Stock Views on CUMMINS INDIA, ASIAN PAINTS, AREVA T&D INDIA

CITIGROUP on AREVA T&D INDIA

The company ended the quarter with a backlog of Rs 5,110 crore, up 21% y-o-y. It has maintained its leadership position in Q2CY10. The backlog would have been higher if prices had stayed flat. Several EPC (engineering, procurement and construction) contractors have entered the T&D (transmission and distribution) space, and they are pulling down prices. The management had earlier expected prices to stabilise by July '10 but now believe this might happen only in December '10. Chinese competition is continuing. Since September '08 transmission prices are down 25% and distribution prices are down 32%. The move to encourage domestic manufacturing in extra high voltage is positive. Planning Commission's study suggests that Chinese and Korean companies enjoy a 15-20% cost advantage due to incentives in their countries. Royalty as a percentage of sales is 1.5% currently and the company is not clear if this will go up as the new parent will have to take a call, especially now that the government has removed the royalty payment limit.

HSBC on ASIAN PAINTS

HSBC downgrades the rating of Asian Paints to `Neutral'. Asian Paints reported strong numbers, 22.8% sales growth versus the estimate of 18%, and adjusted PAT growth at 20.6% versus the estimate of 12%. Domestic business grew much ahead at 28%, driven by strong consumer demand, but also due to increase in pipeline inventory as dealers stocked up in anticipation of a price increase. While gross margins declined by 120 bps, operating leverage helped to mitigate margin hit. Since price increases are mitigating the cost increase impact, and demand environment is strong, HSBC is increasing the EPS estimates for FY11/12 by 5.3%/9.5%. The company has cautioned about demandsupply mismatches existing in products such as titanium dioxide and acrylic acid, and hence will be circumspect in painting too bullish a story. The new multiple is at a 10% premium to its historical average to account for improved volume growth and margins and is slightly below the current multiple of 26.6x.

BANK OF AMERICA on CUMMINS INDIA

Bank of America maintains `Buy' rating on Cummins India with a target price of of Rs 660. Cummins Inc has revised up its revenue guidance for India in '10 by 6% and now expects 49% revenue growth. This announcement was made along with the June '10 quarter result of Cummins Inc. Bank of America believes the guidance has a strong correlation with Cummins India and augurs well. They have estimated 45% yo-y revenue growth in June '10 quarter for Cummins India, which is lower than the 45% growth reported by Cummins Inc for its Indian unit. Also, the estimated Rs 3,900 crore revenue in year '10 is 25% below the revenue guidance of $1049 million for the Indian unit. The key driver for strong growth is sharp recovery in demand for large size gensets. Cummins India is seeing strong cyclical recovery in engine demand within India as well as in exports. Bank of America expects its EPS to grow 36% and 31% respectively in FY11E and FY12E respectively. Recent guidance of Cummins Inc implies almost 20%-25% upside to the FY11E EPS.