Cummins India Ltd’s stock has dropped 6% after it announced its September quarter earnings. Not only had the earnings missed analysts’ estimates as slowing growth in Europe and West Asia hurt the company’s export business, Cummins also sharply cut its sales forecast, leading to analyst downgrades.
From 20% growth in exports earlier, the company reduced its forecast to 0-5%. Exports, which contribute almost one-third to overall revenue, declined 3% from a year ago.
The drop in exports was somewhat unexpected, notwithstanding economic conditions in its overseas markets, since Cummins had introduced new products at the beginning of this fiscal year. But the continued slowdown in Europe and similar conditions in West Asia meant that even the demand for its base product—high horsepower diesel engines—has slumped 44% from a year earlier to Rs.180 crore, according to Emkay Global Financial Services Ltd.
Domestic sales growth too was a tepid 2% year-on-year because of slowing industrial demand. It must be noted though that the power gensets business grew 14% because of power outages and its distribution segment too grew 21%.
The management has retained its domestic growth outlook at 10-11% for FY13, buoyed by strong demand for power generation sets, especially since electricity availability is likely to remain muted given continued problems with fuel scarcity.
What helped Cummins though was that margins have widened by 2.6 percentage points. The company has been able to reduce costs and improve efficiency. Raw material costs as a proportion of net sales dropped to 60% in the second quarter, down 2 percentage points from a year ago. Thus, operating profit grew 28% and net profit was up 25%.
Overall, shares of Cummins have declined 11% from October highs following cuts in earnings estimates by analysts. Ambit Capital Pvt. Ltd has cut its earnings estimate by 1-3% for the current and next fiscal years, assuming revenue declines of 8-10% in FY13 and 12-13% in FY14.
Still, investors seem to have discounted most of the negatives in terms of lower export growth. The shares are trading at 17 times one-year forward price-to-earnings multiple and unless exports growth misses the management forecast or the margins take a hit, further downsides can be ruled out, say analysts.