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Sunday, October 29, 2000













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Cummins India: Long term buy

B. Krishnakumar

Recommendation: Cummins India has managed to record a steady growth in earnings in the recent quarters. The improvement in performance assumes significance if viewed in the context of a slackening domestic demand for diesel engines.

Given the eminent position of the company in the industry, strong fundamentals and impressive performance track record, long-term investors could take exposure in the company. Any price weakness, triggered by overall decline in the market, could be used to build up exposure in the company.

Background: Cummins India is amongst the largest diesel engines manufacturers catering to the non-automotive segment. Its engines are used in power generation, construction/industrial equipments, marine and locomotive applications. The company has a technical-cum-financial collaboration with Cummins Engine Company of US.

Financials: After a strong growth phase, the performance of the company was affected during 1997-98 and 1998-99. The reduced capital spending by the corporate sector and an overall slowdown in the economic-cum-industrial growth had affected the company's performance.

However, a greater thrust towards exports, a steady inflow of revenues from sale of spares and services combined with consistent expansion of product base helped the company bounce back in 1999-2000. The net turnover increased by 28 per cent to Rs 826 crore while the post-tax earnings rose by 25 per cent to Rs 93.31 crore. On the equity base of Rs 39.6 crore, the per share earnings works out to Rs 23.56.


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For the year ended March 2000, the contribution of export income increased to about 34 per cent from about 22 per cent in the previous year. The sharp improvement in export turnover was explained by the increase in offtake of engines by the American parent.

Prospects: As far as future prospects are concerned, the recent efforts to broadbase the product portfolio by aggressive launch of new products and the decision to offer integrated power management solutions would help the company sustain earnings growth.

However, in the near term, the sub-normal monsoon, hike in diesel price and the slowdown in industrial and economic growth would continue to hamper the domestic demand for engines. Though the company has a steady flow of income from sale of spares and services, the growth in export income would be the key driver of earnings growth.

The only major risk from an investment perspective is that if the export demand slows down in the future, it would take a heavy toll on the company's performance. However, the company has the inherent technical-cum-financial strength to withstand business cycles and stifle competitive forces in the industry.

Strong fundamentals and technical backing of Cummins Engines Company of the US are the major positive factors from a prospective investor's perspective. The huge installed base of engines, an extensive distribution network, steady improvement in exports and a relatively low import content places the company a few notches above its competitors.

The recent decision to initiate a stock-split would lend the much-needed liquidity in the stock. Long-term investors could include Cummins India in their portfolio.


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