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Cummins: Steady performance - Views on News from Equitymaster
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Cummins: Steady performance
Feb 18, 2009

Performance summary
  • Net sales grow by 27% YoY in 3QFY09 aided by strong performance of the engine business segment.
  • Operating margins expand by 4% YoY, on account of lower input costs along with favourable impact of forex fluctuations and improved realisations.
  • Net profits grow by 79% YoY during the quarter on the back of a strong operating performance and an extraordinary income on account of sale of rental business. Excluding the same, net profits have increased by 53% YoY.

Financial snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net Sales 5,902 7,495 27.0% 16,608 22,464 35.3%
Expenditure 5,035 6,091 21.0% 14,275 19,075 33.6%
Operating profit (EBITDA) 867 1,405 62.0% 2,333 3,388 45.3%
Operating profit margin (%) 14.7% 18.7%   14.0% 15.1%  
Other income 269 342 27.3% 763 1,063 39.2%
Depreciation 86 110 27.2% 240 308 28.7%
Interest 0 0 0.0% 3 7 176.9%
Profit before tax 1,050 1,637 56.0% 2,854 4,136 44.9%
Exceptional gain/(loss) - 192   - 192  
Tax 303 495 63.3% 803 1,173 46.1%
Profit after tax/(loss) 746 1,334 78.7% 2,051 3,155 53.8%
Net profit margin (%) 12.6% 17.8%   12.3% 14.0%  
No. of shares (m)         198.0  
Earnings per share (Rs)*         18.8  
P/E ratio (x)*         8.7  
* On a trailing 12-months basis, excluding extraordinary items

What has driven performance in 3QFY09?
  • Cummins’ revenues grew by 27% YoY during 3QFY09. This is attributable to a 23% YoY growth in its engine business and 73% YoY growth in its other business, which largely includes sale of generators. However, during 3QFY09, the latter contributed to about 11% of the topline while the balance was contributed by its engine business. During the quarter, exports formed about 47% of total revenues as compared to about 30% in 3QFY08. The company has been able to maintain a robust growth in revenues mainly because of higher volumes along with other factors such as improved productivity, better product mix, and an increase in products prices.

    Segment wise performance table
    (Rs m) 3QFY08 3QFY09 Change
    Engine business
    Revenue 5,477 6,730 22.9%
    % share 92.0% 89.2%  
    PBIT margin 15.7% 18.6%  
    Revenue 474 818 72.5%
    % share 8.0% 10.8%  
    PBIT margin 14.3% 31.2%  
    Revenue 5,951 7,548 26.8%
    PBIT Margin 15.6% 20.0%  
    * Excluding inter-segment adjustments

  • At the operating level, the company’s margins expanded by 4% YoY during 3QFY09. The management has attributed higher margins to better realisations, favourable exchange rate (on exports) and lower input costs. In addition, on account of the sale of the power generation rental business, the company also wrote back Rs 99 m carried in the books for maintenance and overhaul expenses under other expenditure.

  • Cummins recorded a net profit growth of 79% YoY during 3QFY09, which was on the back of stable performance at the operating level. However, profits during the quarter were also boosted by an extraordinary income earned on sale of its power generation rental business. Excluding the same, profits grew by 53% YoY. As compared to the profit before tax, the growth in net profits was impacted by higher tax charges. The company recorded a net profit margin of 15.2% (excluding extraordinary item) during the quarter as compared to 12.6% in 3QFY08.

What to expect?
At the current price of Rs 158, the stock is trading at a multiple of 8.4 times its trailing twelve months earnings. Going forward, the company’s management believes that revenues will decline by 15% YoY to 20% YoY in FY10 on account of lower domestic and export demand. It also expects margins to drop on account of lower volumes and pricing pressure.

The reason the management expects revenues to fall by such an extent is on the back of the slowdown in business it has witnessed in the second half of 2008. The power generation business, which was growing domestically had flattened and has now started to decline. Similar is the case for the industrial business, wherein on account of slowdown in the construction space, it expects the demand to taper down. In addition, its automotive segment has already tanked in the early part of this year. However, the management expects the demand for its automotive products to and gain momentum over the next few quarters.

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