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Cummins India has gained 12 per cent since August and touched its all-time high recently, on expectations that the end-user segment is absorbing cost increases on implementation of pollution norms and from a strong forecast by the management.
The price of engines increased 15-20 per cent after implementation of Central Pollution Control Board-II norms. CPCB9II mandates a significant reduction in engine exhaust emissions for diesel generators up to 800 Kw, effective July. Analysts say the industry is still in the process of absorbing the sharp price rise affected in the September quarter. Sales in the short term could be muted, given softer demand and inventory of existing gensets. Further, volumes are expected to have fallen on a sequential basis due to pre-buying and supply issues. Given the costs of the new CPCB-compliant engines and a competitive market, there could be a 50 basis points impact on margins in the near term.
Most analysts say growth in the domestic market for Cummins might be limited (the management has forecast zero to five per cent in FY15) and should look up in FY16. The domestic show is expected to be muted, as it is dependent on the economic recovery. Growth in the near future is likely to come from export. The company expects export, currently Rs 1,200 crore (30 per cent of revenue), to grow 30 per cent this financial year, led by low horse power engines. This segment had revenue of Rs 350 crore, estimated to grow 70 per cent this year. The LHP sales, largely targeted at Africa and West Asia, are likely to constitute half the export by FY16, against 30 per cent now.
The rapid export growth (up 41 per cent over a year in the June quarter) led the management to improve its overall revenue growth forecast this financial year to 10-15 per cent, from zero to five per cent a few months earlier. Cummins’ long-term prospects appear strong, given its parent’s vision. Cummins Inc has a target of doubling its revenue from the Indian market to $3 billion by 2019, with operating profit margins of 17.5 per cent and return on assets of 45 per cent (from 25 per cent currently).
Analysts at Prabhudas Lilladher believe the outlook for Cummins continues to be positive, given the strong ramp-up in exports and likely improvement in market position after changes in the emission norms. Further, low utilisation levels of 50-60 per cent leaves an upside surprise on margins once volumes improve. At Rs 670, the stock is trading at 22 times its FY16 earnings. Domestic growth, dependent on industrial recovery, is still a few quarters away and exports will continue to be a mainstay in FY15. Invest on dips.
