Edelweiss - Cummins (KKC IN, INR 311, maintain Buy)

Cummins India's (KKC) Q4FY07 results surprised us in terms of profitability despite revenue performance being softer than our expectations. For Q4FY07, revenue grew by ~30% Y-o-Y to INR 5 bn, EBITDA grew by ~41% Y-o-Y to INR 823 mn, and net profit grew by ~21% Y-o-Y to INR 657 mn. EBITDA margins expanded by ~130bps Y-o-Y to 16.3% driven by lower other operating and raw material expenses (as a percentage of sales). However, net margins at 13% were lower by ~100bps Y-o-Y due to higher tax rate.

For FY07, on a consolidated basis, revenue grew by ~20% Y-o-Y to INR 21 bn, EBITDA grew by 36% Y-o-Y to INR 3.4 bn, and net profit was up by ~46% Y-o-Y at INR 2.6 bn. EBITDA margins expanded by ~200bps Y-o-Y for the year to 16.3% driven by buoyant demand and pricing scenario. Net margins expanded by ~230bps to 12.6% for the year.

Even though KKC posted strong margins in FY07, the margins outlook for FY08E remains a cause of concern as reduction in import duties, commodity inflation, and exchange rate fluctuations are likely to result in margin pressures. However, we believe that the macro environment is strongly supportive of KKC's growth, going forward, as engines form the core of the capital goods segment and KKC is among the leading manufacturers of diesel engines in India. At our consolidated EPS estimate of INR 16 and INR 20 the stock is trading at a P/E multiple of 20x and 16x for FY08E and FY09E, respectively. We continue to maintain our 'BUY' recommendation.