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Home >Markets >Mark To Market >Cummins India’s profit beat may not sustain as headwinds to growth loom
The slowdown in GDP growth and private sector capital expenditure has pushed hopes of a recovery in economic activity by several quarters
The slowdown in GDP growth and private sector capital expenditure has pushed hopes of a recovery in economic activity by several quarters

Cummins India’s profit beat may not sustain as headwinds to growth loom

  • What’s worse, the management maintained its guidance of 3-5% growth in domestic revenue, and a 20% decline in export revenue for FY20
  • In the analysts’ call, the management was sceptical on the recovery in exports as the African and Middle East markets have deteriorated further

At one point on Wednesday, Cummins India Ltd’s stock had gained as much as 10%, thanks to an overwhelming beat in profits for the December quarter . But the excitement wore off after the company’s call with analysts. The stock ended the day 2.2% higher at 601.20.

What gives?

Eventually, investors figured out that the Q3 Ebitda (earnings before interest, tax, depreciation and amortization ) of 216 crore, which surpassed Bloomberg’s forecast by 18%, may not be sustainable in the coming quarters. The beat was driven by one-off sales of 70 crore in the distribution segment.

But core power generation segment revenue fell about 12%, while the industrial business posted 8% growth. Also note that overall Ebitda was still 5% lower from the year-ago period.

However, the management’s efforts to trim costs bolstered profitability. Ebitda margin of 14.8% was on a par with year-ago levels, but was a solid 200 basis points higher than Bloomberg’s consensus estimate.

Graphic by Satish Kumar/Mint
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Graphic by Satish Kumar/Mint

Ashwath Ram, managing director of Cummins India, said cost-optimization measures, including zero-based budgeting, are helping weather the slow demand cycle.

But the moot point is that strong headwinds in the economy, and slowdown in capital expenditure in the private sector, in particular, will thwart a reversal in demand for capital goods.

Even the 3% year-on-year (y-o-y) growth in Q3 domestic revenue was due to some traction in its marine and railway businesses, while the construction equipment business continued to lag. Meanwhile, exports that helped boost profits in the past, fell 17% y-o-y on weak international demand.

What’s worse, the management maintained its guidance of 3-5% growth in domestic revenue, and a 20% decline in export revenue for FY20.

In the analysts’ call, the management was sceptical on the recovery in exports as the African and Middle East markets have deteriorated further. Contraction in both the industrial and power generation businesses may continue due to multiple headwinds like constrained bank funding and delays in awarding infrastructure projects.

Therefore, in spite of a beat in operating performance, Cummins India is not out of the woods yet. Umesh Raut, analyst (capital goods) at Yes Securities (India) Ltd, said: “The bleak outlook and growth concerns imply no scope for a re-rating in valuations as the stock trades at 23 times the estimated FY22 earnings."

Indeed, some analysts remain optimistic about management efficiency. According to IIFL Securities Ltd, Cummins India offers a good proxy to infra investments in India, with negligible risks of increased working capital or balance sheet. Its short- cycle nature should be able to capture the pickup in ground construction activities faster than peers.

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