16 March 2014
The InSites
Phaltan plant visit updates
Re enforces our positive view
We visited the Phaltan based mega site of KKC. Our visit re enforces our
positive stance on the stock as we saw several growth triggers firmly in
place. Ramp up in LHP business is expected to support export growth from
Indian operations to Cummins Inc's global supply chain. Demand for spare
parts is expected to increase once the engine utilisation increases, which is
currently lower due to lower business confidence. ReCon & Rebuild
operations are expected to get a boost once the engines are despatched at
higher prices post June, 2014 as revised emission norms are implemented.
LHP business ramp underway:
LHP business of CIL is dedicated for
manufacturing of X, S & B series engines having an installed capacity to
assemble 23,000 engines per annum. LHP business's second assembly line
has become operational in last month and products from this facility are
exported to Cummins global supply chain operational in Middle East, Africa
and Latin America.
ReCon & Rebuild centre to support engine reconditioning business:
Recon &
Rebuild unit in Phaltan is of the 17 engine rebuild centers existing across
Cummins Inc's global base of operations. Recon & Rebuild plant has an
installed capacity to rebuild 60 engines per month. We believe, Recon &
Rebuild business of the company could be the major gainer, once the revised
CPCB norms are applied, which would result in higher engine prices of new
engines. Widening gap between the Rebuild engine and new engine, could
work well for customers looking for gen set, strictly for power back up rather
than prime usage.
Valuation:
At the CMP of INR 546, KKC trades 21.8 / 17.7x its FY15E / FY16E EPS
of INR 25 / 30.8. We believe, KKC has seeded multiple growth levers to
maximize the possible gains once the demand revives and the plant visit to
Phaltan only re-enforces our view with greater clarity. (Growth levers
discussed in detail in our report titled - "Cummins India - Seeding new growth
levers" released on 11th Feb, 2014) do let us know if you need a copy of the
same.
Phaltan plant History
August, 2011
- India parts
distribution centre becomes
operational for enhancing supply
chain efficiency and aftermarket
parts distribution business.
Jan, 2011:
Inagurates Phaltan megasite
with launch of 3 manufacturing units a)
High HP rebuild centre b) manufacturing
unit for Tata Cummins for manufacturing
B series & ISB electronic engines &
ReCon (manufacturing facility for parts
& engines up to 19 liters).
May, 2013
- Inaugurates LHP generator
plant in SEZ with an installed capacity to
manufacture 23,000 units per year. New
unit to support exports to countries like Asia,
China, Latin America, Africa & Europe.
March, 2013
- Phaltan Midrange Upfit Center
(PMUC) becomes operational with an installed
capacity to manufacture 80 engines per day. New
facility would be utilized to assemble, upfit, test
and paint mechanical and electrical engines of B
& L series with an installed capacity to
manufacture 20,000 engines per annum.
Feb, 2014
- Tata Cummins Ltd's
(TCL) India Midrange Engines
plant
dedicated
for
manufacturing diesel engine
becomes operational.
September, 2013
-
Opens High Horse Power
plant dedicated for
building QSK 23 series
engines,
with
an
installed capacity of
3000 units per annum.
Cummins India
Takeaways from site visits
Phaltan plant visit updates
KKC's Phaltan based plant is spread
over 300 acres for which MoU was
signed in 2008 between Govt. of
Maharashtra and Cummins group
and is being awarded "Mega Project"
status. Plant was inaugurated in Jan,
2011 with half the acreage of the
plant is dedicated for domestic sales
while remaining half is awarded SEZ
status for exports.
Some of the manufacturing plants in
Phaltan would include, engine re-
build & reconditioning centre, parts
distribution centre, Midrange engine
uplift centre. Phaltan mega site also
comprises
manufacturing
operations for Low and medium
kilowatt range for export markets
(with a matured capacity of 51,000
units) and high HP engine facility in
19 - 60 liter range
Satyam Agarwal
(AgarwalS@MotilalOswal.com); +91 22 3982 5410
Nirav Vasa
(Nirav.Vasa@MotilalOswal.com); +91 22 3982 5422
Investors are advised to refer through disclosures made at the end of the Research Report.
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The InSites
We visited the Phaltan based mega site of Cummins India Ltd. Following are
the key take away’s from the same:
Cumulative investment in Phaltan Mega Site (INR – B)
Investments made per year in Phaltan mega site (INR b)
Source: MOSL, Company
Source: MOSL, Company
Plant wise investment made in Phaltan Mega site (INR m)
Plant
India Parts distribution Centre
Mid range uplift centre
LHP plant for exports in SEZ
High horse power enegine
Amt
500
260
910
360
Source: Company, MOSL
Proposed Capex
Hostel
Common facility
Training centre
Amt
570
270
200
Source: Company, MOSL
LHP business ramp underway
LHP business of CIL is dedicated for manufacturing of X, S & B series engines having
an installed capacity to assemble 23,000 engines per annum. LHP business’s second
assembly line has become operational in last month and products from this facility
are exported to Cummins global supply chain operational in Middle East, Africa and
Latin America. For Cummins Inc, these are relatively new products and hence the
learning curve is expected to be steep. Hence, ramp up of operations is expected to
be gradual, as global economy picks up.
IDPC to act as a central sourcing unit for spare parts
India parts distribution centre (IDPC) was inaugurated 2.5 year ago with an intention
to centralize supply of spare parts to dealers and also support spare part availability
of direct customers like defence organizations and other govt, organizations and its
dealers and customers spread across the country. IDPC is one of the seventeen
centralized distribution parts system existing in the global supply chain network of
Cummins Inc. Operational cost of IDPC is kept at 7% of the spare part cost and also
caters to spare part needs of its Singapore based centralized sourcing unit.
Currently, IDPC warehouses 50,000 spare parts in its warehouse spread across 1 lakh
Sq feet.
ReCon & Rebuild centre to support engine reconditioning business
Recon & Rebuild unit in Phaltan is of the 17 engine rebuild centers existing across
Cummins Inc’s global base of operations. Under the Recon operations, KKC takes
used engine from customers and overhauls the entire engine across the 500 – 1800
KVA segment. Recon engines costs approximately 60% the cost of new engine and is
also supported by Cummins warranty valid for one year or 3600 hours. Recon &
Rebuild plant has an installed capacity to rebuild 60 engines per month. We believe,
Recon & Rebuild business of the company could be the major gainer, once the
13 March 2014
2

The InSites
revised CPCB norms are applied, which would result in higher engine prices of new
engines. Widening gap between the Rebuild engine and new engine, could work
well for customers looking for gen set, strictly for power back up rather than prime
usage.
Mid range factory to provide customized engines for industrial operations
Mid range factory in the Phaltan mega site, customizes B&C series engines to meet
specific industrial requirements coming from industries like construction
equipments, mining and other specialized industrial applications. The current
manufacturing set up is capable of upgrading 25 engines of B series and 16 engines
of C series per day.
Operating Matrix
FY09
Segmental Revenue (INR m)
Power
- MHP / HHP
- LHP
Industrial
Auto
Distribution
- Spare Parts
- Recon
Domestic
Exports
- HH / HHP
- MHP / LHP
Net Sales (before eliminations)
Eliminations
Net Sales
Growth (%)
Existing Business
% YoY
New Businesses (LHP, Recon)
% YoY
9,970
9,970
3,550
1,060
7,590
7,590
22,170
13,129
13,129
35,299
2,256
33,043
14.3
33,043
14.3%
-
FY10
10,461
10,461
4,400
2,600
8,860
8,860
26,321
4,883
4,883
31,204
2,755
28,449
-13.9
28,449
-13.9%
-
FY11
13,495
13,495
5,588
2,600
10,116
10,116
31,799
10,604
10,604
42,403
2,949
39,454
38.7
39,454
38.7%
-
FY12
12,620
12,620
5,360
2,490
7,620
7,620
28,800
11,720
11,720
40,520
0
40,520
2.7
40,520
2.7%
-
FY13
16,000
16,000
nm
5,140
1,590
8,900
8,900
nm
32,400
12,690
8,810
3,880
45,090
0
45,090
11.3
41,210
1.7%
3,880
FY14E
12,000
11,400
600
4,883
1,352
9,345
9,345
nm
28,350
12,056
7,556
4,500
40,405
0
40,405
-10.4
35,305
-14.3%
5,100
31.4%
FY15E
FY16E
13,440
15,456
12,190
13,456
1,250
2,000
5,371
6,177
1,554
1,787
10,466
11,251
9,716
9,751
750
1,500
31,602
35,442
13,261
17,239
7,761
9,739
5,500
7,500
44,863
52,681
0
0
44,863
52,681
11.0
17.4
37,363
41,681
5.8%
11.6%
7,500
11,000
47.1%
46.7%
Source: MOSL, Company
Valuation & Outlook
At the CMP of INR 546, KKC trades 21.8 / 17.7x its FY15E / FY16E EPS of INR 25 /
30.8. We believe, KKC has seeded multiple growth levers to maximize the
possible gains once the demand revives and the plant visit to Phaltan only re-
enforces our view with greater clarity. (Growth levers discussed in detail in our
report titled – “Cummins India – Seeding new growth levers” released on 11th
Feb, 2014) do let us know if you need a copy of the same.
Recent channel checks done by us help conclude that the signs of pre buying are
visible. KKC’s recon & rebuild business can gain major traction once the engines
are sold at revised prices which would further increase the price gap between a
new engine and a rebuild engine coming with Cummins guarantee. With LHP
plant becoming operational tax benefits and logistical advantages should also
accrue. Overall, all this should help KKC in an early cycle play for an investment
climate uptick. Maintain
Buy
rating on the stock with a target price of INR 560.
13 March 2014
3

The InSites
Financials and valuation
13 March 2014
4

The InSites
Financials and valuation
13 March 2014
5

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