Expects double-digit growth in domestic sales driven by infrastructure spending
Cummins India (KKC) has witnessed a pick-up in domestic demand,  driven by strong infrastructure spending by the government. Over the medium term, the company expects domestic sales to register double-digit growth,  given strong infrastructure spending and a pick-up in demand for backup power. Growth in domestic sales is expected to be driven by: a) Industrial segment:Industrial segments such as road construction, railways and mining provide strong opportunities,  given the government’s focus on infrastructure development. Over the medium term, KKC expects growth in the industrial genset segment to come in better than that in the power generation segment,  b) Power generation segment: KKC expects growth in this segment to be directly correlated to domestic GDP growth,  driven by back-up power installations by end-consumers. Revival is seen in the key end-markets of IT/ITES, hotels, hospitals, data centers, and c) Distribution segment.

Gains share in high horse power segment despite fierce competition
Competition in diesel gensets remains intense as demand has been subdued over past few years. Despite this, KKC has been able to gain share,  given its focus on (1) retaining market share (taken two price cuts in the last three quarters in response to rising competition) and (2) providing an improved product offering (via better-technology engines, strong service, OEM/dealer network, and spare part availability to ensure minimum downtime). KKC has also reduced product costs through value engineering.

Strong growth in distribution business led by higher contribution from industrial segment
KKC expects the distribution & spares business to perform well, given higher sales contribution from the industrial segment, where machine usage is very intense (the consequent wear and tear of machines   augments the need for spares). Also,  given the large installed base of machines, demand forspares is expected to remain robust. 

Exports muted, but KKC expects revival from 2HFY18
Exports have been weak,  given bleak demand from end-markets like Africa, LATAM and the Middle East. However, KKC expects demand to revive 2HFY18 onward, given the increase in commodity prices. In the long run, the company expects low-double-digit growth in exports.

leading to improvement in margins
KKC's gross margin contracted 160bp YoY to 35.5% in FY17 due to a) declining contribution from the exports segment (33% of sales v/s 37% in FY16), which commands better margins   than the domestic segment, b) higher share of industrial sales and c) an adverse product mix. The company expects margins to improve in FY18 with a pickup in exports in 2HFY18.

Valuation and view :We have a Neutral rating on the stock with a target price of INR950 (27x FY19E EPS). The stock trades at 34x FY17E EPS of INR26.5, 31x FY18E EPS of INR30.9 and 25x its FY19E EPS of 35.5. Key risks to our rating are: (a) faster-than-expected revival in the domestic power generation market and (b) sharp rise in commodity prices leading to a pick-up in LHP exports.