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Cummins Ltd: Power gen sets business hurts growth
Feb 28, 2014

Cummins India Ltd has announced its third quarter results for financial year 2013-2014 (3QFY14). During 3QFY14, both topline and bottomline declined by 6.1% YoY and 37.1% YoY respectively. Here is our analysis of the results.

Performance summary
  • Net sales declined by 6.1% YoY during 3QFY14. The power gen sets business declined 20% YoY while the industrial business was relatively flat on a YoY basis. Further, automotive business declined 40% YoY while the distribution business grew by 3% YoY during the quarter.
  • Operating profits decline by 5.3% YoY during 3QFY14 as fixed cost absorption becomes difficult amidst declining sales. Nonetheless, operating margins improve by 20 bps YoY to 19.3% during the quarter due to better cost control measures.
  • Net profits decline 37.1% YoY due to muted performance at the operating level. Increase in interest and depreciation expenses by 14.1% YoY and 13.0% YoY respectively also hurt the bottomline growth. Adjusting for exceptional items, net profits declined 21.1% YoY during the quarter.
  • The company declared an interim dividend of Rs 5 per equity share during the quarter.
  • During 9MFY14, the company incurred a capex of Rs 3.75 bn. For the full year it is expected to be in the range of Rs 4 bn.

Financial Snapshot
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Income from operations 10,895 10,230 -6.1% 34,351 30,051 -12.5%
Expenditure 8,808 8,255 -6.3% 27,941 24,793 -11.3%
Operating profit (EBDITA) 2,086 1,976 -5.3% 6,410 5,258 -18.0%
Operating profit margin (%) 19.1% 19.3%   18.7% 17.5%  
Other income 661 236 -64.3% 1,244 1,463 17.6%
Interest 9 10 14.1% 35 31 -10.6%
Depreciation 118 133 13.0% 349 382 9.4%
Profit before tax 2,621 2,069 -21.1% 7,270 6,308 -13.2%
Exceptional items 475 - -100.0% 616 - -100.0%
Tax 755 597 -21.0% 2,130 1,725 -19.0%
Profit after tax/(loss) 2,341 1,472 -37.1% 5,756 4,582 -20.4%
Net profit margin (%) 21.5% 14.4%   16.8% 15.2%  
No. of shares          277.2  
Basic & Diluted earnings per share (Rs)          16.5  
P/E ratio (x)*          21.6  
* On a trailing 12-months basis

What has driven performance in 3QFY14?
  • Revenues declined 6.1% YoY during 3QFY14. This was mainly due to a 20% YoY fall in power gen sets business. Considering the slowdown management maintained its guidance of 10-15% decline in sales during the current fiscal. Domestic business is expected to decline by about 15% while the export business is expected to decline by about 10%. For FY15, revenue growth is expected to be flat.

  • Operating profits declined 5.3% YoY during the quarter with margins remaining more or less flat on a YoY basis. However, the gross margins have shown improvement due to various cost control programs the company has undertaken. But on sequential basis material margins were relatively flat as they were impacted by adverse product mix.

  • Net profits declined 37.1% YoY during the quarter due to muted performance at the operating level and fall in other income. Absence of dividends from subsidiaries in this quarter led to 64.3% YoY fall in other income. Increase in interest and depreciation expenses by 14.1% YoY and 13.0% YoY further impacted bottomline growth. Adjusting for exceptional items relating to profit on sale of investments net profits declined 21.1% YoY.
What to expect?
At the current price of Rs 504, the stock is trading at a multiple of 21.6x its TTM earnings. Amidst poor demand conditions, revenues and profits have declined during 9MFY14. Management expects to end the year with 10-15% decline in revenues. Even the next year is expected to be flat as demand revival may take time since domestically the power generation market is struggling. While margins have shown some improvement due to better cost control measures it would be interesting to see if they are sustainable considering that competition is heating up (nearest competitor, Perkins, likely to have a facility by the end of 2014). Thus, at current valuations, we recommend investors to buy the stock at lower prices.

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