Cummins India shares slip 7% on concerns of Covid-19 impact on biz

The management said the already weak business outlook has worsened, due to the COVID-19 situation impacting the entire global supply chain

Shares of Cummins India slipped 7 per cent to Rs 359 on the BSE on Monday, thus falling 14 per cent in two days, on concerns of weak business outlook.

For the first nine months (April-December) of the financial year 2019-20 (FY20), Cummins India had posted 21.9 per cent year-on-year (YoY) decline in its consolidated profit before tax (PBT) at Rs 642 crore. It had PBT of Rs 822 crore during the same period of FY19. Operational revenues during the period had declined 4.3 per cent to Rs 4,029 crore on a YoY basis.

The already weak business outlook has worsened due to the COVID-19 situation impacting the entire global supply chain.  Exports are key for Cummins India’s growth prospects. With the majority of countries under lockdown, exports are likely to struggle in the near term. The situation is dynamic across countries, with many variables at play.

In a conference call on Friday (April 24), the company's management said it expects the situation to worsen before there is any improvement in sight. Although the near-term outlook is quite weak, the management expects to gain a competitive advantage over peers in such an environment, attributing to its strong net cash balance sheet and access to the parent company’s superior technology.

The pace and timing of recovery depends on the likely government stimulus in India and individual overseas markets. On the optimistic side, domestic demand is expected to take six to nine months to recover, it said.

“Despite a favorable base for FY20, we expect Cummins to report a muted performance, with FY20–22E revenue/EBITDA/PAT CAGR of 4 per cent/4 per cent/-1 per cent. While stock may appear cheap at FY21/22E PE of 22x/17x, compared with historical valuations, the quality of earnings has deteriorated significantly,” Motilal Oswal Securities said in stock update.

The brokerage firm noted that while the profit after tax (PAT) has grown just 4 per cent in the past decade, other income has risen at a CAGR of 16 per cent and forms >30 per cent of PBT, indicating a poor quality of earnings. It maintains 'neutral' rating on the stock given the company’s strong balance sheet and execution capability.

At 12:27 pm, Cummins India was down 5 per cent at Rs 367 on the BSE, against 2.3 per cent decline in the S&P BSE Sensex. A combined 1.6 million shares have changed hands on the counter on the BSE and NSE so far. The stock hit a 52-week low of Rs 282 on April 8, 2020.