4 August 2017
1QFY18 Results Update | Sector: Capital Goods
Cummins India
BSE SENSEX
32,325
S&P CNX
10,066
CMP: INR950
TP: INR1170(23%)
Buy
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the Asiamoney Brokers Poll 2017 for
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Results in-line; domestic execution drives growth
Operating performance in-line:
Cummins India’s (KKC) 4QFY17 revenue grew
7% YoY to INR13.4b (our estimate: INR13.2b). Gross margin contracted 130bp
YoY to 34.9%. EBITDA declined 5% YoY to INR1.95b (our estimate: INR1.95b);
EBITDA margin contracted 183bp YoY to 14.6%, in line with our estimate of
14.8%. PAT fell 8.4% YoY to INR1.7b (our estimate: INR1.7b). Margin
compression was led by adverse product mix and weak exports.
Domestic business delivers strong performance; exports remain weak:
Domestic revenue grew 10% YoY, aided by power generation (+11% YoY),
industrial (+21% YoY), and distribution & spares (+15% YoY) segments. Exports
declined 5% YoY (but grew 30% QoQ) due to overall weakness in the global
market (Africa, Middle East). For FY18, KKC maintained its guidance of negative
5% to flat export revenue growth, and muted 5-10% growth in domestic
business.
Adverse mix leads to gross margin contraction of 130bp:
Gross margin
contracted 130bp YoY to 34.9% due to weak product mix, while operating
margin contracted 180bp YoY to 14.4%. KKC expects margins to improve, with
product mix change in favor of better-margin products. Exports (30% of
revenue v/s 34% in 1QFY17) enjoy better margins than domestic sales.
Maintain Buy:
We maintain our
Buy
rating, with a target price of INR1,170 (32x
June 2019E EPS). The stock trades at 34x FY18E EPS of INR27.7 and 27x FY19E
EPS of INR35. Key risks to our rating are (a) slower -than-expected growth in
domestic power generation market, and (b) delay in pick-up of export demand.
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, INRm
Free float (%)
KKC IN
277
263.3/4.1
1096 / 748
-1/-9/-5
287
49.0
Financials & Valuations (INR b)
2017 2018E 2019E
Y/E Mar
Net Sales
50.8
56.0
65.0
EBITDA
8.0
8.9
11.5
PAT
7.3
7.7
9.6
EPS (INR)
26.5
27.7
35.0
Gr. (%)
-2.6
4.3
26.6
BV/Sh (INR)
135.0 145.7 159.0
RoE (%)
21.2
19.7
22.8
RoCE (%)
20.0
18.8
21.8
P/E (x)
35.8
34.4
27.1
P/BV (x)
7.0
6.5
6.0
Estimate change
TP change
Rating change
KKC: Quarterly Performance (Standalone)
Y/E March
Sales
Change (%)
EBITDA
Change (%)
As of % Sales
Depreciation
Interest
Other Income
PBT
Tax
Effective Tax Rate (%)
Adjusted PAT
Change (%)
Reported PAT
Change (%)
E: MOSL Estimates
1Q
12,590
-3.9
2,063
-6.9
16.4
206
21
416
2,252
440
19.5
1,812
(14.3)
1,812
(14.3)
(INR Million)
Var.
(%)
2.0%
0.1%
FY17
FY18
FY17
FY18 Vs Est.
2Q
3Q
4Q
1Q
2QE
3QE
4QE
1Q
12,790 13,550 11,844 13,408 14,400 15,400 12,982 50,773 56,048 13,150
7.1
19.0
11.1
6.5
12.6
13.7
9.6
7.8
10.4
4.4
1,990 2,265 1,700 1,953 2,300 2,600 2,222 8,018 8,934 1,950
-1.4
31.1
-4.9
-5.4
15.6
14.8
30.7
14.6
7.0
-5.5
15.6
16.7
14.4
14.6
16.0
16.9
17.1
15.8
15.9
14.8
209
225
208
208
250
250
272
848
981
250
43
55
49
42
40
40
46
168
168
40
692
461
511
583
550
550
502 2,080 2,185
450
2,430 2,446 1,954 2,286 2,560 2,860 2,406 9,082 9,970 2,110
461
466
369
625
570
620
489 1,736 2,305
430
19.0
19.0
18.9
27.4
22.3
21.7
20.3
19.1
23.1
20.4
1,969 1,981 1,585 1,660 1,990 2,240 1,917 7,346 7,666 1,680
(0.5)
11.3
(5.1)
(8.4)
1.1
13.1
20.9
(2.8)
4.3
(7.3)
1,969 1,981 1,585 2,222 1,990 2,240 1,917 7,346 7,666 1,680
(0.5)
11.3
(5.1)
22.6
1.1
13.1
20.9
(2.8)
4.3
(7.3)
8.3%
-1.2%
32.2%
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Ankur Sharma – Research Analyst
(Ankur.VSharma@MotilalOswal.com); +91 22 6129 1556
Amit Shah – Research Analyst
(Amit.Shah@MotilalOswal.com); +91 22 6129 1543

Cummins India
1QFY18 operating performance in line with estimates; Weak exports and
adverse product mix impact margins
Weak operating performance led by adverse product mix:
Revenue increase of
7% YoY was led by 10% YoY growth in domestic segment. Domestic revenue was
aided by power gen (+11% YoY), industrial (+21% YoY) and distribution & spares
(+15% YoY) segments. Exports declined 5% YoY (+30% QoQ) due to overall
weakness in the global market (Africa, Middle East). For FY18, KKC maintained
its guidance for negative 5% to flat export revenue growth, and muted 5-10%
growth for domestic business.
RM cost as % of revenues increased to 65.1% as against 63.8% YoY, led by weak
product mix. Management stated that gross margin decline is purely on account
of weak product mix and is not impacted by higher traded goods and
outsourcing to group companies on account of shut down of pants.
Net profit stood at INR1.7b (down 8.4% YoY)
Exhibit 2: RM costs increases YoY by 130bps given adverse
revenue mix
RM (% of sales)
Exhibit 1: 1QFY18 revenues up 7% YoY; driven by 10% YoY
growth in domestic segment
Net Sales (INR b)
22
-3 0
0
13 11
-17-14
-6
Growth (YoY, %)
25
23
19
17
11 7
7
6
4 5
0
-6 -4
Source: Company, MOSL
Source: Company, MOSL
Revenue growth supported by domestic segment, export segment
continues to remain weak
Revenue increase of 7% YoY was led by 10% YoY growth in domestic segment.
Domestic revenue was aided by power gen (+12% YoY), industrial (+18% YoY)
and distribution & spares (+31% YoY) segments. Exports declined 5% YoY (+30%
QoQ) due to overall weakness in the global market (Africa, Middle East). For
FY18, KKC maintained its guidance for negative 5% to flat export revenue
growth, and muted 5-10% growth for domestic business. KKC has maintained
domestic guidance of 5-10% YoY growth in FY18 and for exports expects
negative 5% to Flat growth for FY18. This is on account of growth concerns in
countries Africa, Middle East and Mexico.
Management sounded positive about the domestic market and expects growth
in power gen as well as the industrial segment to remain positive led by
economic cycle recovery. Sectors like mining, railways, infrastructure and data
center segment have started to pick up.
Exports registered decline of 5% YoY to INR3.9b.Although management
maintained its netgative5-0% guidance on the exports front, it expects the
demand deterioration to bottom out in the HHP segment exports and expects
demand to improve in the medium term. Management does not expect
recovery in CY17.
2
4 August 2017

Cummins India
Exhibit 3: RM cost as well as staff cost increase YoY whereas other expenses were under control
INR M
Raw Materials
Staff Costs
Other Expenses
Total
% of Revenues
Raw Materials
Staff Costs
Other Expenses
% YoY
Raw Materials
Staff Costs
Other Expenses
4QFY15
7,159
998
1,419
9,567
63.2
8.8
12.5
20.2
22.2
14.9
1QFY16
8,342
1,027
1,595
10,964
63.5
7.8
12.1
31.7
13.7
12.5
2QFY16
7,470
1,085
1,416
9,970
62.4
9.1
11.8
5.8
6.6
(3.5)
3QFY16
7,351
1,091
1,317
9,759
64.1
9.5
11.5
10.1
7..3
5.8
4QFY16
6,545
1,039
1,362
8,945
61.4
9.8
12.8
6.5
4.1
-4.1
1QFY17
8,030
1,040
1,457
10,527
61.8
8.3
11.6
3.2
4.6
-8.4
2QFY17
8,285
1,125
1,390
10,800
64.8
8.8
10.9
11.0
4.6
-1.9
3QFY17
8,722
1,101
1,462
11,285
64.2
8.1
10.8
19.0
1.8
15.8
4QFY17
7,707
1,069
1,368
10,144
65.1
9.0
11.5
14.0
6.3
6.0
1QFY18
8,435
1,226
1,506
11,455
65.1
9.1
11.2
8.6
17.9
3.5
Source: Company, MOSL
Valuation and view
Over the past few years, KKC has seeded various growth levers (like LHP gensets
for domestic / exports, Reconditioning and Refurbishment, etc).
Key triggers
are: i) incremental success in LHP genset (both domestic and exports), which
contributed INR7.8b to revenues in FY17; internal targets are ~INR15-20b over
the next 3-5 years ii) pick-up in the recon business with CPCB-II implementation
(facilities have been recently established in Phaltan) and iii) accelerated
indigenization of CPCB-2 compliant products supporting margins.
Given demand deterioration scenario bottoming out in the Exports segment and
pick up ni the domestic demand scenario , we maintain our Buy rating on the
stock with a target price of INR1170 (32x June19E EPS). The stock currently
trades at 34x FY18E EPS of INR27.7 and 27x FY19E EPS of INR35. Key risks to our
rating are (a) Slower than expected growth in the domestic power generation
market, and (b) Delay in pickup of export demand
4 August 2017
3

Cummins India
Key highlights of the concall
Guidance maintained for FY18: domestic +5-10% YoY while exports seen flat to
down 5% YoY
Guidance on domestic sales of +5-10% YoY same as earlier guidance; will likely
be at the higher end of the sales guidance range as per the CFO on CNBC today
Exports to be flat to -5%YoY which is the same as the earlier guidance. Worst is
over and expect an improvement from here on in HHP engines while low kva
engines still not bottomed out
Margins –potential improvement of 100-200bps in next few quarters in FY18
Q118 gross margins were at 35% - should hold at current levels and increase by
1-2% by end of FY18
Sourcing strategy had no impact on profitability – outsourcing will only help
improve profitability
Will improve margins driven by cost control - ACE programme kicked off in 2005
and is giving them offsets from the pricing pressures seen in the market place.
Also, upgrading the engines primarily in 500kva and above
Employee costs higher in 1QFY18 on increments at 8% and increase in variable
pay out accrual. This is likely to sustain at INR1.2b on a quarterly basis
Power generation – price competition is still high
No plan to outsource K19 engines - no other plans to sift /outsource any other
HHP engines to CTIL. CTIL will make the QSK19 engines and CIL will sell in the
domestic market
In CY17, Cummins has taken price reductions but this has not hurt profitability
as this was done selectively by them
Sold 6,300 units in 1QFY18 - 2800 is low HP, midrange is 2000 so 5000 is
outsourced but low value. Even earlier, bought from TCL/Simpsons
Demand in HHP/MHP segment driven by data centers, realty, infrastructure,
Exports for HHP engines have bottomed out but low HP still weak
HHP is seeing a recovery in mining and O&G sector and this will help offset the
decline in Low Kva
M East and Africa are down; despite stable commodity prices still not seeing
significant improvement in these. M East and Africa are 20% of overall exports
Do not see a substantial change across market in next few quarters - M East and
Africa have come down on back of lower oil prices and they are struggling on
liquidity; rest is doing better - US, Europe, China are doing better YoY but still
cautiously optimistic.
Capex – seen at INR2b in FY18
Jointly investing in technology center with the parent - almost ready and by
October will have people occupying this facility
Capex by CIL - almost done and in FY18 INR1.7b to be spent. Engineers from CIL
and Cummins Inc. will work together, 70% of the work for global countries and
also benefit CIL as well
4 August 2017
4

Cummins India
Exhibit 4: Operating Metrics
Segmental Revenue (INR m)
Power
- MHP / HHP
- LHP
Industrial
Auto
Distribution
- Spare Parts
- Recon
Domestic
Exports
- HH / HHP
- MHP / LHP
Net Sales
Growth (%)
RM Costs (%)
Gross Margins (%)
EBITDA margin (%)
Net Working Capital (Days)
Net Cash / (Debt), INR M
FY12
12,562
9,002
3,560
5,673
2,837
7,699
7,699
28,770
11,720
9,520
2,200
41,172
2%
64.3%
35.7%
16.9%
63.4
2,088
FY13
16,065
16,065
4,000
5,060
1,659
9,080
9,080
nm
31,864
12,690
8,810
3,880
45,894
11%
62.9%
37.1%
18.2%
65.5
3,547
FY14
11,150
7,850
3,300
5,248
1,162
9,090
9,090
nm
26,650
12,040
8,240
3,800
39,767
-13%
61.0%
39.0%
17.5%
81.0
865
FY15
10,550
8,050
2,500
5,070
1,100
9,050
8,800
250
25,770
17,253
9,003
8,250
44,058
11%
61.8%
38.2%
16.7%
82.9
799
FY16
12,500
9,250
3,250
5,600
700
10,000
9,600
400
28,800
16,670
7,770
8,900
47,088
7%
62.9%
37.1%
16.5%
97.8
897
FY17E
13,500
10,088
3,413
6,960
850
11,610
10,810
800
32,920
16,110
8,306
7,804
50,773
7%
64.5%
35.5%
15.8%
85.9
-1,217
FY18E
15,255
11,672
3,583
8,352
0
13,352
12,551
801
36,959
17,680
8,160
9,520
56,048
10%
64.3%
35.7%
15.9%
85.9
307
FY19E
17,543
13,781
3,762
10,022
0
15,354
14,552
802
42,920
20,487
9,287
11,200
64,983
16%
63.8%
36.2%
17.6%
85.9
999
4 August 2017
5

Cummins India
Financials and valuations
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 (%)
2013
45,894
11.5
28,874
3,386
5,285
8,349
18.2
473
1,577
46
9,407
2,774
29.5
6,633
1,008
7,641
29.2
2014
39,767
-13.4
24,241
3,396
5,162
6,968
17.5
528
1,777
42
8,175
2,175
26.6
6,000
0
6,000
-21.5
2015
44,058
10.8
27,225
3,936
5,547
7,351
16.7
797
2,866
45
9,374
1,515
16.2
7,859
0
7,859
31.0
2016
47,088
6.9
29,622
4,156
5,559
7,751
16.5
810
2,259
96
9,104
1,561
17.1
7,543
0
7,543
-4.0
2017
50,773
7.8
32,745
4,334
5,677
8,018
15.8
848
2,080
168
9,082
1,736
19.1
7,346
0
7,346
-2.6
2018E
56,048
10.4
36,035
4,975
6,105
8,934
15.9
981
2,185
168
9,970
2,305
23.1
7,666
0
7,666
4.3
(INR Million)
2019E
64,983
15.9
41,454
5,391
6,679
11,459
17.6
1,054
2,263
168
12,501
2,890
23.1
9,611
0
9,611
25.4
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Loans
Deferred Tax Liability
Capital Employed
Gross Fixed Assets
Less: Depreciation
Net Fixed Assets
Capital WIP
Investments
Curr. Assets
Inventory
Debtors
Cash & Bank Balance
Loans & Advances
Other Assets
Current Liab. & Prov.
Current Liabilities
Provisions
Net Current Assets
Application of Funds
E: MOSL Estimates
2013
554
23,313
23,867
0
328
24,195
10,415
5,480
4,934
1,208
6,276
24,278
5,304
8,550
3,547
6,788
90
12,501
7,719
4,782
11,777
24,195
2014
554
25,097
25,652
0
465
26,117
15,120
5,928
9,192
958
4,954
22,625
5,513
7,820
865
8,405
22
11,611
6,910
4,701
11,014
26,117
2015
554
28,311
28,865
0
631
29,496
18,830
6,491
12,340
1,706
4,650
24,521
6,823
9,355
799
7,472
73
13,721
8,520
5,202
10,800
29,496
2016
554
34,259
34,813
0
128
34,941
19,917
7,023
12,894
5,192
3,336
23,483
6,003
9,381
897
1,287
5,915
9,964
8,843
1,121
13,519
34,941
2017
554
36,867
37,422
2,508
24
39,953
22,705
7,703
15,001
4,631
7,074
23,702
5,621
9,557
1,291
1,287
5,948
10,455
9,036
1,419
13,247
39,953
2018E
554
39,820
40,375
2,508
24
42,906
24,205
8,684
15,520
4,631
7,074
26,932
6,048
10,284
2,815
1,385
6,400
11,251
9,724
1,527
15,681
42,907
(INR Million)
2019E
554
43,522
44,077
2,508
24
46,609
26,205
9,738
16,466
4,631
7,074
31,494
7,019
11,934
3,506
1,607
7,428
13,057
11,285
1,772
18,437
46,609
4 August 2017
6

Cummins India
Financials and valuations
Ratios
Y/E March
Basic (INR)
Adj EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation (x)
P/E
Cash P/E
EV/EBITDA
EV/Sales
Price/Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC
Turnover Ratios
Debtors (Days)
Inventory (Days)
Creditors. (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
2013
23.9
25.6
86.1
13.0
47.2
2014
21.6
23.5
92.5
13.0
60.1
2015
28.3
31.2
104.1
14.0
49.4
2016
27.2
30.1
125.6
14.0
51.5
2017
26.5
29.6
135.0
14.0
52.8
2018E
27.7
31.2
145.7
14.6
52.8
2019E
35.0
38.5
159.0
18.3
52.8
43.9
40.3
37.7
6.7
10.3
1.4
33.5
30.4
35.7
6.1
9.1
1.5
34.9
31.5
33.9
5.7
7.6
1.5
35.8
32.1
33.0
5.3
7.0
1.5
34.4
30.5
29.4
4.8
6.5
1.5
27.1
24.7
22.9
4.1
6.0
1.9
34.7
30.0
44.4
68
42
46
1.9
24.2
24.4
29.1
72
51
45
1.5
28.8
29.0
26.4
78
57
51
1.5
23.7
23.9
24.0
73
47
43
1.3
21.2
20.0
22.1
69
40
44
1.3
19.7
18.8
22.1
69
40
44
1.3
22.8
21.8
26.8
69
40
44
1.4
0.0
0.0
0.0
0.0
0.1
0.1
0.1
Cash Flow Statement
Y/E March
PBT before EO Items
Depreciation
Interest
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
EO Income
CF from Oper. Incl. EO Items
(Inc)/Dec in FA
Free Cash Flow
Investment & Others
CF from Investments
(Inc)/Dec in Networth
(Inc)/Dec in Debt
Interest Paid
Dividend Paid
Others
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
E: MOSL Estimates
2013
9,407
473
46
-2,377
(1,562)
5,987
0
5,987
(1,469)
4,518
138
-1,331
998
0
0
-4,195
-147
(3,344)
1,312
2,235
3,547
2014
8,175
528
-432
-2,308
(1,607)
4,356
-746
3,611
(4,678)
-1,068
5,528
850
0
0
-42
-4,216
0
(4,258)
203
662
865
2015
9,374
797
-172
-1,853
(815)
7,331
-1,993
5,338
(3,304)
2,035
2,458
-846
0
0
-45
-4,216
(4,261)
231
568
799
2016
9,104
810
96
-1,561
(2,716)
5,732
0
5,732
(5,500)
232
1,461
-4,039
2,922
0
0
-4,518
0
(1,595)
98
799
897
2017
9,082
848
168
-1,736
498
8,860
0
8,860
(2,446)
6,414
(3,789)
-6,236
(221)
0
0
-4,516
2,508
(2,230)
395
897
1,291
2018E
9,970
981
168
-2,305
(1,078)
7,736
0
7,736
(1,500)
6,236
0
-1,500
0
0
0
-4,713
0
(4,713)
1,524
1,291
2,815
(INR Million)
2019E
12,501
1,054
168
-2,890
(2,233)
8,600
0
8,600
(2,000)
6,600
0
-2,000
0
0
0
-5,909
0
(5,909)
691
2,815
3,506
4 August 2017
7

Cummins India
Corporate profile
Company description
Cummins India is a 51 % subsidiary of Cummins Inc.
USA. Cummins India 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 USD1.5b in 2013 and employing close to 9,000
individuals.
Exhibit 1: Sensex rebased
Source: MOSL/Bloomberg
Exhibit 2: Shareholding pattern (%)
Jun-17
Promoter
DII
FII
Others
51.0
21.1
15.0
12.9
Mar-17
51.0
20.9
15.0
13.2
Jun-16
51.0
19.4
16.3
13.3
Source: Capitaline
Exhibit 3: Top holders
Holder Name
ICICI Prudential
HDFC Trustee Company Ltd.
DSP Blackrock
Lavender Investments Limited
Saif Advisors Mauritius Limited
% Holding
7.5
5.0
4.0
4.0
1.6
Source: Capitaline
Note: FII Includes depository receipts
Exhibit 4: Top management
Name
Premchand Godha
A K Jain
Harish P Kamath
Designation
Chairman & Managing Director
Joint Managing Director
Company Secretary
Exhibit 5: Directors
Name
Mark Smith
Norbert Nusterer
Anand T Kusre
Babulal Jain
Name
Dev Parkash Yadava
Manisha Premnath
Ramakanta Panda
Source: Capitaline
*Independent
Exhibit 6: Auditors
Name
Ajay Joshi and Associates
K R Chandratre
S R B C & Co LLP
Type
Cost Auditor
Secretarial Audit
Statutory
Exhibit 7: MOSL forecast v/s consensus
EPS
(INR)
FY18
FY19
MOSL
forecast
27.7
35.0
Consensus
forecast
32.4
39.4
Variation (%)
-14.5
-11.2
Source: Bloomberg
Source: Capitaline
4 August 2017
8

Cummins India
NOTES
4 August 2017
9

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Cummins India
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Disclosure of Interest Statement
Analyst ownership of the stock
Cummins India
No
A graph of daily closing prices of securities is available at
www.nseindia.com, www.bseindia.com.
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Registration details of group entities.: MOSL: NSE (Cash): INB231041238; NSE (F&O): INF231041238; NSE (CD): INE231041238; BSE (Cash): INB011041257; BSE(F&O): INF011041257; BSE(CD); MSE(Cash): INB261041231;
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4 August 2017
10