3 August 2012
1QFY13 Results Update | Sector: Capital Goods
Cummins India
BSE SENSEX
17,198
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
S&P CNX
5,216
KKC IN
277.2
505/322
4/8/11
128.6
2.3
CMP: INR464
TP: INR442
Neutral
Robust operating performance:
Cummins India (Bloomberg: KKC IN) 1QFY13 revenues at INR12.6b (up 20%
YoY) were significantly above our estimates of INR11.3b. Adj EBITDA margin stood at 19.5%, up 260bp YoY,
above our estimates of 18.5%. PAT stood at INR1.8b up 36% YoY, above our estimate of INR1.5b (up 14% YoY).
Exports up 56% YoY, domestic power gen revenues up 27% YoY:
Revenue growth is led by exports (up 56% YoY)
and domestic powergen revenues (up 27% YoY). Growth in exports was supported by new products and
favorable currency movement. Management expects 20% YoY growth in exports in FY13 on the back of INR2b
sales from new products. In domestic market, a large part of the growth was from MHP / HHP segments, which
increased by 25-40% across segments. EBITDA improvement is being driven by: i) Product mix change towards
HHP segment as a large part of the exports and domestic growth in 1QFY13 was from HHP engines, ii) Currency
depreciation, iii) Operating leverage associated with 22% revenue growth, and iv) 2.5% price increase in the
domestic market w.e.f. June 2012.
Guidance:
Management expects FY13 growth of 20% in exports (constant currency) and 10% in domestic
revenues. EBIT margins are expected at ~20%. We have upgraded our earnings estimate by 7%/2% for FY13/
FY14 driven by improved margin assumptions and higher export sales. We model exports growth of 14% and
domestic at 8% for residual 9MFY13.
Maintain Neutral:
Our estimates factor in FY13 revenue growth at 13% (guidance 13-15%) and EBIT margins at
20.8% (guidance 20%). On our current estimates, KKC trades at 19.8x FY13E and 18.9x FY14E EPS. We believe
that Indian DG set market continue to witness structural headwinds. Maintain
Neutral
with price target of
INR442 (18x FY14E, downside of 5%).
Satyam Agarwal
(AgarwalS@MotilalOswal.com); +91 22 3829 5410
Deepak Narnolia
(Deepak.Narnolia@MotilalOswal.com); Tel: +91 22 3029 5126
Investors are advised to refer through disclosures made at the end of the Research Report.
1

Cummins India
Exports revenue growth of 56% YoY a surprise; driven by new product
introductions
Revenue growth of 22% YoY in 1QFY13 is led by exports, which increased 56% YoY
while domestic revenues increased 9% YoY. Exports in 1QFY13 stood at INR4.1b,
and is the highest ever for a quarter. Export growth is supported by INR
depreciation of 7.5% in 1QFY13; in USD terms exports were at USD83m, up 43%
YoY. Depreciation of the rupee by ~16% over the past one year has led to KKC
becoming more competitive within the Cummins Inc group.
Growth in exports was supported by launch of new gensets. HHP segment
(contributing 55% to exports) is already operating at near peak capacity utilization
with ~25 engines per day and hence room for further growth remains constrained.
Management expects growth of 20% YoY in constant currency in exports during
FY13, including from new products that are expected to contribute sales of ~ INR2b
in FY13. We believe that growth in exports from KKC will largely be a function of
(1) existing product portfolio of KKC (growth to be in mid teens given the base
effect), and (2) Low horsepower plant to manufacture 50,000 gensets being set up
at Phaltan (to be commissioned by mid 2014, potential revenues of INR10b). New
technology products will be largely manufactured for the export market through
a 100% subsidiary of Cummins Inc, with the first engine being QSK60 (>2,500hp,
can be a INR2.5b pa opportunity, India market ~180 engines per annum).
Export revenues at all time high (INR m)
Caterpillar Dealer Statistics report continued pressures in
sales (3mma, % YoY)
Source: Company, MOSL
Domestic growth at 9% YoY, supported by sudden demand spurt from South
India
Domestic revenues are up 9% YoY broken down into Power Generation (+27%
YoY), Industry (-15% YoY) and Auto (-30% YoY). Growth in power generation
business is led by a sudden spurt in demand from South India, particularly Tamil
Nadu. For the first time in history, power generation sales in South were equivalent
to the combined sales in North and West.
The management stated that while market growth of DG gensets stood at 25-30%
in 1QFY13, products with range above 160kva witnessed a demand growth of 25-
40%. This is in contrast with the earlier understanding that a large part of the
incremental growth is being driven by LHP segment. KKC has a dominating market
3 August 2012
2

Cummins India
share in MHP / HHP segments (market share of ~50%+), and thus has been a
beneficiary of the demand growth in these segments. Robust growth for KKC is
also being driven by launch of upgraded product ranges.
Going forward, we believe growth rates will moderate as power availability
improves in the Southern part. Commissioning of the nuclear power plant (~2GW
by March 2013) and asynchronous grid connection (by mid FY14) are important
structural drivers for improving power availability in the Southern region.
While macro volatility has increased, it is important to note that inventory in the
sales chain is down 50% YoY, and thus any possible demand growth could lead to a
magnified near-term effect. However, we believe that domestic market growth
will remain constrained, and the impact will be more pronounced in the HHP
segment (contributes ~60-65% of power generation sales for KKC). This is given
the macro uncertainty in the investment climate. Also, the management stated
that ~40% of the genset applications are for prime power, and the quantum will
reduce in a structural manner going forward.
Base power deficit in South witnessed sudden spurt in 1 year,
while all-India has been largely stable (ttm)
Power deficit in North and West continues to moderate,
impacting demand for DG sets (ttm)
Source: Company, MOSL
1QFY13 margin improvement driven by product mix change / currency /
operating leverage / price increase; structural headwinds exist going forward
1QFY13 EBITDA margin stood at 18.5% (up 160bp YoY, down 25bp QoQ); adjusting
for the forex gains of INR135m which is included in other income, the adjusted
margins stands at 19.5% (up 260bp). This is much higher than our estimates of
18.5%.
We understand the EBITDA improvement is being driven by: (i) Product mix change
towards HHP segment as a large part of the exports growth and domestic growth
in 1QFY13 was for HHP engines, (ii) Currency depreciation, (iii) Operating leverage
associated with 22% revenue growth, and (iv) 2.5% price increase in the domestic
market w.e.f. June 2012.
While there exist several headwinds to margins, we believe the 2.5% price increase
and currency movement (for exports) could help support margins. Headwinds to
margins include: (i) Increased competitive intensity particularly in HHP segment
(dominated by KKC with market share of 55-65% across product range), and (ii)
3 August 2012
3

Cummins India
Mix change to LHP segment. In the near term, currency movement has impacted
the market positioning of several competitors, particularly in the HHP segment,
where many of the new entrants have been relying on imports. Softening
commodity prices are also likely to support margins; but we are yet to witness any
meaningful decline in domestic pig iron prices, partly due to weak rupee.
EBITDA margins supported by lower RM costs
Pig iron prices continue to remain at peak levels
Source: Company, MOSL
3 August 2012
4

Cummins India
Cummins India: an investment profile
Company description
Cummins India Limited is a 51 % subsidiary of Cummins
Inc. USA. Cummins India, headquartered in Pune since
1962, is the country's leading manufacturer of diesel and
natural gas engines for power generation, industrial and
automotive markets. Cummins in India is a group of eight
legal entities (including Cummins India) across 200
locations in the country with a combined turnover of
USD2b in 2011 and employing close to 14,500 individuals.
Continued anti-inflationary measures might have
counter impact on demand. Improved power
availability will impact demand in a more structural
manner.
Recent developments
Cummins Group is investing US$300-500m over next
five years, to significantly augment capacities with a
CAGR of 20% over next 3-5 years in India. Of this,
Cummins India invested nearly Rs2.5b over last four
years and is expected to spend ~Rs3-4b per year over
next 2.3 years.
The company has recently taken price increase of
2.5-3% wef 1st July across product categories in its
power generation segment to counter impact of rise
in input prices.
Key investment arguments
With growing power shortage in the country, demand
for DG sets is expected to be steady in next few
years. Cummins India, with a market share of over
35%, stands to gain from the opportunity.
Cummins Inc has identified India as a key outsourcing
destination for its global markets. Most of Cummins
India's exports is for power generation applications.
The company is setting up a Low Horse Power plant
within its Phaltan site to manufacture 50,000 gensets
to be commissioned by mid 2014 and has a potential
revenues of INR10b).
Valuation and view
Cummins is among the best performing stocks in the
capital goods sector. We believe that valuations are
rich and we maintain a Neutral rating on the stock in
light of emerging headwinds like muted demand,
increased competitive intensity.
The stock trades at 19.8x FY13E and 18.9x FY14E EPS.
Key investment risks
Rising competition and entry of newer players can
impact profitability given the aggressive pricing
stragegy adopted by newer players to enter market.
Sector view
We remain Neutral on the sector.
Comparative valuations
Cummins
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY13E
FY14E
FY13E
FY14E
FY13E
FY14E
FY13E
FY14E
19.8
18.9
5.6
5.0
2.7
2.4
14.4
13.2
Crompton
10.6
8.8
1.7
1.5
0.5
0.5
5.9
4.7
Thermax
14.2
12.6
2.7
2.4
0.8
0.7
8.1
7.1
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
23.4
24.5
Target
Price (INR)
442
Consensus
Forecast
22.6
26.1
Upside
(%)
-4.8
Variation
(%)
3.4
-6.1
Reco.
Neutral
FY13
FY14
Current
Price (INR)
464
Target price and recommendation
Stock performance (1 year)
Shareholding pattern (%)
Promoter
Domestic Inst
Foreign
Others
3 August 2012
Jun-12
51.0
21.6
13.1
14.4
Mar-12
51.0
21.0
13.6
14.5
Jun-11
51.0
21.1
12.1
15.9
5

Cummins India
Financials and Valuation
3 August 2012
6

Cummins India
N O T E S
3 August 2012
7

Disclosures
This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement
to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been
furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form.
Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates
or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt
or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or its
affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or
employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report . MOSt or any of its affiliates
or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness
for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.
This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision
based on this report or for any necessary explanation of its contents.
MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest
Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.
Disclosure of Interest Statement
1. Analyst ownership of the stock
2. Group/Directors ownership of the stock
3. Broking relationship with company covered
4. Investment Banking relationship with company covered
Cummins India
No
No
No
No
Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or
will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible
for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.
Regional Disclosures (outside India)
This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to
law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.
For U.K.
This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to
which this document relates is only available to investment professionals and will be engaged in only with such persons.
For U.S.
MOSt is not a registered broker-dealer in the United States (U.S.) and, therefore, is not subject to U.S. rules. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange
Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S.,
Motilal Oswal has entered into a chaperoning agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). Any business interaction pursuant to this report will have to be executed
within the provisions of this Chaperoning agreement.
This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional
investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major
institutional investors and will be engaged in only with major institutional investors.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, Marco
Polo and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
Motilal Oswal Securities Ltd
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com