January 14, 2011

ENGINEERING
INITIATING COVERAGE

Institutional Equities Cummins India (Rs745)

Out performer
India Research Target Price: Rs909

Stock Data Cummins India: Capitalising on infrastructure thrust

Bloomberg Code KKC IN • Demand drivers leading to strong revenue growth of 34% CAGR over FY10
to FY13E: Massive investments of USD 1 trillion are planned in various
Market Cap. (Rs bn / US$ bn) 147.3/3.3
infrastructure projects in The Twelfth Five Year Plan (FY12-FY17) which in
52-week High/Low (Rs) 809/427 turn is expected to drive 34% CAGR growth in CIL revenues over FY10 to FY13E
against 10% CAGR growth in revenues in FY07-FY10. Due to major shortfall
Shares Outstanding (mn) 198 in power generation capacity in The Eleventh Five Year Plan (FY08-FY12),
demand for CIL's power generation products will grow by 50% in FY11E and
Avg. daily volume ('000) 238
35% in FY12E. CIL's industrial engine business expected to grow by 50% in
Avg. daily value (Rs mn) 162 FY11E and 35% in FY12E on back of strong demand from construction and
mining sectors. Similarly, CIL's automobile business expected to grow by
Promoter holding (%) 51.0 40% in FY11E and 30% in FY12E due to strong demand for CVs and large
Free float (%) 49.0
vehicles. Recovery in global markets and increased outsourcing from parent
group leading to exports growth of 108% in FY11E and 30% in FY12E
FII holding (%) 12.0 • Strong balance sheet and strengthening return ratios making CIL attractive
at current valuations: We like CIL due to its strong return ratios and strong
balance sheet. We expect ROCE ratio to go up from 31.6% in FY10 to 39.8% in
Relative Performance FY12E and ROE ratio to go up from 28.4% in FY10 to 33.8% in FY12E. We like
CIL due to its debt free status (cash per share Rs 52 FY12E), strong cash flows
220 generation (Rs 22 bn in FY11E - FY13E) and aggressive capex of Rs 3,200 mn
200 in next three years.
180
160 Outlook & Valuation: On the valuation front, at a CMP of Rs. 745, CIL is trading at
140 a P/E of 18x FY2012E earnings. CIL will continue to command premium valuations
120 due to strong technology from parent group, diversified product portfolio, high
100
80
growth visibility in revenue and profit for next two years, decent cash flow
60 generation and increase in exports to parent group. We expect CIL to trade in its
Dec-09 Jun-10 Dec-10 five year high P/E band of 22x - 24x. High earnings growth over FY10-FY12E to
reduce P/E ratio from 33x FY10 to 18x FY12E, PEG ratio to come down from 4.71
CUMMINS SENSEX
in FY10 to 0.55 by the end of FY11E, making CIL attractive at current valuations.
We initiate coverage on Cummins India with an 'Outperformer' rating and 12-
month target price of Rs 909, implying P/E of 22x FY12E EPS.
BSE Sensex 19,182
Y/E March (Rs Mn) FY2009 FY2010 FY2011E FY2012E FY2013E
Net Sales 32,741 28,125 41,126 53,594 67,013
EBIDTA 4,772 5,275 7,632 10,102 12,631
Net Profit 4,145 4,439 6,331 8,177 10,005
EPS (Rs) 20.9 22.4 32.0 41.3 50.5
EPS Growth (%) 38.6 7.1 42.6 29.2 22.4
EBIDTA Margin (%) 14.6 18.8 18.6 18.8 18.8
PER (x) 35.5 33.2 23.3 18.0 14.7
PEG 0.92 4.68 0.55 0.62 0.66
EV/EBITDA (x) 33.2 28.4 19.1 14.2 11.0
Jabal Patel RoCE (%) 31.0 31.6 38.7 39.8 38.1
jabal.patel@karvy.com ROE (%) 29.7 28.4 33.7 33.8 31.9
+91-22-22895028
Source: Company and Karvy Institutional Research

Karvy Institutional Equities • 2nd Floor, Regent Chambers, Nariman Point - Mumbai 400 021 • +91-22-2289 5000.

For Private Circulation only. For important information about Karvys’ rating system and other disclosures refer to the end of this material.
Karvy Stock Broking Research is also available on: Bloomberg - KRVY <GO>, Thomson Publisher & Reuters.
 January 14, 2010

Institutional Equities Cummins India

Investment Arguments
Globally one of the leading independent technology players:
With global revenues of US$10.8 Bn, Cummins Group USA is the world's largest
independent Diesel engine designer & manufacturer in above 200 Horse Power (HP)
categories and one of the strongest players catering to power generation, industrial and
automotive segments. Cummins group also has technology to address growing demand
for gas & dual fuel engines. Cummins USA is one of the few MNC groups in India in which
the parent group is making investments in the listed Indian entity Cummins India (CIL) in
developing new products and technologies to create long term business visibility.
Only player catering to engine requirements of many industries
While globally there are other players in diesel and gas engine segments, they are not
present across all the segments and Cummins group is one the preferred engines players
across many industries.
• Wartsila is mainly into marine segment and large industrial power.
• Caterpillar group is globally known for mining and infrastructure equipments but it
also manufactures diesel engines providing power to trucks, ships and boats.
• Navistar of US, a global transportation company also manufactures under MaxxForce
brand diesel engines for leading original equipment manufacturers (OEMs) in auto
space, mainly targeting markets of North and South America.
Cummins India Limited (CIL), a 51% subsidiary of Cummins USA, is India's leading
manufacturer of diesel engines in 205 HP to 2365 HP range. Engines can be broadly
classified into small engines (3HP to 20HP), medium engines (20-800 HP) and large
engines (above 800 HP). CIL is present in medium engines and large engines with market
share of about 50%. CIL also manufactures generator sets in range of 7.5 KVA to 2000 KVA
and gas engines for industrial applications. Domestic market constitutes about 75% to
CIL's total revenues and exports forms 25% of total revenues.

Exhibit 1: Domestic revenue breakup

20%

Power Generation

10% 50% Industrial Engine

Automotive
Distribution
20%

Source: Company

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Institutional Equities Cummins India

Strong thrust on Infrastructure to sustain high GDP growth

The robust demand for machineries & equipments is driven by various infrastructure
and industrial projects. The Eleventh Five Year Plan (FY08 to FY12) envisages a total
investment of Rs 20,542 billion (USD 500 billion) in infrastructure sector for bridging
the infrastructure deficit and for sustaining a GDP growth momentum of 9%, as per The
Planning Commission of India. This ambitious target requires 35% of the total investment,
i.e. Rs 7,429 billion, through private sector participation.

Exhibit 2: Strong capex growth led by public and private investments

3500 30%
Rs bn
3000 25%
24%
2500 15%
18% 20%
2000 14%
12% 15%
1500
10%
1000
500 5%
0 0%
FY08 FY09 FY10 FY11E FY12E
Public Investment Private Investment Growth (%) YoY

Source: The Planning Commission

CIL is one of the best positioned companies in the engineering sector to benefit from
infrastructure boom
The demand for CIL's products is driven by infrastructure capex, which is expected to be
about Rs 40,992 billion (US$ 1,025 billion), growing at a CAGR of 14.8% in The Twelfth
Five Year Plan (FY12-FY17), to achieve a share of 10% as a proportion of targeted GDP.
In engineering sector CIL is one of the best positioned companies with strong technology
catering to demands of power, construction, roads & bridges, railways, ports, storage,
mining, oil & gas, airport, retails, commercial and many other sectors.
Economics of operating costs one of the key criteria for buyers while buying engines
Backed by strong product designing and development skills of parent group, CIL has an
edge over the competitors. The running cost of CIL engines is one of the lowest in
industry therefore buyers such as contractors, builders, retailers, OEMs prefer CIL
engines over competitors. We believe that it is the driving point behind Cummins India's
growth in the domestic market.

Robust demand for power generation continues to drive demand

for CIL
CIL leads the way in providing range of power solutions such as engines, generators,
alternators, digital controls, transfer switches and digital paralleling systems. CIL
makes generator sets in range of 7.5 KVA to 2000 KVA. Power solutions business
contributes about 50% to its domestic revenues. Due to sluggish investment outlook in
FY07-10, Power solution division revenues grew at a CAGR of 9% over FY07-FY10. With
strong pick up in demand for power solutions business, revenues from power solutions
business have grown by 50% YoY in Q2FY11. Going forward we estimate power solutions
business to grow strongly by 50% in FY11E and 35% in FY12E.

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Institutional Equities Cummins India

Exhibit 3: Growth in CIL's power generation business over FY10 - FY13E

30000 60.0%
25000 50.0%
35.0% 30.0%
20000 50.0% 40.0%
15000 30.0%
4.0%
10000 20.0%
5000 10.0%
0 0.0%
FY10 FY11E FY12E FY13E
Power generation revenues (Rs mn) Growth (%) YoY

Source: Karvy Institutional Research

Power sector investments in XIth Five Year Plan not sufficient

Historically India has a poor track record when it comes to augmenting power generation
capacities. Moreover, with State owned electricity boards in losses for long time, new
investments in power sector were difficult to take-off. Against a backdrop of severe
short supply in power, the investments in power sector in last two years of Eleventh
Five Year Plan (FY08 to FY12E) are not sufficient to match the demand supply gap of 12%
- 16%. Also, The Planning Commission of India expects major shortfall in capacity
addition in The Eleventh Plan with total estimated capacity addition of 62,374 MW as
compared to a target of 78,700 MW. Moreover, the actual demand numbers released by
CEA which have been collated from the State boards, suggest that the true demand may
have been under-reported by the State boards. It means that actual demand for power
was met through captive power generation. CIL has been a leader in supplying captive
diesel generator sets in India.

Exhibit 4: Investments in power sector in XIth Five Year Plan

1800 16.0%
Rs bn 15.1% 10.0%
1600 14.0%
1400 12.0%
1200 10.0%
1000 5.4% 7.6% 8.0%
800
5.0% 6.0%
600
400 4.0%
200 2.0%
0 0.0%
FY08 FY09 FY10 FY11E FY12E
Power Sector Growth (%) YoY
Source: The Planning Commission

We are unfazed by the recent concerns on surplus power capacity in India

The recent concerns in market about power supply overtaking demand from FY13
onwards are not likely to hamper the demand for CIL due to the following reasons.
• Still most of the places in India face regular power cuts for many hours of the day.
Due to this, domestic & commercial consumers either buy diesel-powered portable
generators or inverters for un-interrupted power supply.
• About 25% - 30% of industrial consumption is still met by captive power plants as
grid power is not reliable, and dependence on the grid would mean being at the
mercy of SEBs who could impose power cuts.

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Institutional Equities Cummins India

• In addition to captive power generation requirements, CIL products are also targeted
at back up power for security, stability, connectivity and other requirements.
• We do not expect Coal India to ramp up coal production in line with rising demand
from coal powered plants due to hurdles in commissioning new mines owing to
problems in land acquisition and delays in obtaining regulatory clearances.

Strong growth in industrial engine business led by mining &

construction sectors
Industrial engines business contributes about 20% to CIL's domestic revenues and CIL
is a market leader in the medium range of engines (from 20 HP to 800 HP), which find
applications in construction machineries, earthmoving equipments and material
handling equipments such as crawlers, excavator, wheel loaders, backhoe loaders,
compactors, motor graders, cranes, forklift trucks, dozers and many others.
Industrial engine business contributes about 15% - 20% to CIL's revenues and has
grown at a CAGR of 21% over FY07-FY10. In Q2FY11 it has grown at a rate of 70% YoY on
back of strong growth from construction and mining sectors. We expect industrial
engine business to post strong growth of 50% in FY11E and 30% in FY12E.

Exhibit 5: Growth in CIL's industrial engines business over FY10-FY13E

12000 60.0%
25.0%
10000 30.0% 50.0%
23.0%
8000 50.0% 40.0%
6000 30.0%
4000 20.0%
2000 10.0%
0 0.0%
FY10 FY11E FY12E FY13E
Industrial engine revenues (Rs mn) Growth (%) YoY
Source: Karvy Institutional Research

Mining & construction equipment industry volumes set to increase going forward

Exhibit 6: Strong demand from mining & construction equipment industry

80 Units in '000 11.5% 40.0%
70 30.0%
60 17.3% 20.0%
50
13.0% 10.0%
40 31.4%
0.0%
30
20 -10.0%
-18.6%
10 -20.0%
0 -30.0%
FY09 FY10 FY11E FY12E FY13E
Construction Equipments Growth (%) YoY

Source: Industry reports

Mining & construction equipments volumes for industry are expected to register a
CAGR of 18% over FY09-13E from 35,000 units at the end of FY2009 to 68,000 units by
FY2013E.

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Institutional Equities Cummins India

Automotive business looks promising with upswing in demand for

CVs and large vehicles
CIL has a strong product portfolio for automotive business (contribution of 10% to
revenues) such as filtration, exhaust, turbo technologies, fuel systems and lubrication
to serve commercial vehicles, buses and large vehicles. With increase in usage of gas
for automobiles, CIL has also developed gas engine and has recently executed order for
2,500 low floor CNG buses for Delhi Transport Corporation. Buoyed by good demand
for its small B series engines (6 litre diesel as well as gas) CIL is setting up a plant for
30,000 units at Phaltan megasite which will commence from April 2011. Automotive
business contributes about 10% to CIL's revenues and has grown at a CAGR of 60% over
FY07-FY10. In Q2FY11 it has grown at a rate of 40% YoY on back of good demand for
large vehicles such as CVs, bus and others. We expect automotive engine business to
post decent growth of 40% in FY11E and 30% in FY12E.

Exhibit 7: Growth in CIL's automotive business over FY10-FY13E

6000 160.0%
20.0%
5000 140.0%
30.0% 120.0%
4000 40.0% 100.0%
3000 144.0% 80.0%
2000 60.0%
40.0%
1000 20.0%
0 0.0%
FY10 FY11E FY12E FY13E
Revenues from Automotive business (Rs mn) Growth (%) YoY

Source: Karvy Institutional Research

Augmenting overall capacity by 40% to drive the business growth in near term
With strong demand from domestic as well as exports, CIL is setting up a green-field
manufacturing facility at Phaltan, Maharashtra for increasing engine and generator
capacity, rebuilding facility and distribution centre. CIL is planning total investments
of about Rs 900 mn, Rs 1,400 mn and Rs 900 mn in FY11E, FY12E and FY13E, respectively,
entirely from internal cash generations. We expect about 40% increase in CIL gross
block over FY10 to FY13E.
(1) Engines plant (6 litre capacity diesel as well as gas engine) with annual capacity of
30,000 units for highway vehicles, power generation and off-highway equipments.
(2) Plant for manufacturing 15,000 units per annum of 200 KVA generators for exports
to parent group. The capacity will be scaled up to 40,000 units per annum in three
phases over next three years.
(3) Unit for rebuilding and refurbishing of engines for domestic market. CIL has a large
population of engines which it plans to overhaul and rebuild. As the population of
engines increases this segment will also grow in future.
(4) Components & parts distribution centre which will centralize assembling and
distribution activities from a centralized location to cater to the requirements of
other plants of Cummins as well as aftermarket sales requirements.

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Institutional Equities Cummins India

Exports to increase on back of parents' outsourcing

CIL is one of the top three outsourcing locations identified by parent group along with
China and England for sourcing high horse power and medium horse power engines.
CIL exports engines up to 50 Litres to its parent group (V-28, K-38, and K-50 series
engines). Of the total exports, about 75% falls under engines in high horse power
category and the balance 25% is for generators under 200 KVA. Recently, parent group
has identified CIL as sourcing hub for 200 KVA generators to be manufactured at its new
facility at Phaltan Maharashtra with initial capacity of 15,000 units per annum, to be
scaled up to 40,000 units per annum in three phases. We expect yearly revenue potential
of Rs 10,000 mn from 15,000 units per annum with 70% utilization levels in first year
full year of operations. In H1FY11, exports grew by 195% YoY to Rs 4,910 mn, albeit on
a lower base of last year, due to resumption of orders from parent group for USA, South
America and Asian countries. We expect the company to achieve exports level of FY2009
again in FY2012, with commissioning of new capacity at Phaltan and increase in exports
to parent group for existing products. We expect CIL's exports to post strong growth of
108% in FY11E and 30% in FY12E.

Exhibit 8: Exports on a strong growth path over FY10 to FY13E

18000 150.0%
16000 75.1% 25.0%
30.0% 100.0%
14000
12000 108.3%
10000 50.0%
8000 -62.8%
0.0%
6000 20.4%
4000 -50.0%
2000
0 -100.0%
FY08 FY09 FY10 FY11E FY12E FY13E
Exports YoY Growth (%)

Source: Company and Karvy Institutional Research

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Institutional Equities Cummins India

YTD financial performance

Robust Q2FY11 and H1FY11 performance
CIL reported excellent set of numbers for Q2FY11. Domestic market which contributes
around 75% to total revenues grew by 45% YoY, while exports jumped by 281% YoY in
Q2FY11. With higher capacity utilization, EBIDTA increased by 89% YoY to Rs 1,933 mn
and EBIDTA margin increased by 130 bps YoY to 18.1% in Q2FY11. However, on a
sequential basis, EBIDTA margin was lower by 160 bps to 18.1% in Q2FY11E due to
increase in raw material prices and wage costs. PAT for the quarter was up by 91.3% YoY
to Rs 1,678.9 mn. For H1FY11, CIL's revenues grew by 60% YoY, EBIDTA grew by 81.2% YoY
and PAT grew by 73.7% YoY.

Rs Mn Q2FY10 Q1FY11 Q2FY11 YoY (%) QoQ (%) H1FY10 H1FY11 YoY (%)
Net Sales 6,077 9,100 10,675 75.7 17.3 12,333 19,775 60
Operating Costs 5,056 7,305 8,742 72.9 19.7 10,275 16,047 56
EBIDTA 1,021 1,796 1,933 89.4 7.7 2,057 3,729 81
EBIDTA Margin (%) 16.8 19.7 18.1 1.3 -1.6 16.7 18.9 2.2
Other Income 279 276 444 59.4 61.1 583 720 24
Interest 8 4 4 -46.1 0.0 14 8 -40
Depreciation 99 93 93 -6.0 -0.2 188 186 -1
Profit Before Tax 1,193 1,974 2,281 91.2 15.5 2,439 4,255 74
Tax 316 572 602 90.7 5.2 665 1,173 76
Tax Rate (%) 26.4 29.0 26.4 -0.1 -2.6 27.3 27.6 0.3
Adjusted PAT 877 1,402 1,679 91.3 19.7 1,774 3,081 74
Reported PAT 877 1,402 1,679 91.3 19.7 1,774 3,081 74

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Institutional Equities Cummins India

Financial outlook and key assumptions

CIL revenues to grow at a CAGR of 34% over FY10-FY13E
CILs revenues have grown at a decent rate in last 7-8 years, except in FY10, when CILs
revenues declined by 14% on account of postponement in industrial capex and slowdown
in economy. This brought down its CAGR growth in revenues to 10% in FY07-FY10. Going
ahead, on the back of strong growth in economy, industrial capex is once again expected
to accelerate. Revenues from domestic market have grown by 39.3% to Rs 14,865 mn in
H1FY11 on back of strong growth across industry sectors. In Q2FY11, CIL's power
solutions business which contributes about 50% to its domestic revenues has grown
by 50% YoY, whereas, Industrial engines business, contributes 20% to revenues, has
grown by 70% YoY in Q2FY11. Similarly, automotive business too has grown strongly by
40% YoY in Q2FY11. Moreover, exports to parent group has picked up in current year
and it will continue to grow strongly in FY12E and FY13E due to commissioning of new
capacity at Phaltan and increase in exports to parent group for existing products.
Overall, we expect CIL revenues to grow at a CAGR of 34% over FY10 to FY13E.

Exhibit 9: Strong revenue growth over FY10 to FY13E

80000 50.0%
25.0%
70000 40.0%
30.3%
60000 46.2% 30.0%
50000
20.0%
40000 25.1% 23.3%
-14.1% 10.0%
30000
20000 0.0%
10000 -10.0%
0 -20.0%
FY08 FY09 FY10 FY11E FY12E FY13E
Net Sales (Rs mn) YoY Growth (%)

Source: Company and Karvy Institutional Research

Segmental break up of revenues (Rs mn) FY10 FY11E FY12E FY13E

Power generation 10,319 15,478 20,895 27,164
Industrial engines 4,127 6,191 8,048 10,061
Automotive 2,211 3,096 4,024 4,829
Distribution 6,584 6,191 7,405 8,434
Exports 4,883 10,170 13,221 16,526
Total revenues (Rs mn) 28,125 41,126 53,594 67,013
Source: Karvy Institutional Research

CIL to maintain steady EBIDTA margins going forward

CIL posted one of the best EBIDTA margins at 18.8% in FY10, despite sharp decline in
exports which pulled down its overall revenues by 14%. This is attributable to softening
of commodity prices and cost reduction programs such as six sigma initiatives. In
FY10, CIL saved about Rs 940 mn (about 18% of FY10 EBIDTA) due to six sigma programs
amd Rs 472 mn from reduction in materials cost of ownership programs. For FY11E, we
are factoring margins to remain in 18.6% due to sharp increase in prices of commodities
such as pig iron, steel and others. With commencement of new facilities at Phaltan
from April 2011, we expect higher operating leverage to offset any increase in commodity
prices and expect steady EBIDTA margins of 18.8% in FY12E and FY13E.

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Institutional Equities Cummins India

Exhibit 10: Sustained improvement in EBIDTA and EBIDTA margins

14000 18.8% 20.0%
12000 18.8% 18.6%
18.8% 15.0%
10000
14.6%
8000 14.1%
10.0%
6000
4000 5.0%
2000
0 0.0%
FY08 FY09 FY10 FY11E FY12E FY13E
EBIDTA (Rs mn) EBIDTA Margin (%)
Source: Karvy Institutional Research

Return ratios to strengthen going forward

Cummins has been consistently reporting strong ROCE and ROE ratios on back of high
operating margins and asset light balance sheet. Capacity utilization level was quite
low in FY10. However, due to strong demand for CIL's products from various sectors of
economy, capacity utilization levels are very high in current year. As a result, we expect
ROCE ratio to go up from 31.6% in FY10 to 38.7% in FY11E and further to 39.8% in FY12E
due to commencement of new facility from April 2011. Similarly, with no dilution in
equity, CIL's ROE ratio is expected to go up from 28.4% in FY10 to 33.8% in FY12E. ROCE
and ROE ratios are expected to marginally taper down in FY13E, as 40% addition in
gross block is planned phase wise between FY10 to FY13E and peak utilization from
these new capacities take about 2 to 3 years.

Exhibit 11: Strong ROCE and ROE ratios

45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
FY08 FY09 FY10 FY11E FY12E FY13E
ROCE (%) ROE (%)
Source: Karvy Institutional Research

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Institutional Equities Cummins India

Strong cash flow generation from operations and healthy balance sheet
CIL has been consistently generating free cash flows from operations and continues to
be debt free company with surplus cash of Rs 559.3 mn and liquid investments of Rs
7,014 mn as at March 2010 (cash per share of Rs 52 FY12E). In FY10 CIL reported strong
cash flow from operations at Rs 6369 mn as compared to Rs 2452 mn in FY09, despite
reduction of 14% in revenues in FY10E. This is attributable to higher EBIT in FY10 over
FY09 on prudent cost control measures and strict working capital management. As a
result, working capital requirements for the year came down and funds were released
from working capital. For FY11E, working capital requirements will go up again due to
strong growth in overall business. Going forward, we expect CIL to post strong growth
in cash flow from operations in FY12E and FY13E.

Exhibit 12: Strong cash flow generation in FY12E and FY13E

12000
9634
10000
7406
8000 6369
6000 4894
4000 3151
2452
2000
0
FY08 FY09 FY10 FY11E FY12E FY13E
Cash flow from operations (Rs mn)

Source: Karvy Institutional Research

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Institutional Equities Cummins India

Outlook & Valuation

India's GDP is likely to grow at a CAGR of 8-9% for next 2-3 years and this would mainly
be driven by manufacturing, service and infrastructure sectors. We prefer CIL as one of
the strongest technology play in diesel & gas engines space with capabilities to stay
ahead of the competitors in terms of new product development. Massive investments of
USD 1 trillion are planned in various infrastructure projects in The Twelfth Five Year
Plan (FY12-FY17) which in turn is expected to drive 34% CAGR growth in CIL revenues
over FY10 to FY13E against 10% CAGR growth in revenues in FY07-FY10. Due to major
shortfall in power generation capacity in The Eleventh Five Year Plan (FY08-FY12),
demand for CIL's power generation products will grow by 50% in FY11E and 35% in
FY12E. CIL's industrial engine business is expected to grow by 50% in FY11E and 35% in
FY12E on back of strong demand from construction and mining sectors. Similarly, CIL's
automobile business is expected to grow by 40% in FY11E and 30% in FY12E due to
strong demand for CVs and large vehicles. Recovery in global markets and increased
outsourcing from parent group leading to exports growth of 108% in FY11E and 30% in
FY12E. Overall, we estimate CIL to register a CAGR growth of 34% in net sales and 34%
in PAT over FY10-FY13E.
We like CIL due to its strong return ratios and strong balance sheet. We expect ROCE
ratio to go up from 31.6% in FY10 to 39.8% in FY12E and ROE ratio to go up from 28.4%
in FY10 to 33.8% in FY12E due to increase in utilization levels and commencement of
new facility from April 2011. We like CIL due to its debt free status (cash per share Rs 52
FY12E), strong cash flows generation (Rs 22 bn in FY11E to FY13E) and aggressive capex
of Rs 3,200 mn in next three years.
On the valuation front, at a CMP of Rs. 745, CIL is trading at a P/E of 18x FY2012E
earnings. CIL will continue to command premium valuations due to strong technology
from parent group, diversified product portfolio, high growth visibility in revenue and
profit for next two years, strong cash flow generation and increase in exports to parent
group. We expect CIL to trade in its five year high P/E band of 22x - 24x. High earnings
growth over FY10-FY12E to reduce P/E ratio from 33x FY10 to 18x FY12E, PEG ratio to
come down from 4.71 in FY10 to 0.55 by the end of FY11E, making CIL attractive at current
valuations. We initiate coverage on Cummins India with an 'Outperformer' rating and
12-month target price of Rs 909, implying P/E of 22x FY12E EPS.

Exhibit 13: Five year PE band chart

(Rs)

24x
850
18x
650
12x
450

250 6x

50
04/12/2006 26/05/2008 23/11/2009

Source: Karvy Institutional Research

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Institutional Equities Cummins India

Concerns
• The company's fortunes are linked to prospects in capital goods industries. If
recovery in global markets is delayed then CILs exports business could take a hit
as it was witnessed in FY10. Capital goods cycle moves up in lag effect to uptick in
other industries and is the first one to get hit in case of downturn in economy.
• Any sharp rise in commodity prices particularly base metals could adversely impact
company's operating margins. Our sensitivity analysis of EPS to change in EBIDTA
margins suggests CIL's EPS can decline to Rs 38 in FY12E (as compared to our
estimates of Rs 41.3) in case of conservative scenario and EPS to decline to Rs 34
in FY12E, in case of pessimistic scenario.

Exhibit 14: FY2011E FY2012E FY2011E FY2012E

EBIDTA (%) PAT (Rs mn) EPS (Rs)

18.0 6233 7940 31.5 40.1
17.0 5933 7546 30.0 38.1
16.0 5633 7152 28.4 36.1
15.0 5332 6758 26.9 34.1
Source: Karvy Institutional Research

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 January 14, 2010

Institutional Equities Cummins India

Financials
Profit & loss statement
(Rs mn) FY2009 FY2010 FY2011E FY2012E FY2013E
Net revenues 32,741 28,125 41,126 53,594 67,013
% Growth 23.3 (14.1) 46.2 30.3 25.0
Operating expenses 27,968 22,850 33,493 43,492 54,382
EBIDTA 4,772 5,275 7,632 10,102 12,631
% Growth 27.5 10.5 44.7 32.4 25.0
EBIDTA margin (%) 14.6 18.8 18.6 18.8 18.8
Other income 1,507 1,216 1,520 1,633 1,768
Interest 26 21 16 16 16
Depreciation 456 361 371 461 601
Profit Before Tax 5,798 6,109 8,765 11,257 13,781
% Growth 32.2 5.4 43.5 28.4 22.4
Provision for tax 1654 1670 2434 3080 3776
Effective tax rate 28.5 27.3 27.8 27.4 27.4
Adjusted Net Profit 4,144.5 4,438.7 6,331.0 8,176.9 10,005.4
% Growth 38.6 7.1 42.6 29.2 22.4
Net Margin (%) 12.7 15.8 15.4 15.3 14.9
Reported Net Profit 4,336.5 4,438.7 6,331.0 8,176.9 10,005.4
% Growth 45.0 2.4 42.6 29.2 22.4
EPS (Rs) 20.9 22.4 32.0 41.3 50.5
% Growth 38.6 7.1 42.6 29.2 22.4
DPS (Rs) 9.0 12.0 12.0 12.0 12.0
Dividend payout (%) 43 54 38 29 24

Balance sheet
(Rs mn) FY2009 FY2010 FY2011E FY2012E FY2013E
Equity capital 396 396 396 396 396
Reserves & surplus 13,551 15,214 18,383 23,785 31,015
Shareholders funds 13,947 15,610 18,779 24,181 31,411
Long Term Loans 212 86 75 75 75
Total Loans 212 86 75 75 75
Finance lease liability 17 0 0 0 0
Deferred tax liability (231) (170) (100) (3) 121
Total Liabilities 13,945 15,526 18,754 24,253 31,607
Gross block 7,414 7,776 8,676 10,076 10,976
Depreciation 4,324 4,440 4,810 5,271 5,872
Net block 3,090 3,337 3,866 4,805 5,104
Investments 3,993 7,329 8,329 9,579 11,079
Inventory 4,680 4,097 5,965 7,745 9,685
Debtors 6,821 5,229 7,662 9,985 12,485
Cash & Bank Bal 323 559 92 1,167 4,326
Loans & Advances 2,663 2,695 2,727 2,760 2,793
Current Assets 14,570 12,673 16,580 21,831 29,506
Sundry Creditors 4,762 3,768 5,506 7,149 8,940
Current Liabilities 7,708 7,812 10,021 11,962 14,082
Net current assets 6,862 4,861 6,559 9,869 15,424
Total Assets 13,945 15,526 18,754 24,253 31,607

14
 January 14, 2010

Institutional Equities Cummins India

Cash Flow
(Rs mn) FY2009 FY2010 FY2011E FY2012E FY2013E
EBIT 4,317 4,914 7,262 9,641 12,030
(Inc)/Dec in working capital (1,865) 1,454 (2,368) (2,235) (2,396)
Cash flow from operations 2,452 6,369 4,894 7,406 9,634
Other income 1,507 1,216 1,520 1,633 1,768
Extra-ordinary income 192 0 0 0 0
Depreciation 456 361 371 461 601
Interest paid (26) (21) (16) (16) (16)
Dividends paid (1,782) (1,703) (2,376) (2,376) (2,376)
Tax paid (2,051) (2,009) (2,763) (3,382) (4,051)
Net cash from operations 748 4,213 1,629 3,725 5,559
Capital expenditure (434) (362) (900) (1,400) (900)
Free Cash Flows 313 3,850 729 2,325 4,659
Inc/(Dec) in LT borrowing (76) (126) (11) 0 0
(Inc)/Dec in investments 875 (3,337) (1,000) (1,250) (1,500)
Finance lease liability (39) (17) 0 0 0
Others (995) (135) (185) 0 0
Cash from Financial Activities (235) (3,614) (1,196) (1,250) (1,500)
Opening Cash 245 323 559 92 1,167
Closing Cash 323 559 92 1,167 4,326
Change in Cash 79 236 (467) 1,075 3,159

Ratios
FY2009 FY2010 FY2011E FY2012E FY2013E
Raw Material Cost / Sales (%) 68.3 66.0 64.5 64.4 64.4
Manpower Cost / Sales (%) 6.5 6.9 6.1 6.3 6.3
Operating & Other cost / Sales (%) 10.7 8.3 10.9 10.5 10.5
EBIDTA Margins (%) 14.6 18.8 18.6 18.8 18.8
EBIDTA Growth (%) 27.5 10.5 44.7 32.4 25.0
Revenue Growth (%) 23.3 (14.1) 46.2 30.3 25.0
PAT Growth (%) 38.6 7.1 42.6 29.2 22.4
PAT Margins (%) 12.7 15.8 15.4 15.3 14.9
Fixed assets turnover ratio (x) 4.5 3.7 5.0 5.7 6.4
Avg. collection period (Days) 76 68 68 68 68
Avg. payment period (Days) 62 60 60 60 60
Cash & Liquid Invst. /share (Rs) 19 38 41 52 76
ROCE (%) 31.0 31.6 38.7 39.8 38.1
ROE (%) 29.7 28.4 33.7 33.8 31.9
Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0
PER (x) 35.5 33.2 23.3 18.0 14.7
EV/Sales (x) 4.4 5.0 3.4 2.5 2.0
EV/EBIDTA (x) 33.2 28.4 19.1 14.2 11.0

15
 Institutional Equities

Stock Ratings Absolute Returns

Buy : > 25%
Out Performer : 16 - 25%
Market Performer : 0 - 15%
Under Performer : < 0%
Sell : <(25%)

Hemindra Hazari
(Head of Research)
hemindra.hazari@karvy.com

For further enquiries please contact:

research@karvy.com
Tel: +91-22-22895000

Disclosures Appendix

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