Power Play

Cummins India, a premier diesel engine manufacturer, has been a consistent performer and will become a sourcing

base for its parent for some products. Investors can buy for the long term

Cummins India enjoys one of the highest margins in the industry. The parent Cummins, USA, has increased its stake to 51 per cent and taken over management control. The scrip has been an FII favourite in the past and it is only because of the industrial slowdown that the market price has fallen from Rs 540 in December 1997 to the present levels of Rs 320. Once the economy improves, Cummins India (CIL) will do well.

 

CIL was originally promoted by Cummins Engines Co., USA with a 50 per cent stake initially and Kirloskar Oil Engines (KOEL) holding 25.5 per cent. The venture was to manufacture diesel engines under the specification of Cummins. As per the agreement, CIL concentrated on the 1200 horse power (HP) segment till 1980, while KOEL made engines below 70 HP and above 1200 HP.

But the promoters had a long running dispute and finally in 1997, the parent took over the management of the company after buying the additional one per cent from KOEL at Rs 400 per share. The balance stake held by KOEL will either be sold to Cummins, US or placed with FIIs. Either ways, it will be good for the company.

Engines are classified according to horse power and fuel type. Diesel engines are most popular with varied applications starting from 0.5 HP engines for home appliances to 20,000 HP for power generation. Major end users of engines are automobile, power and construction sectors. Engine manufacturing is technologically intensive, especially the high powered engines.

The industry is divided into two segments -- the low horse power engines segment -- primarily meant for passenger vehicles like cars where many players have in-house manufacturing facility and the high horse power segment catering to industrial users. The industrial sector is dominated by companies like Caterpillar, Cummins, Wartsila and Pielstick.

During financial year 1996-97, CIL produced 10,147 engines. The company has till date manufactured over 130,000 engines and nearly 90,000 engines are still in operation. CIL makes diesel engines in the 70 to 2000 HP range, gas engines in 75 HP to 800 HP range and dual fuel engines in 80 to 1060 HP range. The majority of its turnover comes from diesel engines.

Diesel engines generate electric power. The demand for diesel engines is driven by growth in its consumer industries like power, transport and mining. CIL's focus on high power engines above 400 HP has paid off to an extent as it has been able to get higher realisations.

For 1997-98, CIL's sales dropped 6.9 per cent to Rs 740 crore. CIL's business is directly related to overall industrial growth, thus last year with an overall industrial slowdown, its sales took a backward leap. Despite this, CIL has been able to maintain its margins with strict control on costs.

Its operating profit margin stood at 17.27 per cent for 1997-98 against 17.44 per cent in the previous year. With a lower interest burden of Rs 6.93 crore down 26 per cent and overall cost control its net profit went up marginally to Rs 82.27 crore for 1997-98 from Rs 80.03 crore last year.

The construction and mining market contributes more than 10 per cent of the CIL turnover. CIL engines are used in all types of earth moving equipment like excavators, dumpers, bulldozers etc. An industry analyst at a leading foreign brokerage avers, "With the opening up of mining sector and increased outlays for infrastructure like roads, demand for Cummins engines will go up steadily." Among other markets, CIL supplies engines for oil fields and marine and industrial segments.

CIL is a major player in the power generation market with almost 58 per cent of its turnover coming from this segment. The company is a dominant player in the 125 KVA to 1250 KVA range of diesel generator (DG) sets with a market share of 65 per cent.

The domestic DG sets market consists of three segments. The first segment consists of smaller engines for households and shops where Birla Yamaha and Shriram Honda dominate the market. The second segment consists of DG sets between 30 KVA and 520 KVA where Greaves is one of the major players.

CIL faces competition from Hindustan Powerplus which offers a similar product range. Wartsila has a market share of around 70 per cent in engines above 1250 KVA. Apart from Wartsila, Kirloskar Oil Engines (KOEL) and imports account for the balance in this category.

Engine cost accounts for about 70 per cent of a DG set. CIL supplies engines to OEMs like Powerica, Jackson and Sudhir which in turn offer a complete package to customers.

The DG sets are used as a stand-by or as the only source of power. In recent years where a number of states have been witnessing a power deficit scenario, a captive source of power has gained more importance. Delays in implementation of private sector power projects and long gestation periods of coal/naphtha based projects, power shortages will continue in the near future.

CIL's product range falls in the larger segment where growth is comparatively higher than the lower range. This has been the reason that a number of players have tended to move towards higher end of the market. CIL compares well with its competitors as it has the lowest import content at 50 per cent of raw materials as compared to 60-70 per cent for other players, says another analyst.

In its endeavour to grow, CIL is expanding its product range by introducing engines which can generate 4.5 MW of power. CIL is eyeing for potential customers in the range of 380 KVA up to 10 MW. Major players in this segment are KOEL, Hindustan Powerplus (through its promoter Caterpillar) and Wartsila.

Though competition should intensify in the coming years, CIL with established presence in the domestic market, support from its parent, well developed vendor base and a strong after sales service network, would do well in future.

CIL provides after sales service through its wholly owned subsidiary -- Cummins Diesel Sales and Service. The subsidiary provides round the clock after sales service through a range of dealer networks and service offices across the country. The turnover and net profit of this subsidiary were Rs 224 crore and Rs 9.1 crore. This company paid a dividend of Rs 0.9 crore to CIL.

Exports is another thrust area for CIL accounting for nearly 19.5 per cent of sales. It is one of the largest exporter of diesel engines. In the current budget the 4 per cent across the board hike on import duty (plus rupee depreciation) will increase costs for CIL, but still CIL is in a better position compared to its competitors because it has higher indigenisation.

CIL is the exclusive producer of VAT 28 engines for Cummins worldwide. These engines contribute 50 per cent of CIL exports. Cummins, USA is introducing the Quantum series of engines aimed with better technology and lower fuel emission. The new series of engines will be produced at the Cummins plant in UK and at Cummins India which will also be marketed in India.

With the increase of Cummins stake in CIL, its become a major production centre for Cummins worldwide has further hastened. In order to cater to the automotive segment, CIL has entered into a 50:50 joint venture with

Tata's in Tata Cummins catering exclusively to the automotive segment with a capacity of 60,000 engines per annum at Pune.

Though the industry is not doing that well at present as competition is hotting up and demand is still sluggish. "CIL, with tight control on costs and solid backing from its parent company, still has an edge over its competitors," says Anand Subramanian, analyst, Meghraj Finance. In addition, it is turning out to be a sourcing base for its parent giving it a cutting edge with continuous access to latest technology.

The CIL stock price has been making new lows with currently and is hovering around Rs 320 levels. It was only after the bomb blasts that the stock had touched a low of Rs 265 in 1995. At the current levels, it could still bottom out around Rs 280. Buy on declines.