Domestic demand picking up for Cummins India

For accelerated growth, broader recovery in domestic market critical as outlook for exports remains weak

On a day when the market was back to its cheerful normal, the stock of Cummins India also gained two per cent. While this does not correlate with the weak results that disappointed even Street estimates, the management’s reassurance on improvement in domestic demand helped the stock.

Revenues at Rs 1,228 crore missed Bloomberg estimates of Rs 1,256 crore. Exports remained a pain point in the June quarter, posting a revenue decline of 22 per cent year-on-year at Rs 413 crore. Domestic revenues, however, demonstrated sustained growth and were up nine per cent y-o-y at Rs 846 crore. Cummins makes engines and industrial equipment used in power generation and distribution projects.

A combination of strong demand from state electricity boards as well as industrial consumers for low horse power engines and heavy duty products, which grew 30 per cent, aided the company’s performance in the quarter under review. Operationally, moderate raw material costs cushioned the fall in margins to 16.39 per cent (down 50 basis points y-o-y) in Q1, despite a sharp drop in exports. However, net profit for Q1 declined 14 per cent y-o-y to Rs 181 crore, missing Bloomberg estimates of Rs 199 crore, as other income (dividend from group companies) also declined 30 per cent to Rs 42 crore.

That said, the management stuck to its earlier revenue growth target of 8-8.5 per cent in FY17. Domestic sales are expected to grow 10-12 per in FY17, while exports might remain flat or even see slightly downward pressure. Operating margins are likely to be 17-18 per cent. Revival in mining industry and defence orders will keep the momentum healthy, apart from orders from its core power generation and industrials sectors. In a concall with analysts, Anant Talaulicar, chairman and managing director of Cummins India, said he was more confident of domestic demand.

The positive commentary helped improve market sentiment for the Cummins India stock. Analysts say this commentary was much needed, as its parent, Cummins Inc, gave a cautious guidance on India and China. This kept the stock under pressure for the past few weeks. “Now with the Cummins India’s management reinforcing their outlook on domestic demand, it has put to rest the apprehension on the earnings,” says Ruchir Khare of Kotak Securities. Guidance from parent includes that of KPIT Cummins (the IT subsidiary) and a few unlisted joint ventures of Cummins Inc in India.

With domestic demand appearing promising, the recent correction in the price earnings of Cummins India’s stock makes it attractive for long-term investors. The stock trades at 29 times FY17, which is significantly lower than its historical valuation of 40 times.