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Cummins India Stock Analysis

HomeCummins India Stock Analysis

Date: 14 December 2016

Price: Rs. 783

About the Company

Cummins India Limited (“Cummins India” or the “Company”), operates as a manufacturer of diesel and natural gas engines. The Company operates through four business units: industrial engine, power generation, distribution, and automotive.

  • The Industrial Engine Business manufactures diesel engines ranging from 65 Horsepower (HP) to 3,500 HP. The range is designed to serve different market segments such as construction, mining, railways, agriculture, power generation, defense etc.
  • The Power Generation Business addresses the standby and prime power needs through the design and manufacture of pre-integrated generator sets, transfer switches, paralleling equipment and controls.
  • The Automotive Business integrates the Company’s diesel and natural gas engines with related technologies such as filtration, exhaust, turbo, fuel and coolant systems and lube oil to serve the commercial vehicle segment in India.
  • The Distribution Business operates under the brand name “Cummins Sales and Service India” and sells engines and provides after-sales support services to customers in India, Nepal, and Bhutan.

Also see: Cummins India Financial Report

cummins india stock analysis

Financial Performance

Particulars

FY 2014

FY 2015

FY 2016

Total Income from Operations

3,976.67

4,405.80

4,724.29

Operating Profit

696.73

735.05

760.42

PBT

817.51

937.39

906.42

PAT

600.02

785.85

751.85

Operating Profit Margin Ratio

17.52

16.68

16.10

Net Profit Margin Ratio

15.09

17.84

15.91

Net worth

2,565.15

2,886.52

3,333.21

Debt

ROCE

27.16

25.46

22.81

ROE

23.39

27.22

22.56

THE COMPANY OPERATES WITH ZERO DEBT

Cummins India has shown consistent growth over the last ten years (i.e. 2006-07 to 2015-16). It’s sales revenue over this period grew at an impressive CAGR of 20.12 %. Company’s reserves are in excess of Rs. 3,277.77 Cr (FY 2016), and it operates with zero debt on its books. Cummins India has been consistently paying dividends for more than 10 years.

cummins india financials

Weakness in domestic private investment and a sluggish export market weigh on the company. The stock now trades at ₹ 921, nearly 22 per cent lower than the peak of ₹ 1,189 recorded in August 2015.

Cummins India trades at a price earnings multiple of 35 times its trailing 12-month earnings, higher than its three-year average of 33 times. 

Benefits from Slowdown in Capex Cycle

Cummins India’s peers are right now struggling on 2 counts:

  1. Overleveraged balance sheets
  2. Demand slowdown at the end of expansion

Many large Indian power generation and distribution companies have culminated their capex plans over the last few years in the hope of demand revival in the sector, which did not happen. In this environment Cummins India will benefit going forward for 2 main reasons:

  1. Overcome competition: in such an environment companies with no debt / interest obligations will find it easier to eat market share of their competitors by offering cheaper rates, cutting costs and incentivizing customers for switching over.
  2. Alternative power: Continuous power deficit creates an environment ripe for alternative power generation and industrial engine business.

Strong Parentage and Technological Superiority

Cummins India enjoys technological superiority on account of its having access to its parent – Cummins Inc which owns 51% of Cummins India. Cummins Inc is headquartered in the United States and is a globally recognized leader in design and manufacture. Not only does it have wide distribution capabilities and strong client reach, it operates in an environment where emission norms are far stricter than in India. Going forward, emission norms and environmental laws will make it increasingly competitive for companies to operate in this sector.

Access to its parent company’s technological expertise will help Cummins India in staying competitive and maintaining higher than industry margins which will improve its overall profitability.

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PEER COMPANIES

Larsen & Toubro

Bharat Heavy Electricals

Thermax

Greaves Cotton

Kirloskar Oil Engines

ABB India

Alstom T&D India

Crompton Greaves

Siemens

BEML

Also see – Post on Power Stocks in India 

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.