31 October 2020
2QFY21 Results Update | Sector: Capital Goods
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Financials & Valuations (INR b)
EPS Gr. (%)
Div Yield (%)
FCF Yield (%)
120.3 / 1.7
653 / 282
TP: INR336 (-23%)
Margin surprise on favorable sales mix; Outlook weak
Further lockdown in Europe and LATAM pose risk to exports
While Cummins (KKC) reported in-line revenue, EBITDA came in 25% higher
than our estimates. This was largely owing to favorable mix (higher
contribution of distribution segment and export revenue), continued cost
rationalization measures, and cut in employee wages. Further, cost
reduction was aided by the reduction in warranty and royalty expenses.
As sales normalize and lower margin domestic product sales pick up, gross
margin is likely to reverse to historical levels. Also, KKC had reduced
employee wages by 10-20% during the lockdown owing to decline in
demand and volumes. However, with gradual recovery in volumes, these
costs are expected to be reversed. Moreover, warranty provisions will also
come back along with products sales, thereby making current margin levels
CPCB4+ led export opportunity remains a key positive for KKC. However, with
the likely deferment of implementation by 9-12 months implies that any
benefits from this opportunity would accrue only from FY23E. We increase our
FY21 EPS estimates by 8%, but maintain our FY22/22E estimates with TP of
Revenue declined 11% YoY to INR11.6b and was in line with expectations.
EBITDA grew 9.8% YoY to INR1.7b and was
25% ahead of expectations.
EBITDA margin surprised positively and jumped to 14.4% (v/s our expectations
of 11.4%). Other income declined 37% YoY to INR580m and was below
expectations. Adj. PAT declined 21% YoY to INR1.5b and was
14% ahead of
Domestic sales declined 22% YoY to INR7.43b – Powergen was down 35%
YoY, Industrial was down 21% YoY, while distribution was down just 4% YoY.
Export sales increased 18% YoY to INR3.98b, helped by pent-up demand.
Gross margin was up owing to lower sales of low-margin products like LHP,
Powergen, and industrial sales from construction sector. Sales mix was
favorable as products sales are yet to recover in the domestic market,
thereby leading to gross margin expansion.
Telecom is one of the segments where growth outlook is positive on the
exports side with investment in 5G across most Asian countries. Middle East
remains weak with lower oil prices, while large countries in Africa (South
Africa and Nigeria) continue to face slowdown. Management is cautiously
optimistic with global lockdowns coming into effect again.
We largely maintain our FY22/FY23E estimates and our TP of INR336 (15x
Mar’22E EPS). Other income (largely driven by dividend and rental income),
constituted 43% of PBT in FY20 and supported the company’s overall RoE.
Adj. for the same, RoE declined to 8.9% in FY20 from reported 15.4%,
indicating pain in the core business. Maintain
Pent-up demand aids export revenues
Shareholding pattern (%)
Key management call highlights
FII Includes depository receipts
Valuation and view
Nilesh Bhaiya – Research Analyst
Pratik Singh – Research Analyst
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.