Notwithstanding a dull March quarter (Q4), missing estimates on all counts, multinational capital goods manufacturer Cummins India Ltd’s management struck an optimistic outlook for the coming year. They guided for an 8-10% growth in fiscal year 2019 (FY19) on expectations of strong sales in engines for the power generator and industrial segments. But the Street is not convinced and the company’s shares have fallen by 4% since its results were announced.

The biggest disappointment was Ebitda (earnings before interest, tax, depreciation and amortization), which at Rs173 crore fell short of Bloomberg’s forecast of Rs196.5 crore by 13 analysts. Besides, it was only a tad higher than the year-ago period and accounted for 14% of the net revenue for the quarter. This was lower than the 15.1% that the Bloomberg analysts had estimated.

What went wrong? So far, competition has been rampant in the smaller-power engines. However, it has risen in the higher-power segment too, thanks to the entry of aggressive competitors. That appears to have put pressure on incumbents on the pricing front. Meanwhile, raw material costs have been soaring. Stiff competition could have also made it difficult to pass on cost increases to customers.

Therefore, domestic sales for the quarter declined. Fortunately, the 30% year-on-year increase in exports shored up revenue. Still, net revenue was lower than forecast and only 4% higher than a year ago.

In the analysts’ call, the Cummins India management was more hopeful on domestic sales growth improving. Increase in demand for high-powered engines from oil and gas, and mining sectors is expected to boost sales in the quarters ahead. Not just this, infrastructure activity in construction and railways should also boost demand.

The management said seven out of 10 of the equipment in the 22-tonne road excavators are powered by Cummins India’s engines, which shows a strong presence for the company.

This forecast also comes against an optimistic backdrop of the US parent increasing revenue growth guidance to 10-14% in calendar year 2019, from the earlier guidance of 4-8%. Note that in 2018, the parent clocked a 21% revenue growth with strong traction in regions such as Latin America, India and China.

Be that as it may, the need of the hour from an investor standpoint is for revenue growth to trickle down into profits. Rising material costs will necessitate passing on cost pressures to customers in order to sustain, if not ramp-up earnings.

Even the Cummins India stock, which has been running downhill and is underperforming benchmark indices, is feeling the effect of investor concern on margins. At the current price of Rs708, the stock trades at a fair price-to-earnings ratio of 21 times the estimated FY20 earnings. Any further margin pressures will cap upside in the stock.