Date: 14 December 2016
Price: Rs. 783
Spent the whole day looking at Cummins India. Good business with zero debt & massively underperforming for 2 years. This will change soon.
— Rajat Sharma (@SanaSecurities) December 14, 2016
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 Businessmanufactures 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 Businessintegrates 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 Businessoperates 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
Total Income from Operations
Operating Profit Margin Ratio
Net Profit Margin Ratio
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.
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:
- Overleveraged balance sheets
- 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:
- 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.
- 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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Also see – Post on Power Stocks in India
About the Author
Rajat 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.Follow @SanaSecurities