Cummins (India): Hold/Buy on declines

Recommendation: Hold/Buy on declines

Anup Menon

Trading at around Rs 91, the stock of Cummins (India) may be a good investment bet from a long-term perspective.

The company's performance in recent times has been very impressive, given the overall trends in the diesel engine industry. Based on its latest annualised earnings per share, the price-earnings multiple for the company works out to around 18 times. Given the strong fundamentals and the present status in the engines industry, the near-to-medium-term outlook for the company is positive. The company had recently effected a stock-split in the ratio of 5:1.

Earnings performance: The company's earnings performance for the first half of fiscal 2000-2001 was fairly impressive. Sales revenues rose 6.17 per cent to Rs 399.75 crore compared to the corresponding previous period. In the same time-frame, operating margins improved marginally from 18 per cent to 20 per cent. Post-tax earnings rose 22 per cent to Rs 48.49 crore. On an equity base of Rs 39.6 crore, the annualised earnings per share of the company works out to around Rs 5 (based on a post-split face value of Rs 2).

Business profile: Cummins (India) is one of the major players in the domestic diesel engine industry. It is one of the largest and most-efficient players in the industry. Cummins (India) is a subsidiary of Cummins Engineering Corporation, US, which is one of the leading players in the international diesel engine markets.

Prospects: The company's prospects in the near term seem bright. The earnings performance for the year-ended March 2000 and the first two quarters of fiscal 2001 was fairly impressive. While Cummins has done well, the performance of the diesel engines industry as a whole has not been very impressive. How has Cummins managed a better show?

One of the key support factors have been revenues from exports. For the year-ended March 2000, revenue earnings in foreign exchange improved 115 per cent to Rs 277.52 crore compared to the previous year. With the rupee depreciation in the recent past, the net realisation from exports is likely to be high.

The other main factor is the strong emphasis on spares and service. Recognising that the diesel engine market is cyclical by nature, the company has been focussing on revenues from spares and services. For the year-ended March 2000, close to 22 per cent of the company's turnover was derived from this segment. The volatility of earnings from this division is likely to be on a low scale, which helps sustain earnings stream at healthy levels.

Cummins India is targeting a growth rate in turnover of around 30 per cent for fiscal 2001. The company plans to achieve this by increasing its product range to target homes and small offices also. Further, the company has also diversified into the road construction business. With higher investment in the National Highways Development Projects under way, this should augur well for the company.

Overall, the company's fundamentals are quite stable. Further, given the overall position of the company in the industry and its strong financial performance, shareholders can stay invested.