Higher material costs hit Cummins’ profit margin in June quarter

Higher material costs hit Cummins’ profit margin in June quarter

Cummins India Ltd is among those multinational capital goods makers that have been showing their commitment to Indian operations by way of capacity expansion and making the country a global sourcing hub for higher value products. But soaring commodity prices have affected their profitability as severely as that of Indian peers in the last two quarters.

Cummins’ June quarter operating profit contracted by around 6% from a year earlier in spite of sales growth of around 12.6%. This was also the lowest growth rate registered in the last four quarters. Sales growth was shored up partly by a robust 26% growth rate in exports.

The key reason for lower profit was not different from that of its peers. Raw material costs as a percentage of sales rose 250 basis points. Employee costs increased, too, though to a lesser extent. As a result, operating margins fell 350 basis points from the year-ago period. But it managed to sustain profitability in line with the March quarter. One basis point is one-hundredth of a percentage point.

The strain in operating profitability trickled down as Cummins’ net profit dipped by about 10% from the year-ago period. Reported net profit, which was 26.4% higher, included profit of 51.4 crore from the sale of its shareholding in Cummins Exhaust India Ltd, which was considered a non-core business.

However, the euphoria on account of the bonus issue of two for every five shares held led to a spike in the stock price by around 5%. But shares closed lower on poor performance for the quarter. Analysts are of the view that the overall grim outlook for the capital goods sector will also weigh on the Cummins stock, which is more vulnerable to rising interest rates, and could thwart industrial activity—its prime target market.

The current share price of Rs614 discounts fiscal 2013 earnings by around 15 times, which is also close to its five-year historical average. The stock will see gains only once the uncertainty in domestic and global economies clears up.

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