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Cummins Ltd: Other income boosts profits - Views on News from Equitymaster
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Cummins Ltd: Other income boosts profits
Feb 3, 2015

Cummins India Ltd has announced its third quarter results for financial year 2014-2015 (3QFY15). During 3QFY15, topline increased by 5.9% YoY while bottomline increased by 23% YoY. Here is our analysis of the results.

Performance summary
  • Net sales increased by 5.9% YoY during 3QFY15. Domestic sales were down 7% YoY to Rs 6.67 bn while exports increased 39% YoY to Rs 3.9 bn.
  • Operating profits declined by 4.2% YoY during 3QFY15 due to cost pressures. Operating margins erode by 180 bps YoY to 17.5%.
  • Despite a weak performance at the operating level, net profits increased 23% YoY. Sharp rise in other income (+74.1% YoY) for the quarter arising from profit on sale of land and fall in tax rate (12.8% in 3QFY15 as against 28.8% in 3QFY14) boosted profits.

Financial performance: A snapshot
(Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Income from operations  10,230 10,831 5.9% 30,051 32,723 8.9%
Expenditure 8,255 8,937 8.3% 24,793 27,132 9.4%
Operating profit (EBDITA) 1,976 1,894 -4.2% 5,258 5,591 6.3%
Operating profit margin (%) 19.3% 17.5%   17.5% 17.1%  
Other income 236 411 74.1% 1,463 2,205 50.8%
Interest 10 13 38.1% 31 36 14.4%
Depreciation 133 217 62.7% 382 606 58.9%
Profit before tax 2,069 2,075 0.3% 6,308 7,154 13.4%
Tax 597 265 -55.6% 1,725 1,200 -30.4%
Profit after tax/(loss) 1,472 1,810 23.0% 4,582 5,954 29.9%
Net profit margin (%) 14.4% 16.7%   15.2% 18.2%  
No. of shares         277.2  
Basic Diluted earnings per share (Rs)         21.48  
P/E ratio (x)*         33.9  
* On a trailing 12-months basis

What has driven performance in 3QFY15?
  • Revenues increased 5.9% YoY during 3QFY15. The domestic sales were down by 7% YoY while exports jumped 39% YoY. The power gen sets segment contributed Rs 2.3 bn, industrial Rs 1.65 bn, auto Rs 250 m and distribution Rs 2.35 bn to the topline for the quarter.

  • Operating profits declined 4.2% YoY during the quarter as cost pressures mounted. Slowdown in overall demand impacted sales growth thereby making absorption of fixed cost difficult; as a result of which margins fell 180 bps YoY.

  • Net profits increased 23% YoY during the quarter due to higher other income. Lower tax rate during the quarter further boosted profits.
What to expect?
At the current price of Rs 906, the stock is trading at a multiple of 33.9x its TTM earnings. While exports may have registered a strong performance, domestic markets continued to witness slowdown pressure. Unless the domestic demand revives, the power gen sets business would continue to suffer. However, the distribution unit is expected to gain traction in coming quarters. Since the last update, we have revised our estimates and rolled forward our target to FY17. Considering the expensive valuations we maintain our view of buying the stock at lower levels.

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