Cummins India
Cummins India (KKC=20 IN; Mkt Cap USD1.1b, CMP Rs239, Buy);
Excellent play on several mega = trends: Cummins = makes diesel engines and is an excellent=20 play on several mega trends in India: (1) sustained demand for backup = power, (2)=20 huge investment in infrastructure and mining, and (3) India as a = global=20 outsourcing hub. We expect 23% topline CAGR through FY10E. =
New products, = Six Sigma to sustain=20 profitability: = Cummins is=20 constantly introducing new products and expanding capacities. Current = programs=20 include: (1) new unit near Pune for low horsepower gensets; (2) = migration to=20 ISLe (i.e. electronic) platform, and (3) Cummins group campus. The = company is=20 confident of diluting cost pressures through its Six Sigma and ACE = (accelerated=20 cost efficiency) initiatives.
Subsidiaries and affiliates add = significant value: = Cummins’ flagship subsidiary =E2=80=93 Cummins Sales and=20 Services (CSS) =E2=80=93 is being merged w.e.f. FY09. Other than CSS, = Cummins’=20 affiliates include high-growth companies like Cummins Generator = Technologies=20 India (which makes Stamford brand of alternators) and Valvoline = Cummins=20 (which makes lubricants). For FY10E, we expect subsidiaries (including = CSS), JVs=20 and associates to account for 15-20% of Cummins’ consolidated = PAT.=20
25% EPS CAGR = through FY10E;=20 target of Rs383; Buy:= We see=20 consolidated EPS CAGR of 25% through FY10E. Cummins’ fundamentals = compare well=20 with peers, but its stock trades at a sharp discount. We value Cummins = at 15x=20 FY10E consolidated EPS of Rs25.5 to arrive at a target is Rs383, a 60% = upside=20 from current levels. We upgrade Cummins to Buy.
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