Cummins India: Growth engines in place

Additional capacities with enhanced technology will help tap domestic demand after new pollution norms kick in

With new capacities in place, Cummins India, a leading manufacturer of engines for industrial, power and auto companies, is expected to be a key beneficiary of new pollution norms. The Central Pollution Control Board’s phase II (CPCB-II) emission norms are expected to be implemented from June 2014. In addition to a fillip to its sales, Cummins India is also expected to benefit from an expected revival in India's capex cycle.

The Street believes that the new norms could lead to an improvement in pricing and margins. Says Satyam Agarwal of Motilal Oswal Securities, "Our channel checks suggest that dealers have started formally informing customers about CPCB-II implementation (June 2014) and also a possibility of price increases to the tune of 15 per cent or more." In addition to this, analysts also believe that given the new norms there is very low inventory at the dealers' end, which is expected to pick up once the demand for such products starts to kick in and replacement demand starts.

These developments will rub off positively on Cummins India in the coming years. Besides sales growth, this will improve margins as well as return ratios as some of its past capex starts to contribute to profits. Analysts are expecting the company's return on equity to improve from about 24 per cent in FY14 to 28 per cent in FY16. During this period, operating margins are expected to move up by 100 basis points to 18.4 per cent in FY16. "We see multiple triggers ahead such as the implementation of new norms resulting in market share gains, pricing improvement, export growth potential and continuing growth in spares and services," says Axis Capital.

Technology edge, tax gains

Cummins India, a 51 per cent subsidiary of Cummins Inc of the US, commissioned new capacities in February where it invested about Rs 1,470 crore funded through internal accruals. Importantly, the capacity is not only aimed at providing better technology given the changing emission norms, but also earmarks its strategy to emerge as a low-cost hub for export opportunities and to serve as a supplier to the parent. This plant is in a Special Economic Zone, which means over a period of time the advantages of low cost and tax will reflect in profitability. Apart from that, through these capacities, the company, which is largely into high horse power gensets and engines is now looking to enhance its position in the low horse power segment.

“For the LHP (low horse power) domestic segment, the company is targeting a 20 per cent market share over the next three years. The CPCB-II emission norm change provides an opportunity to enter the business, given the increased technology play. We model LHP revenues of Rs 950 crore in FY16 compared to Rs 390 crore in FY13; and the growth rates are being led by traction in both exports and the domestic market,” said Satyam Agarwal of Motilal Oswal Securities. This is also the reason analysts are expecting higher growth in both sales and profits.

Export push

Exports is one more area expected to contribute significantly in terms of revenues. Analysts believe with the emphasis on growth and products for exports, the company's export turnover will move from Rs 1,269 crore in FY13 to Rs 1,724 crore by FY16, that is annual growth of almost 17 per cent. Overall, this will mean a positive impact on revenues and earnings.

“We expect sales to grow at 15 per cent annually over FY14-16 and earnings to grow at 16 per cent annually over FY14-16,” said Chinmay Gandre, who tracks the company at KR Choksey Shares and Securities.