Cummins India ticks right boxes on growth, value; sees uptick in demand

Valuation of 26 times its FY20 earnings estimates looks attractive

Known to be a conservative capital goods major, the phase of cautious growth is perhaps nearing its end for Cummins India. The firm recently upgraded its growth target for domestic and export markets. 

From 8–10 per cent growth guidance in India, Cummins is now confident of achieving 10–12 per cent growth in the domestic market in FY19. Likewise, it is hopeful of clocking 3–5 per cent growth overseas as against a flat revenue guidance earlier. 

Domestic prospects appear bright, thanks to an improvement led by traditional industries such as manufacturing, IT, infrastructure and data centres. These are pockets in which Cummins India has dominance, explaining the Street’s bullish view on the stock. 

To be sure, the earlier wave of demand for power generators (powergens) in 2014 was led by the telecom industry, a segment where Cummins does not have adequate presence. 

Change in emission norms for the industry further aggravated the lull for Cummins. Further, analysts at Nomura say the past few years for Cummins have been a classic case of cyclicality, which has hurt the entire powergen market. That trend is turning favourable for Cummins India. 

While Cummins did witness a fall in market share from 43 per cent in FY15 to 41 per cent now due to intense competition, mainly from Kirloskar Oil Engines, it hasn’t lost its focus on profitability in a bid to compete on pricing. 

Operating margins have been upwards of 12 per cent in the past two years despite the downturn and had risen to about 17 per cent in the September quarter. Base effect, too, is favourable for domestic and export markets. 

Cummins India is seeing an uptick in demand led by the West Asian and African markets. These are traditionally markets with demand for low horse power (LHP) generators. Cummins India has a stronghold in the LHP segment and demand is expected to remain buoyant, thanks to favourable crude oil prices. 

Valuations at 26 times its FY20 earnings estimates strengthens the investment case. However, there is some risk to timing the growth uptick. Even as the firm remains positive of a favourable demand in both markets, deferment of capital expansion due to the upcoming general elections in India, or unfavourable trade relationships overseas could significantly challenge or delay the growth expectations.