PremiumMUMBAI: With Cummins India Ltd continuing to face execution challenges, its subdued Q4 figures have not given investors reason to cheer.
While the slowdown in the economy has been dogging Cummins for some time now, covid-19 threw a spanner in its growth engines, causing it to suffer a ₹190 crore loss in sales in the fourth quarter of last fiscal.
As such, Q4 turned out to be a huge disappointment with revenues dropping about 22%. In addition, the company has been unable to fall back on exports amid the covid-19 pandemic.
Exports shrunk about 20% year-on-year and could continue to be constrained in the near term because of the state of the global economy. There are hopes that demand may revive in the second half depending on the reopening of economies, but that too will be slow.
Nevertheless, to improve margins Cummins will have to rely on absorbing high fixed costs. Q4 margins contracted to a low of 6.3% from 12.8% in the year-ago quarter. This is a worry as fixed costs are expected to climb.
“We expect fixed costs, as proportion of sales, to rise to 18% (from 15-16% in FY18-19) despite 10% y-o-y lower employee costs on account of voluntary retirement in FY20. The rise in the proportion of fixed costs-to-sales is largely on account of the 12.5% y-o-y decline in sales we estimate for FY21," said analysts at Nomura India.
That said, its prospects for FY21 are subdued.
Due to the pandemic, the company has been operating at significantly lower capacity - about 50% of pre-covid levels. But execution remains a challenge as some of its suppliers are in hotspots.
“Beyond customer-specific issues, execution may also be hurt by key supply chain centers of Cummins being in areas sensitive to the Covid impact (Maharashtra, Tamil Nadu, NCR)," said analysts at Kotak Institutional Equities in a note to clients.
A revision in emission norms, however, could be the catalyst in boosting pricing and gaining market share. But this is likely to play out only in FY22 and later. For now, slower growth will keep earnings in check. Even though the stock valuations are reasonable at 15 times FY20 earnings, the company may not be able to fire on all cylinders for some time.
