Cummins in a sweet spot to capture growth

Dec quarter performance the best in recent times; higher infra allocation in Budget also positive

Much in contrast to the results so far, when most companies reported their slowest revenue growth in the December quarter (Q3), Cummins stood out as an exception. This is despite demand for its low-horsepower (HP) motors being relatively weak because of the note ban. Importantly, the outlook for the company is looking better and analysts say, the higher allocation to infrastructure sector is also beneficial for capital goods players such as Cummins.
 
For the quarter, net revenues at Rs 1,355 crore expanded by 18 per cent year-on-year (y-o-y), making it one of the most convincing performances in recent times. Operating profit also expanded to Rs 226 crore, up 31 per cent y-o-y and consequently it boosted the operating profit margins from 15.2 per cent a year ago to 16.7 per cent in Q3. Clearly, the cost rationalisation measures undertaken in the past few years are yielding the desired results. A product mix positioned towards medium and high HP, which finds use in industries such as railways, construction and mining and power generation, helped Cummins better its margin performance.

 
In fact, growth in its domestic revenue (Rs 972 crore) for the quarter at 16 per cent y-o-y, is one of the best in recent times and was largely helped by government orders. This is assuring for investors as government orders in the past were sporadic and didn’t leave much comfort for the private players to bank on the public sector demand. With this issue getting addressed, Cummins is confident that domestic revenue growth is sustainable.
 

Net profit was higher by 11 per cent y-o-y at Rs 198 crore. With Q3 performance exceeding the Street’s expectations by a noteworthy margin along with positive management commentary over targets, Cummins India’s stock price gained over six per cent on Thursday.

 
On the domestic revenue front, Cummins is confident of meeting its earlier 10–12 per cent growth guidance. As for export revenues, the guidance appears cautiously positive. Cummins has upped its export revenue guidance to “flat” revenue growth from an earlier expectation of “negative to flat” growth. Though after nearly six quarters of de-growth in the international business, export revenue grew by 23 per cent (Rs 451 crore) in Q3. However, as the management feels that a secular demand revival in its export markets remains elusive, the guidance is also cautious.
 
On the whole, with Cummins well past its dull and unpredictable phase of earnings, at current valuations 27x FY18 price-earnings ratio, the stock trades at the lowest multiples since FY15. At these levels, Cummins’ stock holds potential for long-term investors wanting to play the government spending theme.