin America & Mexico 11% US & Canada 23% 3.3 6.1 7.3 11.1 3.1 12.4 2007 2011 2015 2007 2011 2015 Cummins Inc: Powergen sales mix ROW 9% China 10% Powergen: Cummins Inc maintains target 6.8 26 27 21 1. outsourcing form low cost countries to aid margins Sales (USD b) 14% CAGR EBIT (%) 18 30 14. new emission norms across world and market share gain.5 India 13% Europe & Middle East 31% Africa 3% 2007 2011 2015 KKC: Exports to grow at 11% CAGR over FY11-13 KKC's exports have grown at a CAGR of 17% over FY05-11. introduction of new products to drive growth Exports (INR b) 36 Exports (% of Revenues) 39 33 24 33 31 26 13.

751 1-Jul-09 1-Jan-10 1-Jul-10 1-Jan-11 Exports-domestic sales mix Exports (INR b) Domestic Sales (INR b) Exp / Sales (%) RM/Sales EBITDA Margin (%) RM (% of sales) 12 9 6 3 0 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 48% 36% 24% 12% 0% 70.1 22. EBITDA margin to pick up strongly in FY13 KKC’s EBITDA margin has been impacted by three key factors: (1) higher pig iron prices.3 62.8 62.2 63. We believe that margins will pick up strongly in FY13.4 63. We expect EBITDA margin to decline from 20% in FY10 to 16.1 13.5% in FY12.6 1 3.8 1 8.1 1 3. We believe that adverse revenue mix will persist for the remainder of FY12 due to moderate growth in HHP power generation engines.000 1-Oct-09 1-Oct-10 1-Apr-09 1-Apr-10 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 1-Apr-11 1-Oct-11 1 7.7 Pig iron prices showing no signs of softening 26. EBITDA margins impacted by rising input prices/adverse sales mix EBITDA Margin (%) 22. (2) declining share of HHP engines in overall sales mix.000 16.3 1 8.4 21.500 Pig iron (INR/MT) 24.3 18.6 17.1 64.0 61 .8 65.7 1 9.500 12. led by better product mix.0 70.6 21 .6 67.3 18.9 62.7 13. expect recovery in FY13 Better product mix.9 17.6 1 3. We expect EBITDA margin to decline from 20% in FY10 to 16.4 20.3 18.6 18. likely correction in raw material prices and favorable impact of price increases / cost cutting initiatives.1 1 7.5 64.6 64.5% in FY12.7 1 8.9 63. We believe that margins will pick up strongly in FY13.4 1 8.000 22. (2) declining share of HHP engines in overall sales mix. and (3) high share of exports.2 13.2 1 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1-Jul-11 1QFY12 Source: Copmpany/MOSL 22 December 2011 2QFY12 10 .1 15.1 19. likely correction in raw material prices and favorable impact of price increases / cost cutting initiatives.8 19. likely correction in raw material prices to drive margin expansion   KKC’s EBITDA margin has been impacted by three key factors: (1) higher pig iron prices. led by better product mix. and (3) high share of exports.4 20.3 6.Cummins India EBITDA margin to remain under pressure in 2HFY12.

3 751 572 309 423 611 662 12.Cummins India Cost cutting programs have helped to sustain margins KKC has been highly successful in its cost saving programs.2 10.8 5.6 19. During FY11.4 Material Cost Reduction (INR m) Material Cost Reduction (% of PBT) 14.1 5.3 10.4 12.9 FY07 3.9 FY04 1.8 FY12E FY13E FY08 FY09 FY10 FY11 FY06 FY07 FY08 FY09 FY10 FY11 Source: Copmpany/MOSL 22 December 2011 11 .4 FY05 2. achieved bottomline savings of INR124m and avoidance savings of INR397m.9 7.1 15.1 13. Its EBITDA margin improved after the launch of ACE in FY08.2 0. achieving 96% of targeted savings (INR538m).8 13.7 15.1 8. launched in FY10 with the objective to reduce indirect material cost by 10% per year over three years.6 18.0 11.5 8. it successfully completed ACE-II (launched in FY08).0 FY06 2.2 16.6 12. Cost cutting programs help sustain margins EBITDA (INR b) EBITDA Margin (%) 20.7 7. The TRIMS program.

EBITDA margin is likely to expand to 18.3 FY12E 2. RoCE has consistently improved over FY04-11 from 20.7 Earnings to recover in FY13 PAT (INR b) PAT Grow th (%) 37.037 18.5 33.440 87 15.329 4. mainly driven by significant increase in investment in fixed assets and higher working capital requirement. RoCE is exceptionally high at 74% (up 510bp) as at endFY11.8 4.8 18. Cash and investments together constitute 46% of its total balance sheet.411 7.301 559 15.3 2010 99 1 100 21 47 28 4 100 12.0 5. KKC continues to be virtually debt-free and is cash-rich.8 42.4 8.1 6.9 4.058 4.0 19.0 14.8 26.0 FY07 FY08 FY09 FY10 FY11 FY04 FY05 FY06 1. Excluding cash and investments.5 28.9 6.3 54.337 7.4 25.4 1.5 23.6% in FY12.875 183 18.5 33. Estimate revenue CAGR of 8%. Cash and investments together constitute 46% of KKC’s total balance sheet. Sales (excluding other operating income) Revenues (INR b) Revenue grow th (% YoY) 27.5 39.9 FY12E FY13E FY03 1. respectively over FY11-13.4 9.527 3.526 2011 Common Size (%) Source: Company/MOSL 22 December 2011 FY10 12 .1 1.5% to 44.5 10.1 25.8 0.255 5. respectively over FY11-13.4 -3.058 2010 15.6 16.0 -15.356 1. KKC’s balance sheet continues to be strong.6 9.4% in FY13 after dipping to 16.4 2.7 47.9 12.3 42.5%.4 38. PAT CAGR of 3% over FY11-13 We expect KKC to clock revenue and PAT CAGR of 8% and 3%.3 23.Cummins India Balance sheet strong. Strong balance sheet (INR m) 2011 Net worth Loans Total capital employed Fixed assets Investments Net working capital Cash and bank Total assets 17.037m in FY11. expect earnings recovery in FY13 Estimate PAT CAGR of 3% over FY11-13    We have cut FY13 earnings by 8% and now expect KKC to clock revenue and PAT CAGR of 8% and 3%.4 2.7 FY13E FY11 FY02 FY04 FY05 FY06 FY07 FY08 FY09 99 1 100 24 40 30 6 100 Source: Copmpany/MOSL Balance sheet remains strong In FY11.8 28.1 5. KKC’s balance sheet increased by 16%. Cash and bank balance almost doubled from INR559m in FY10 to INR1.

4 11.0 19.3 23.5% to 35%.5 FY09 4.4 25. cash & inv (INR m) RoCE (%) (excl cash and investments) 68.5 29.5 17.886 20.4 FY05 3.7 41.6 22.4 FY13E FY12E Source: Company/MOSL RoCE has improved to 35%.7 FY04 3. KKC is cash-rich.948 9.703 6. working capital requirement has been continuously decreasing over the last 8 years.7 5.047 9.9 38.921 FY12E 19.4 FY11 4.5 63.917 FY13E 73. Inventory declined from 52 days in FY10 to 47 days in FY11 while creditors increased from 47 days in FY10 to 55 days in FY11.5 13. Excluding cash and investments.9 19.3 32.527 18.486 47.9 FY12E 5.4 3.2 FY07 4.278 27.5 16. Interestingly.3 FY10 5.824 7.2 RoCE (%) 35.058 18.222 FY12E FY13E FY04 FY05 FY06 FY07 FY08 FY09 FY10 7.3 NWC (% of Sales) Debtors days 89 91 90 83 86 74 64 53 49 45 63 52 Creditors days 66 47 65 55 70 55 70 55 1.1 13.804 5.7 Capital employed excl.2% in FY11.308 7. Continuous decline in working capital as a percentage of sales NWC (INR b) 28.Cummins India Reduction in working capital (as a percentage of sales) continues Working capital declined from 14. its RoCE was high at 74% (up 510bp) as at end-FY11.8 FY06 4.929 6.7x in FY10.066 10.945 15. with cash and investments constituting almost half the balance sheet.366 7.0 28.8 61.7 10.8% of sales in FY10 to 13.6 11. driven by reduction in inventory days and increase in creditor days.6 11.5 30.2 FY08 6.5 15.191 13.9 12.1 28. Total asset turnover ratio increased to 4. despite significant capex KKC’s return on capital employed (RoCE) has consistently improved over FY04-11 from 20.4x in FY11 from 3.5 18. RoE and RoCE maintained Capital Employed (INR m) 33.938 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Source: Company/MOSL FY11 FY13E FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 22 December 2011 13 .

750 2.5 3. marine and fire pump markets.  Power gensets and G-drive manufacturing facility in L/MHP range: This facility is being set up at the MIDC SEZ in Phaltan and should commence production by the middle of 2012.000 engines. mainly for export markets.  Unit for manufacture/assembly and upfit of B. which undertakes kitting of parts and components. compressor.  Parts Distribution Center (PDC): A PDC. It will have an annual capacity of ~20.2 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E Source: Company/MOSL 22 December 2011 14 . spending USD300m-500m over 3-5 years  High Horsepower Engine Rebuild Center: KKC’s facility to rebuild HHP engines began operations in March 2011.Cummins India Capacity building in full swing.440 1.2 1.8 2. It would have a matured annual capacity of 51.1 4. and distributes these from a centralized location commenced operations in 3QFY12. C and L series engines: This facility is likely to commence operations by 1HFY13.0 2.1 1.000 FY13E 355 181 522 981 623 4. catering to construction.062 1.5 3.000 units by 2015. Significant capex planned over FY11-13 Capex (INR m) % of sales 4.9 2.

4 FY09 8.5 57. Buy. Over the years. which we believe is the key reason for re-rating. Fundamental earnings drivers remain intact and will continue to drive growth. Buy.7 45.4 43.5 Dividend Payout (%) 70. Coupled with its parent’s increasing thrust on outsourcing from India.Cummins India Valuation and view Maintain Buy with a target price of INR406    Over the years. with a target price of INR406 (18x FY13E earnings).0 53. KKC has maintained high dividend payout without sacrificing growth and investments.9 FY07 3. this imparts high visibility to KKC’s revenues and earnings. Fundamental earnings drivers remain intact and will continue to drive growth. the stock has got re-rated. which we believe will be a continuing trend. Maintaining healthy RoE Source: Company/MOSL  High dividend payout: Companies with high growth and high payouts command higher P/E. We assign following reasons for the same:  Improved earnings visibility: There has been significant improvement in revenue visibility in the domestic market. Maintaining high dividend payout DPS (INR/Share) 72. thereby providing support to valuations.9 FY06 2.6 FY10 15. KKC trades at 17x FY12E earnings.3 FY08 6. at par with its 5-year average P/E.  Sustained RoE over the long-term: The company has maintained healthy RoE since FY04.1 32. We believe this trend will continue in future.4 2.9 FY04 2. the stock got re-rated due to significant improvement in domestic revenue visibility and its parent’s increasing thrust on outsourcing from India.0 FY11 Source: Company/MOSL 22 December 2011 15 .9 FY05 2. with a target price of INR406 (18x FY13E earnings) KKC trades at 17x FY12E earnings. at par with its 5-year average P/E.7 32.

7 326 406 L&T Buy 11.5 11.1 75.9 25.9 383 501 # Year end December.0 30.4 12.0 9.0 8.6 11.8 13.0 15.1 32.8 27.0 23.9 13.0 22.0 26.0 38.3 17.3 5.7 Avg(x) Peak(x) Min(x) Cummins India P/B band Indian Engineering Sector: Earnings and Valuation Summary Company ABB# Rating M-Cap CMP TP EPS (INR) USD INR/sh INR/sh FY11 FY12E FY13E Neutral 2.7 14.5 28.5 37.7 36.7 15.9 17.8 14.4 567 509 3.7 15.5 14.9 P/E (x) 28.2 18.4 136.7 30.2 5.7 10.2 7.4 7.1 42.4 71.3 110 138 Cummins Buy 1.0 17.1 33.1 10.3 69.0 19.1 12.4 10.4 11.6 18.4 BHEL Neutral 10.3 11.7 23.1 10.9 4.3 38.3 21.6 6.2 22.2 180 266 Crompton Neutral 1.3 14.7 EV/EBITDA FY11 FY12E FY13E 38.1 13.9 4.3 25.3 28.4 9.0 10 3 Jun-08 Jun-09 Jun-10 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Jun-11 Jul-07 Dec-11 6.2 22.9 32.1 5.1 20.1 5.6 11.4 9.8 17.9 13.2 24.9 395 472 Havells Buy 0.9 29.2 8.5 999 1.8 P/E FY11 FY12E FY13E 190.0 6.1 44.7 25.306 Siemens## Neutral 4.4 28.2 31.0 10.1 6.2 19.3 17.4 26.0 35.5 5.9 234 301 BGR Energy Neutral 0. ## Year end September 22 December 2011 16 .9 2.3 35.Cummins India Cummins India P/E band 31 24 18.3 36.6 654 743 Thermax Neutral 0.0 7.9 10.0 39.1 12.3 26.2 5.9 10.0 7.8 Source: Company/MOSL 33.9 31.6 83.8 5.6 RoE (%) FY11 FY12E FY13E 2.7 29.4 7.0 17 15.1 4.0 33.4 8.

5 Balance Sheet Y/E March Share Capital Reserves Net Worth Loans Deferred Tax Liability Capital Employed Gross Fixed Assets Less: Depreciation Net Fixed Assets Investments Curr.356 18.477 3.194 1.438 36.987 2.886 10.278 12.402 3.729 3.090 3.935 24 5.641 11.1 (INR Million) 2012E 42.556 123 1.221 4.282 -10.6 392 700 21 7.134 9.4 18.549 4.767 5.Cummins India Financials and Valuation Income Statement Y/E March Total Revenues Change (%) Raw Materials Staff Cost Other Expenses EBITDA % of Total Revenues Depreciation Other Income Interest PBT Tax Rate (%) Adjusted PAT Extra-ordinary Income (net) Reported PAT Change (%) Adj.792 19.440 0.9 6.929 2.097 4.031 0 1.070 26 5.610 87 -170 15.337 18.507 26.399 2.432 6.198 11.283 183 -187 20.011 2.4 22.258 0 6.709 18.191 6.247 4.114 26.0 5.321 10.807 0 2.037 288 -134 11.215 5. & Prov.069 13.1 25.225 1.803 5.891 183 -187 18.6 456 1.080 407 3.258 9.191 2009 396 13.037 3.682 30.343 10.144 4.670 27.134 3 4.807 16.3 4.129 1 3.8 30.0 6.220 30.058 9.909 0 5.365 20.947 213 -231 13.762 0 1.527 7.693 -3.894 5.886 (INR Million) 2013E 554 19.801 4.337 54.003 1.654 28.828 7.816 20.282 514 5.798 1.695 93 6. Assets Inventory Debtors Cash & Bank Balance Loans & Advances Other Assets Current Liab.5 4.411 7.2 27.894 5.659 6.642 7.541 4.6 2013E 47.1 361 676 21 6.1 330 1.634 4.677 7.113 4.494 4.776 4.909 33.728 5. Consolidated PAT Change (%) 2008 23.243 100 11.551 13.302 5. Creditors Other Liabilities Provisions Net Current Assets Application of Funds E: MOSL Estimates 2008 396 10.442 3.097 5.384 2.126 5.945 2010 396 15.4 516 770 24 8.1 2.2 366 617 19 8.971 8.279 22 December 2011 17 .255 15.4 4.338 2.2 2009 33.7 2010 28.337 7.214 15.246 21.480 42.258 18.182 1.440 0 4.324 3.3 5.510 4.255 17.063 183 -187 18.539 13.153 29.466 7.768 0 2.414 4.058 2012E 554 18.209 15.438 8.983 3.732 6.526 2011 396 17.130 3.297 98 9.1 5.111 1.023 2.189 5.663 83 6.728 20.190 7.0 2011 40.5 4.990 -13.438 2 4.909 33.993 14.940 2.0 3.540 5.440 2.612 40.680 6.960 1.229 559 2.556 7.227 7 3.301 15.112 16.667 18.734 4.440 3.828 3.4 16.255 19.329 12.821 323 2.808 2.7 5.538 6.145 192 4.768 7.546 4.927 100 10.253 7.852 18.945 7.

670 2.7 32.440) 75 -1.1 15.960 59 -126 21 2.136 0 3.3 39.0 0.3 9.0 86 50 63 3.496) -2.4 13.6 2.610 (1.4 2010 16.062) (1.2 35.000 (0) 0 24 4.6 1.Cummins India Financials and Valuation Ratios Y/E March Basic (INR) Adj EPS Cash EPS Book Value DPS Valuation (x) P/E Cash P/E EV/EBITDA EV/Sales Price/Book Value Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios Debtors (Days) Inventory (Days) Creditors.391 96 19 4.059 0 7.037 1.011 406 22 December 2011 18 .863) 236 323 559 2011 8. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance E: MOSL Estimates 2008 3.5 6.1 4. (Days) Asset Turnover (x) Leverage Ratio Debt/Equity (x) 2008 10.0 2013E 22.0 (INR Million) 2012E 19.3 70 55 55 3.682 (513) 6.865 (4.011 2013E 8.5 4.865 (3.8 4.0 0.3 2009 15. EO Items (Inc)/Dec in FA (Pur)/Sale of Investments CF from Investments (Inc)/Dec in Networth (Inc)/Dec in Debt Less : Interest Paid Dividend Paid CF from Fin.241 (1.478 (981) 329 -652 578 -75 26 2.153 (7) 3.6 74 51 52 4.0 16.889) (604) 1.5 15.6 0.775 (2.0 Cash Flows Statement Y/E March PBT before EO Items Add : Depreciation Interest Less : Direct Taxes Paid (Inc)/Dec in WC CF from Operations EO Income CF from Oper.0 0.625) 200 123 323 2010 6.5 30.750 (0) 0 21 4.0 5.238 7.5 67.5 15.4 10.960 330 7 1.000) 0 -2.399 392 21 2.341) 2.1 30.285 (2.037 (INR Million) 2012E 7.4 72.7 8.5 35.286 192 2.241 0 5.3 3. Incl.940 516 24 2.136 (1.7 65 47 55 4.0 17.0 0.886) (27) 1.5 33.865 (4.9 27.6 24.054) 5.6 64.6 49.9 4.397) 478 559 1.366 1.337) -3.066 (844) (265) 388 123 2009 5.0 15.9 11.654 (2.111 361 21 1.9 28.557 (35) 263 7 1.6 17.1 11.059 (623) (3.6 1.3 14.096 514 6.102 (1.798 456 26 1.6 27.023 366 19 2.6 2011 21.1 20.3 55.285 0 6.3 22.8 70 55 55 3.8 4.3 28.0 0.114 (1.3 32.7 33.5 15.5 66 52 47 3.220 503 6.750) 0 -1.6 14.

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