Cummins India: Buy

Recommendation: Buy

Sowmya Krishnan

TRADING at around Rs 55.50, Cummins India is a good investment proposition for investors with a long-term investment horizon.

With its earnings per share of Rs 5.50, the current price represents a price earnings ratio of around 10 times its March 2001 earnings. Though the economic slowdown has affected its performance, a revival in the broad economic indicators will improve its prospects. The wide product range, distribution and service networks, close relationship with end use customers, access to parent's technology and global markets, strong cash position are its strengths.

Business: Cummins India manufactures diesel engines in the 126- 1,600-hp range, covering a wide range of market segments such as power generation, construction and mining, oil fields, marine, locomotive and automotive. The company derives a major chunk of the revenues from the power sector.

Growth opportunities: Cummins India, like other players in the engineering industry, has been impacted by the economic slowdown. However, growth opportunities exist even in a difficult macro-economic environment. Two main alternative avenues for revenue growth are through sale of spareparts, services and export growth. Sale of spares depends on the installed base of engines and hence, even in a slowing economy, it would provide an alternate source of revenue.

Cummins Inc uses Cummins India as its low-cost global sourcing base for certain types of engines. Of late, there has been a shift in demand from heavy-duty engines to high horsepower engines in the European and Asian market. The slowdown in the information technology sector, a key end use customer segment, and a global recession have dampened its growth prospects to some extent.

However, better integration with worldwide Cummins product range and cost competitiveness (compared to other low-cost Cummins manufacturing locations) have enabled Cummins India sustain growth this year. Growth in exports for the half year ended September 2001 was around 11.6 per cent at Rs 144.2 crore.

Cummins has also reduced dependence on imports. For the year ended March 2001, the share of imported raw materials was reduced from 47 per cent to 42.5 per cent. Higher levels of indigenisation, coupled with other cost-cutting measures such as better inventory management has improved the company's operating margins. Cummins had posted a 12 per cent growth in profit before taxes against the sales increase of four per cent for March 2001.

Cummins India is also transforming from a mere engine manufacturer to a 'total power solutions' provider. It has entered into the business of renting gensets, selling power rather than engines, providing finance and selling associated items such as lubes, exhaust systems, and so on. It has also extended its product range in the 30-KVA segment as a strategy to ward off competition.

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Financial performance: The effect of slowdown is reflected in the company's performance with both topline and bottomline showing a decline. For the half year ended September 2001, sales declined 8.6 per cent to Rs 365.50 crore. Net profits were also down around 17.89 per cent to Rs 391 crore. However, with the construction activity picking up, prospects for CNG engines in the automotive segment looking positive and given the hope power sector reforms will be implemented soon, the company's prospects look better in the long run.