Cummins India: Engine of growth

Cummins India (CIL), a leading company that designs, manufactures, distributes and services power systems , is expected to gain from the Centre’s increased focus on the infrastructure sector. The Centre has allocated about ₹2.4 lakh crore in the recent Budget for creating transport infrastructure, including roads, railways and ports. Besides, the decision to grant infrastructure status to affordable housing should also give a thrust to the construction sector.

Well-established manufacturing facilities and sound technical expertise give the company an edge in the highly competitive power segment market.

Investors with a long-term perspective can buy the stock. Despite the weakness in domestic private investments and beaten down export market, the fiscal boost by the Centre should drive the demand for the company’s products. The stock’s current price to earnings (trailing 12 month) of about 33 times, is almost in line with its three-year average of about 32 times. Higher revenue and earnings over the next few years should translate into upside in the stock.

CIL gets its revenue mainly from four segments: power generation, industrials, auto and distribution business units.

In 2015-16, the company recorded its highest revenue (₹4,603 crore) and adjusted profit (₹752 crore), 6.5 per cent and 4.9 per cent respectively higher than the year earlier. About 65 per cent of the revenue is contributed by the domestic business.

The power generation segment that contributes close to 40 per cent of the total revenue caters to a wide range of sectors such as telecom, construction, IT and IT enabled services, and data centres. With increasing consumption of data through internet , the growth in this segment is expected to be steady.

The industrial business segment contributes close to 20 per cent of the domestic business. The management has indicated healthy growth in compressor sales, predominantly driven by the road and rail segment, in the year so far.

In the quarter ending December 2016, revenues of both the power generation and industrial segments grew by 20 per cent each y-o-y. The Centre’s increasing thrust on building strong transportation infrastructure should give a boost to construction (cement) and mining (steel) sector ; this should aid CIL .

Increased construction activities are also indicated by a revival in distribution and after sales service. The distribution business segment, which accounts for about 30 per cent of the revenue, showed around 17 per cent y-o-y increase in sales in the December 2016 quarter.

However, the revenue from export market that contributes about 35 per cent of the revenue remains flat. But with crude oil and metal prices reviving, growth in this segment should pick up.

Unlike the three quarters ending between June 2015 and December 2015, when the revenue decreased sequentially, the last four quarters have seen steady revenue growth.

The revenue rose from ₹1,112 crore in the March 2016 quarter to ₹1,401 crore in the December 2016 quarter. Also, during this period, the adjusted profit after tax grew from ₹167 crore to ₹198 crore.

For the nine months ending December 2016, CIL’s revenue and adjusted profit are ₹4,050 crore and ₹576 crore respectively, 6 per cent higher and 2 per cent lower compared to the same period a year earlier. The rise in expenditure played spoilsport. The operating margin for the nine months ending December 2016 is 19 per cent. The company’s debt is negligible.

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