Cummins India’s share falls as margins hit by weak exports
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Cummins India Ltd’s shares have been moving downhill and have lost 12.5% since it declared its March quarter results last week. The Street had high expectations from capital goods companies, with shares appreciating on the back of the economic recovery. Cummins India’s results provided a reality check.
The company’s revenue growth of 11% for the quarter from a year ago fell short of the average forecast by 17 Bloomberg analysts. Although the domestic business forged ahead by 18% year-on-year, there was pain on the export front due to a liquidity crunch caused by weak economic conditions in Latin America and Africa.
Further, the product mix was not favourable as the higher horsepower (HP) engines, which enjoy higher profitability compared to the lower HP ones, did not fare well. The management’s explanation that it may take a few more quarters for higher HP engine sales to rev up in overseas markets puts Cummins India on a weak wicket as this segment enjoys higher profit margins.
The March quarter’s results also corroborated this. Due to an adverse product mix, operating margin contracted by 240 basis points year-on-year to 14.4%, much lower than Bloomberg’s average estimate of 16.3%. A basis point is 0.01%.
Therefore, operating profit declined by about 4.5% to Rs170 crore. Even higher other income did not do much for net profit growth. On the other hand, it fell by 5% to Rs158.5 crore, coming nearly 20% below the 15-analysts’ average pencilled by Bloomberg.
The only silver lining in an otherwise gloomy picture for Cummins India is that the domestic industry, especially in sectors like mining and construction, posted robust growth with high demand for engines.
The sharp decline in the company’s share reflects a downgrading of expectations. The shares trade at 28 times its estimated consolidated earnings for fiscal year 2018 but these estimates could be watered down if the travails in export markets continue. While the management has guided for a 5-10% growth in domestic markets, it has indicated a decline of 5% in exports. How these trends impact Cummins India’s profitability and earnings in the coming quarters is critical to its stock price trajectory.