Cummins indicated that order enquiries have begun to slow down. The management indicated that the strong growth in the current fiscal may slacken in the fourth quarter.
Demand from the infrastructure and commercial real estate sector has been on a declining trend.
A large share of exports goes to the US markets mainly for power generation applications as back-up/auxiliary power.
Although exports have grown well through the year, indications are that exports could also slow down by the fourth quarter.
Cummins India Ltd’s parent i.e. Cummins Inc has revised its outlook for 2008 due to the continuing decline in many of its key markets around the world. Cummins Inc now expects 2008 sales to increase by 9% over 2007, compared to its previous guidance of a 12% increase.
The major decline in the US market has been in the auto and construction market sector.
Cummins is not contemplating further capacity additions given subdued demand outlook for domestic and global markets. Its low HP plants at Pirangute is operating at 60-70% capacity utilization leaving scope for meeting FY10 requirement.
Due to factors like product price hikes, some softening of material prices, depreciation in rupee and continuing value-engineering exercises, we believe there is a strong case for margin expansion in Q3 FY09.
The stock is trading at 10.9x and 9.9x FY09 and FY10 earnings respectively. On an EV/EBITDA basis, the stock is trading at 6.9x FY09.
We maintain ACCUMULATE with a price target of Rs270 (Rs280 earlier) based on DCF. At the target price, the stock would be valued at 13x FY09 earnings.