Raw material (mainly steel and cast iron) costs accounted for 64% of the revenues for Cummins India in FY08.
In response to the sharp increase in material prices (steel and cast iron) in January-June 2008 period, the company had taken price hikes between 2-2.5% across its product categories in Q1. However, the full impact of these hikes is expected in current quarter.
Steel prices had a strong run in the first half of CY08. The average increase in domestic HR coil prices in the first quarter of current fiscal was estimated to around 30% over the corresponding quarter of previous fiscal.
In recent times, there have been price cuts taken by leading global steel makers like POSCO. In response to this, domestic steel makers have also cut prices by Rs2000 per ton beginning September 2008.
During the current quarter, the rupee slipped 6.5% from the beginning of the quarter. We expect the company to benefit from rupee depreciation but the extent would depend on forward cover that the company has taken to hedge receivables.
The stock is trading at 14.9x and 12.5x FY09 and FY10 earnings respectively. On an EV/EBITDA basis, the stock is trading at 10.5x FY09. We reiterate a BUY with an unchanged price target of Rs358 based on DCF. At the target price, the stock would be valued at 18x FY09 earnings.