The Cummins stock has rallied in the last one month despite tougher operating environment. We downgrade it to ?sell? from ?neutral?. We cut our target price to R377 (from R410) to factor in 6-10% EPS cut over FY14E-16E on 5-8% lower sales and 33-75-bps lower margins. Our estimates are 2-8% below consensus over FY14E-16E. We suggest investors switch to L&T (our high-conviction top India Industrial pick).
Power demand, which was growing at 5-10% y-o-y, has come off significantly since November 2012 on back of the economic slowdown. This has led to both base energy and peak demand deficits coming down to the lowest levels in the last seven years.
This is despite India?s monthly thermal generation utilisation levels having fallen to seven-year lows of 56%.
Consequently, the all-India notified monthly power cuts/restrictions on industries collapsed to 5,970 MW in August 2013 from 14,668 MW in September. This does not bode well for Cummins? power generation business (36% of FY13 sales).
Diesel prices in India have increased 29% in the last year. We believe this should have started impacting domestic demand for diesel gensets (72% of FY13 sales).
After Q1, the management had guided for flat FY14E (+5% to -5%) consisting of export sales declining 5% and domestic sales growing 0-5%. Given the tougher operating environment, we would not be surprised if this guidance gets revised lower.
The management had also mentioned that margins can be held at Q1 levels, but they could decline another 0.5% q-o-q if sales decline.
Citigroup
