Stock Review: CUMMINS INDIA

Cummins India posted a strong show last fiscal, easily outperforming the Sensex. But rising commodity prices are still a worry. Investors should take a long-term view and look to buy on dips, says Bakul Chugan Tongia

 

   Cummins India is riding high on its robust performance in FY '11. The 51% subsidiary of Cummins, USA, has outperformed the benchmark Sensex by good margins over the last 12 months. The stock has risen by 22% while the 30-scrip index has gained under 10% during the period.

Cummins India is a pioneer of advanced diesel engine technology. It caters to the diverse power requirements of the core sectors. Cummins is also active in the distribution segment. It has a market capitalisation of over 13,000 crore and is a key player in the engine industry.

FINANCIALS

For the year ended March 2011, Cummins India reported a strong top line growth of about 40% while its bottom line grew by about 33%. However, rising commodity prices took a toll, cutting operating margins by about 90 basis points. Given the current high inflationary trend, the pressure on margins is likely to continue in the current fiscal.

The company has raised prices by about 1% in April to ease the pressure on margins. A further increase is expected around July. But rising competition means there is limited scope for such price increases in the near term.

Despite the worry over input costs, the company has a robust outlook on revenues and has issued a guidance of 20% for FY12. This guidance may be impacted by measures RBI is undertaking to soften the inflationary trend in the economy.

GROWTH DRIVERS

The company has planned capital expenditure (capex) of about 200 crore in FY12 for capacity expansion at its mega site at Phaltan. It plans to raise the annual production at the Tata Cummins factory to 90,000 engines by October '11 from the current 60,000 engines.

The company is also expected to commission a parts distribution centre at the site by July '11. It is also setting up a power generation plant on the SEZ portion of this site which will manufacture small generator sets of up to 200 kVA. The capex will also be used to fund the setting up of a distribution rebuild plant and a recondition plant besides the midrange fit centre for B-series and C-series engines, ISL engines and natural gas engines for buses.

The change in the diesel emission norms, w.e.f April '11, is also expected to bring more market share for the company as such technological changes tend to impact the smaller players more, thus benefiting the larger and technologically more advanced companies like Cummins.

VALUATIONS

Trading in a price range of 680 to 690, the stock commands a priceearning (P/E) multiple of 22.7x - 23x FY11 earnings, quite a premium over its peers. But the company enjoys a relatively larger scale of operations vis-a-vis its competitors and has an edge in terms of technology advancements through its parent company. The stock can be accumulated at dips with a longtem perspective.
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KEY FACTORS

POSITIVES
Impressive revenue and profit growth in FY11 with a robust outlook for FY12
A near zero-debt balance sheet, relatively insulates co from hardening interest rates
Clear growth strategies for capacity expansion and setting up of new facilities.
NEGATIVES
Rising material costs have hit operating margins in FY11.
Auto business remains flat in the absence of big orders like the one from the Delhi Transport Corporation for the CW Games.
Cautious outlook on export growth given the slow pace of global recovery.