Cummins India: Wheels of change - Hold

Cummins is well-placed to reap the benefit of the Centre’s increased thrust on infrastructure sector. Increasing allocation to roads and railways, ongoing policy changes to encourage mining activities and plans to increase investment in the port sector should benefit the company.

The company makes industrial engines, power gensets and engines for auto manufacturers. It provides after-sales service for its equipment through its distribution business. A robust capital investment in its manufacturing units over the last few years, focus on developing strong R&D capabilities and the technical expertise of its parent company, Cummins Inc, are advantages.

But weakness in domestic private investment and a sluggish export market weigh on the company. The stock now trades at ₹ 921, nearly 22 per cent lower than the peak of ₹ 1,189 recorded in August 2015.

It trades at a price earnings multiple of 35 times its trailing 12-month earnings, higher than its three-year average of 33 times. The positives appear factored in the price. However, given the positive impact of higher investment by the Centre, investors can continue to hold the stock.

Cummins India (CIL) recorded its highest revenue ever of ₹4,603 crore in 2015-16, a 6.5 per cent increase compared with the previous year. Net profit after adjustments was at ₹752 crore, a growth of 4.9 per cent over the previous year. While revenue grew at an annualised rate of 0.7 per cent between 2012-13 and 2015-16, improved supply chain management led to a higher 1.4 per cent growth in profit (annualised) in the same time period.

For the full year, domestic sales contributed close to ₹2,940 crore; around 65 per cent of the total sales.

The domestic power generation business contributed nearly 40 per cent to the domestic sales. The revenue from this segment has grown around 18 per cent over the last two years. The lack of aggregate growth in demand for these equipment and increasing competitive pressures may slow the growth rate in this segment.

The industrial engine segment, thatcontributes around 20 per cent to the domestic business, caters to segments such as construction, mining, rail, oil and gas, agriculture, power generation and defence.

The Centre’s increasing thrust to catapult growth momentum through its investment in road, rail, mining and port projects should further accelerate growth in this segment.

The distribution and after-sales service segment accounts for 30 per cent of the domestic revenue.

Export revenue from low horse power, heavy duty and high horse power engines decreased by 13, 30 and 15 per cent, respectively in 2015-16. This segment contributed 65 per cent to total exports.

The drop in exports was due to a fall in demand from the developed market and a simultaneous drop in commodity prices.

Export of new products and sale of spare parts however, grew 40 and 50 per cent, respectively, in 2015-16. This segment accounted for around 35 per cent of the export revenue in 2015-16.

The consolidated revenue for 2015-16 increased around 5 per cent to ₹ 5,369 crore while profit dropped 5 per cent to ₹ 733 crore from the earlier year.

The quarter ending June 2016 saw domestic sales increase 9 per cent, while the exports remained down 22 per cent compared to the same quarter a year earlier.

The ₹1,000-crore R&D centre planned in India as a joint venture with its parent company Cummins Inc is expected to add value in the long run.

The company’s financials are firm with close to zero debt. Operating profit and net profit margin for the year stand at 19 per cent and 14 per cent respectively.

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