Cummins India rating: Maintain ‘buy’ with target price of Rs 530

By Edelweiss Securities

Our recent interaction with the top management of Cummins India (KKC) creates greater comfort on its competitive edge as demand cycle normalises. The management is hopeful of better bottom-line translation from upcoming emission norms than past cycles as it is striving for greater differentiation on cost/product offerings.

Exports, the weakest link for a while now, may uncork unexpected upside in the wake of additional mandate from parent (Rs8 billion in new orders with five to seven-year execution) in our view. The management is looking at a sequential pickup in revenues, better translation of launches with focus on tapping into new OEMs (e.g. in off-highway) while keeping capex and cost measured. We like management’s unwavering and bifocal approach: innovative launches and tighter cost-control. Maintain ‘BUY/SO’; we believe KKC’s efforts to sustain its competitive edge with a much more robust product portfolio could take Street by surprise as demand cycle normalises. Potential for better industrial/exports pick-up remains a key trigger.

Management remains hopeful of a Q-o-Q pickup in revenues and mentioned Q2 growth to date has fared well. They mentioned a complete production portfolio overhaul for the industry at large—be it off-highway (excavators etc) or power generation, which coupled with current demand downswing could nudge the company into repositioning (a la previous emission/demand cycles). Management exhibited greater confidence on its premium pricing capability, better cost structures and expanding global mandate as demand cycle normalises. We reiterate strategy execution remains key for KKC.

In our view,
Street’s modest expectations on exports and industrial BU, both of which are sequentially/cyclically looking better, could add a positive surprise to its estimates given a much better global cyclical demand outlook, domestic resilience and pickup potential in railways, infrastructure (e.g. roads), mining, etc, which are key for KKC.

Against our initial expectation of a cost-led surprise, we now notice clearly improving commentary with focus on revenues. Maintain ‘BUY/SO’ with a target price of Rs 530 (22x PE).