Cummins: Concerns over exports, unlisted arm

Revenues declined six per cent due to steep fall in exports; the focus is now on domestic sales

Exports have been a worry for Cummins India and the pain continued in the March quarter (Q4). Revenues at Rs 1,038 crore in Q4 declined seven per cent year-on-year and came below Bloomberg consensus estimate of Rs 1,212 crore, on a 30 per cent year-on-year decline in exports. Cummins posted its results after market hours on Wednesday. The stock opened with a four per cent decline on Thursday. The news of shifting manufacturing of new export products to an unlisted Indian arm of Cummins Inc (the parent company of Cummins India) took Cummins India's stock further down by 12 per cent intra-day on Thursday. Some analysts said the move should not be a concern for Cummins India's revenues or profits. The stock ended 6.2 per cent lower on Thursday.

Renu Baid of IIFL says India is the core market for Cummins Inc and any product range where Cummins India is competitive and has expertise in is channelised to Cummins India. "But, the key deciding factor for Cummins India is whether the products and applications are suitable for the Indian market," she says. According to her, this practice is followed by most foreign firms that have manufacturing sites in India. "This is not any corporate governance issue or change in management functioning," she says.

An email to Cummins India went unanswered till press time. Given lack of clarity on how the move will affect Cummins India's prospects, expect overhang. Any move the market perceives as harmful for Cummins India could affect the stock, which currently trades at a rich valuation of 28 times its FY17 estimated earnings.

Exports may remain depressed on subdued demand. Contribution from exports to total revenues has already been moderating from 40 per cent in FY15 to 31 per cent in Q4FY16, partly due to higher domestic growth. According to Baid, weak exports may keep the stock valuation muted in the near term.

The firm is optimistic of benefiting from a domestic recovery, led by construction, marine, and railways. Growth is currently driven by mid-range and heavy-horse power engines, which saw 25-30 per cent revenue growth in Q4. While these segments are performing better, commodity prices are inching up. Compared to an operating margin of 16 per cent in Q4 (up 50 basis points year-on-year) and in FY16, the management expects operating margin to be 14 per cent in FY17.