Cummins India

Shareholders can stay invested in Cummins India (CIL), a leading manufacturer of diesel engines. Though the stock is not inexpensive at Rs 273 (13 times its FY09 per share earnings), what lends confidence is its strong position in the domestic market. With the new government likely to increase thrust on improving road and power infrastructure in the country, Cummins appears well-positioned to leverage on the opportunity.

However, a drastic fall expected in its high margin export revenues may still mute overall sales and profits for the year.

Hit by recessionary trends in the overseas markets, the company expects its export revenues — in spite of the backing of its MNC parent, Cummins Inc — to be hit during the year.
Results scorecard

For the year-ended March 2009, Cummins India reported a sales and earnings growth of over 40 per cent and 54.5 per cent respectively. The topline growth, however, was helped by the increased contributions from Cummins Sales and Service and Cummins Auto Services, two subsidiaries that the company had amalgamated with itself during the year.

Excluding contributions from the two, the company’s revenue and profit growth was limited to about 23 per cent and 32 per cent respectively.

On the margin front too, the company managed to better itself, what with operating margins expanding by 1.4 percentage points to 14.6 per cent, helped primarily by lower raw material cost.

Cummins’ performance for the last quarter, however, does not reflect a healthy picture. Net sales (excluding the amalgamated subsidiaries) declined 8.2 per cent, while its profits dropped by over 18 per cent.

Interestingly, the company saw its exports contribution equal that of its domestic revenues during the quarter.

While increased sourcing by Cummins Inc drove the export revenues, the management does not expect a continuance of such volumes in exports in the coming quarters.

On the contrary, it expects the export revenues to slide drastically due to the recessionary trends in the overseas target markets.

Cummins India’s guidance projects a fall of over 50-70 per cent in its export revenues for the year. While on the face of it such guidance may appear a tad too pessimistic considering that there have been slight signs of revival in most global economies, it still may not be way off the mark.

Any revival in global economies may take a couple of quarters to translate into orders for Cummins India. Besides, Cummins Inc itself has given a guidance with a 30 per cent fall in revenues this year.

Even so, channel inventories of its parent may be the first to get cleared in the event of revival in demand; curtailing export revenues for the Indian arm.

This may call for a greater reliance by the company on the domestic market.
key to growth

Cummins India appears well-placed to benefit from the government’s thrust on improving infrastructure, with its domestic operations straddling high potential sectors such as infrastructure, road development, telecom, construction, mining, auto and power.

While the bulk of its domestic revenues are made up from power generation (30-35 per cent) and industrial (10-15 per cent), revenues from the auto sector (5 per cent) may perk up in the coming years.

The JNNURM (Jawaharlal Nehru National Urban Renewal Mission) scheme, under which the government is aiming to provide improved public transport system in 63 cities, may help the company rake in decent growth in the auto segment, as the scheme would provide assistance to States as a one-time measure for the purchase of buses for the urban transport system. The company has already won the Delhi tender for the Commonwealth Games for the supply of engines for 2,500 buses.

Besides, with the availability of natural gas likely to improve, the demand for its gas-based generators and engine may also look up. That said, it still remains to be seen how far Cummins succeeds in capturing a meaty share of the domestic market, even as the shrinking overseas market is certain to attract competition.

While the company has made clear its intention not to participate in any price war, CIL may lose volume growth if competitors do cut prices.

However, to its credit, CIL’s strong balance-sheet with little debt and high cash (Rs 400 crore), not to mention its long-standing relations in the industry, do make it a strong contender in the domestic market.

Trends in order and revenue inflows over the next couple of quarters may, therefore, bear a close watch.

via BL