Cummins India
Will get back on the consistent growth track
Catering to well diversified market segments, the company should continue to grow its sales at healthy rates and recover the profit margins, which were affected by one-time factors
| Buy | Cummins India |
| BSE Code | 500480 |
| NSE Code | CUMMINSIND |
| Bloomberg | KKC@IN |
| Reuter | CUMM.BO |
| 52-week High/Low | Rs 463 / Rs 265 |
| Current Price | Rs 295 (as on 30th May 2008) |
Cummins India (CIL) is an integrated engine, equipment and component manufacturer - it operates in market segments that include power generation equipment, commercial vehicles and, industrial equipment and applications (such as construction and earth moving equipment, compressors, pumps and cranes). Nearly 45% of the total sales come from sales of engines to Power Generation sector, 15% to industrial sector, 5% to Automobiles sector, 30% to exports and the rest from spare parts. In automobile sector, the company has engines based on duel fuel technology ie, natural gas and diesel. The company has won the CNG bus orders from Tata Motors of 2500 engines (each engine is worth around Rs 3-4 lakh).
Subsidiary of a strong parent
Cummins Inc. (which holds 51% equity stake in the company) is a global power leader and is a corporation of complementary business units that design, manufacture, distribute and service engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, (USA) Cummins serves customers in more than 160 countries and territories through its network of 550 company-owned and independent distributor locations and more than 5,000 dealer locations. With more than 28,000 employees worldwide,
March 2008 quarter was affected by one time factors
For the quarter ended Mar’08, the net sales grew by 33% to Rs 670.00 crore. OPM fell by 530 bps to 11.0%, which resulted in fall in operating profit by 11% to Rs 73.64 crore. However, interest declined by 64% and depreciation grew by 23% leading PBT to increase by 13% to Rs 110.61 crore. The dip in the effective tax rate (by 100 bps) helped Net Profit to grow by 15%.
- The OPM of the company for the quarter ended Mar’08 stood at 11% via a vis 16.3% y.o.y. The margins were hit badly due to the following reasons (most of which are of exceptional nature): -
- There was a retrospective revision in pricing of steel (pig iron) of the previous nine months during this quarter by the suppliers. As a result of which the company got hit by around 200 basis points in margins (150 due to previous nine months increase and 50 basis points for the quarter)
- The Pune Municipality increased Octroi for the import of some components from 3% to 7% from Jan’08, which lead to 50 basis points reduction in margins. However, the company is confident that after negotiations with government, the same will be brought back to 3% by June’08
- Exchange rate loss of Rs 27 crore (for the year and around 9 crore for the quarter as against exchange gain in the corresponding previous quarter). The exports stand around 30% of the total sales and the company is net exporter. The exports grew by 22% in dollar terms and 20% in rupee terms.
- Change in product mix. The production of lower engine category (below 160 KVA capacity) was more vis a vis corresponding previous year. The low capacity engine have lower margins vis a vis heavy duty and high horse power engine. (More than 350 KVA). Presently the low engine represents 12% of sales, mid range engine (range between 160 KV-250 KV) represents 25% of sales, heavy duty engine (range 250-350 KV) represents 10%, spares contributes around 8%, while the rest is contributed by high horse power (more than 350 KV). While the trend in product mix will continue, because the demand for low horsepower engine is more and is increasing, the company will try to maintain the optimum balance within the same.
According to Mr. Anant Talaulicar, Chairman, Cummins India " 'It has been another year of very respectable performance improvement by the Company with business growing strongly in both domestic and export markets. We are investing aggressively in our people, new customer relationships, new products and additional manufacturing capacity to sustain our profitable growth. Unfortunately, as expected, the company’s bottom line performance this quarter was impacted by unprecedented increases in commodity prices over the past few months, the appreciation of the Rupee against the dollar when compared with the previous year, as well as a sudden decision by the Pune administration to raise Octroi charges on imported inputs. In spite of these adverse factors we were able to grow our profits for the quarter, compared to the corresponding quarter last year. As we look ahead, we could look forward to continued profit growth particularly if commodity prices and the exchange rate levels out.'
Capacity expansions on track
The two new manufacturing facilities for manufacturing diesel engines became operational from Jan’08 at Pirangut near Pune and one in Ranjangaon. The company had spent around Rs 100 crore for FY’08 and expects to spend another Rs 150 crore for FY’09. However there is no theoretical term of capacity as it largely depends upon the engine size. So overall, the company has mentioned that the capacity is 30% higher than the previous year.
The capacity expansions at Phaltan, near Pune is progressive beyond their expectations and the full fledge capacity will be operational by the end of this calendar year. The company will manufacture engines both for exports and for domestic marker.
Reasonable valuation
For FY 2009 we expect Cummins India to report consolidated sales of Rs 3032.38 crore, net profit of Rs 389.41 crore and consolidated EPS of Rs 19.7. Current price of Rs 295 discounts this less than 15 times.
| | 0503 (12) | 0603 (12) | 0703 (12) | 0803(12) | 0903 (12P) |
| Net Sales | 1490.24 | 1806.92 | 2156.83 | 2655.00 | 3032.38 |
| OPM % | 11.8 | 14.0 | 16.0 | 14.1 | 15.7 |
| OP | 176.35 | 252.85 | 345.42 | 373.80 | 474.96 |
| Other income | 67.14 | 64.54 | 91.17 | 131.00 | 134.12 |
| PBIDT | 243.49 | 317.39 | 436.59 | 504.80 | 609.08 |
| Interest | 4.13 | 4.52 | 6.46 | 2.50 | 2.64 |
| PBDT | 239.36 | 312.87 | 430.13 | 502.30 | 606.26 |
| Depreciation | 40.64 | 39.04 | 38.10 | 38.30 | 43.83 |
| PBT | 198.72 | 273.83 | 392.03 | 464.00 | 562.42 |
| Tax | 65.29 | 90.19 | 124.06 | 139.60 | 173.01 |
| PAT | 133.43 | 183.64 | 267.97 | 324.40 | 389.41 |
| EPS (Rs)* | 6.7 | 9.3 | 13.5 | 16.4 | 19.7 |
| Annualised on current equity of Rs 39.60 crore, | |||||
| Cummins India: Standalone Results |
| | 0803(3) | 0703(3) | Var (%) | 0803(12) | 0703(12) | Var (%) |
| Sales | 670.00 | 504.91 | 33 | 2330.78 | 1840.78 | 27 |
| OPM (%) | 11.0 | 16.3 | | 13.2 | 16.0 | |
| OP | 73.64 | 82.34 | -11 | 306.92 | 294.67 | 4 |
| Other income | 46.39 | 23.64 | 96 | 122.71 | 85.34 | 44 |
| PBIDT | 120.03 | 105.98 | 13 | 429.63 | 380.01 | 13 |
| Interest | 0.41 | 1.14 | -64 | 0.67 | 1.41 | -52 |
| PBDT | 119.62 | 104.84 | 14 | 428.96 | 378.60 | 13 |
| Depreciation | 9.01 | 7.35 | 23 | 32.96 | 32.60 | 1 |
| PBT | 110.61 | 97.49 | 13 | 396.00 | 346.00 | 14 |
| Tax | 35.01 | 31.81 | 10 | 115.31 | 103.95 | 11 |
| Net Profit | 75.60 | 65.68 | 15 | 280.69 | 242.05 | 16 |
| EPS | 15.3 | 13.3 | | 14.2 | 12.2 | |
| Annualised on current equity of Rs 39.60 crore, | ||||||
| Cummins India: Segment Results |
| Standalone | | | | | | | | | Consolidated | | | |
| Particulars | 0803(12) | 0703(03) | (%) of Total | Var (%) | 0803(12) | 0703(12) | (%) of Total | Var (%) | 0803(12) | 0703(12) | (%) of Total | Var (%) |
| Segment Revenue | | | | | | | | | | | | |
| Engine business | 612.96 | 469.78 | 90 | 30 | 2129.77 | 1710.05 | 91 | 25 | 2566.86 | 2185.02 | 87 | 17 |
| Others | 65.01 | 39.81 | 10 | 63 | 222.43 | 150.58 | 9 | 48 | 366.86 | 198.80 | 13 | 85 |
| Total Sales | 677.97 | 509.59 | 100 | 33 | 2352.20 | 1860.63 | 100 | 26 | 2933.72 | 2383.82 | 100 | 23 |
| Less : Inter-Segment Revenue | 0.00 | 0.00 | | 0 | 0.00 | 0.00 | | 0 | 240.48 | 226.52 | | 0 |
| Net Sales | 677.97 | 509.59 | | 33 | 2352.20 | 1860.63 | | 26 | 2693.24 | 2157.30 | | 25 |
| Segment Results | | | | | | | | | | | | |
| PBIT | | | | | | | | | | | | |
| Engine business | 84.65 | 81.17 | 93 | 4 | 310.86 | 284.92 | 92 | 9 | 363.64 | 335.61 | 88 | 8 |
| Others | 6.74 | 5.40 | 7 | 25 | 28.58 | 16.85 | 8 | 70 | 48.43 | 23.03 | 12 | 110 |
| Total Segment Results | 91.39 | 86.57 | 100 | 6 | 339.44 | 301.77 | 100 | 12 | 412.07 | 358.64 | 100 | 15 |
| Less: Intra-group eliminations | 0.00 | 0.00 | | 0 | 0.00 | 0.00 | | 0 | 0.85 | 1.85 | | 0 |
| Interest (Net) / Dividend Income | 0.41 | 1.14 | | -64 | 0.67 | 1.41 | | -52 | 2.54 | 6.46 | | -61 |
| Other Unallocable Income net off Unallocable (Expenditure) | 19.63 | 12.06 | | 63 | 57.23 | 45.64 | | 25 | 55.82 | 41.70 | | 34 |
| EO | 0.00 | 0.00 | | 0 | 0.00 | 0.00 | | 0 | 0.00 | 0.00 | | 0 |
| PBT | 110.61 | 97.49 | | 13 | 396.00 | 346.00 | | 14 | 464.50 | 392.03 | | 18 |
| Capital Employed | | | | | | | | | | | | |
| Engine business | 654.12 | 663.21 | 91 | -1 | 654.12 | 663.21 | 91 | -1 | 709.89 | 715.58 | 91 | -1 |
| Others | 68.41 | 25.88 | 9 | 164 | 68.41 | 25.88 | 9 | 164 | 68.63 | 36.48 | 9 | 88 |
| Aggregate for the company | 722.53 | 689.09 | 100 | 5 | 722.53 | 689.09 | 100 | 5 | 778.52 | 752.06 | 100 | 4 |
| Source: Capitaline Corporate Database | ||||||||||||
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