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Shares of engineering company Cummins India Ltd have seen a sharp rise in the past year. Last week, the stock hit a new 52-week high of 1,064 on the NSE. The price of this midcap stock has more than doubled in the past year with returns of 120%. In the same span, the sectoral index Nifty 500 has lagged with 57% returns.

Midcaps have been in a sweet spot in the post-pandemic stock market rally. The stock has partly benefited from that. Analysts said that the ongoing recovery in the demand scenario has also boosted investors’ sentiment towards this firm.

In a recent interaction with some brokerages, the company’s management highlighted that it is witnessing sequential improvement in demand in the industrial sector, including infrastructure, data centres and real estate in domestic and global markets such as the US and UK, with the increase in vaccination drive. Further, the management added that its new product launches in FY22 are spread across segments.

Beat by a mile
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Beat by a mile

“We believe improved economic recovery, robust exports momentum and improved capacity utilization will sustain margins and business growth. We forecast 19%/27% revenue/profit after tax CAGR over FY21-24," analysts at JM Financial Institutional Securities Ltd said in a report on 13 September. CAGR is short for compound annual growth rate.

Sharing the optimism, analysts at PhillipCapital India Pvt. Ltd said that Cummins India has the potential to surprise on the upside even beyond the recovery phase. “Positive management commentary aside, the market dynamics of global consolidation, robust tailwinds to finally grow exports beyond the FY15 peak and multiple margin levers should lead to an 18% CAGR in FY20-24 core earnings," added the PhillipCapital report dated 10 September.

On the flip side, the firm expects supply chain concerns to continue because chip shortages and container availability will persist until early 2022.

As far as commodity price inflation is concerned, the management said that it is nearing its peak, but cost rationalization measures such as price hikes, among others, are likely to ease the pressure on margins going ahead. It should be noted that the management aims to improve Ebitda margins by 100 basis points on a year-on-year basis in FY22 through sales of value-added products and improved cost efficiencies. Ebitda is short for earnings before interest, tax, depreciation and amortization. One basis point is 0.01%. In FY21, the company’s operating margin stood at 13.4%.

Meanwhile, the stock is trading at an expensive one-year forward price-to-earnings ratio of around 35 times, shows Bloomberg data. Analysts at PhillipCapital note that a further uptick in the stock would depend on a meaningful earnings surprise, which is likely from 2HFY22 onwards.

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