Cummins India: Revenue growth fires all-round performance

Revenue grew by 19% to Rs1,355 crore from the year-ago period, which was about 9% ahead of Bloomberg’s 20-broker average estimate


Sales in the industrial segment looked up on higher infrastructure spending by the government.
Sales in the industrial segment looked up on higher infrastructure spending by the government.

Cummins India Ltd’s shares rallied 6.4% on Thursday as its December-quarter performance outstripped Street expectations. The woes of the currency ban did not dim this capital goods maker’s fortunes.

Revenue grew by 19% to Rs1,355 crore from the year-ago period, which was about 9% ahead of Bloomberg’s 20-broker average estimate. Although Cummins India shone on both domestic and export sales, the company’s management expressed caution that the 25% year-on-year growth in exports may not sustain in the quarters ahead. Global markets are not yet on firm ground.

However, the all-round markup in domestic performance is a good sign. Sales in the industrial segment looked up on higher infrastructure spending by the government, even as the power generator and distribution business segments did well. On home ground, the firm is well poised given the government’s big-bang infrastructure reforms announced in the budget. HDFC Securities Ltd, in its results analysis, points out that while gensets are mainly used as a backup for power, industrial engines have a higher usage which augurs well for Cummins India’s sales. Revival in private sector capex will be the next lap of growth.

Be that as it may, the operating leverage that came from higher sales lifted the operating margin by 154 basis points year-on-year to 16.7%—higher than the forecast of 15.2% on the Street. In fact, revenue growth helped to offset the rise in raw material costs, although the firm prudently managed both employee costs and other expenses. Thus operating profit surged by 31% to Rs226.5 crore, again beating the average Street estimate.

Yet, there are concerns among analysts on rising costs thwarting steady margin expansion from the current levels.

Meanwhile, the December quarter’s net profit growth of 11% was also higher than investor forecasts. This was in spite of lower other income and higher tax paid out during the quarter.

Such a huge outperformance on all fronts was mainly on the back of higher revenue. Whether this will be sustained is the question, given that concerns on exports remain. However, if revenue growth continues in the forthcoming quarters, it may instil confidence in investors, which in turn could further expand the rich valuation of 31 times one-year forward estimated earnings.

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