Growth drivers in place for Cummins India

Growth drivers in place for Cummins India

Shares of multinational capital goods manufacturer Cummins India Ltd have outperformed the capital goods index of the Bombay Stock Exchange by a wide margin since April.

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The increased investor interest in the scrip is being driven by strong growth prospects in the next two years. This comes after a near 14% drop in revenue in 2009-10. The bounce-back in revenue is being reflected in the share price.

Cummins India has benefited from the parent firm’s focus on emerging markets and its intent to outsource from India. The firm’s new megasite facility, which would be commissioned during the last quarter of the current year, will further help service this need. The new facility will make heavy engines and power generators for the export market.

A Motilal Oswal Services Ltd report says, “The growing product basket for exports is the biggest growth driver for Cummins." According to Motilal Oswal’s estimates, export revenue could triple by FY12 to 1,500 crore from FY10 levels. This is partly on account of a low base in FY10.

In the September quarter, exports jumped by as much as 280% year-on-year (y-o-y) thanks to a low base effect.

Domestic markets are buoyant, too. During the September quarter, domestic revenue rose 45% y-o-y, driven mainly by the power generation segment, which accounts for about half its domestic sales, and the construction machinery segment.

And thanks to the automotive boom, demand for Cummins engines—though it accounts for only 10% of its revenue—is expected to be robust.

On the whole, after a lacklustre FY10 performance, Cummins’ growth appears to be on track. It reported a 46% y-o-y growth in revenue in the June quarter and in the September quarter, it managed an even higher growth of 76%. In addition, its cost-cutting exercise over the last several years has resulted in a 200 basis points rise in the operating profit margin. Operating profit jumped by about 92%, with a commensurate rise in net profit to about Rs168 crore.

While Cummins may face pressure due to rising commodity prices, this should be offset as capacity utilization increases in the company’s new capacities and operating leverage kicks in.

Cummins shares have risen by about 50% during the current fiscal, and they now trade at around 20 times estimated FY12 earnings. Since valuations are already high, any further upside would depend on a faster-than- expected recovery in the overseas markets.

Graphic by Yogesh Kumar/Mint

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