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Cummins: Inflection point?

Jun 13, 2002

Diesel engines major, Cummins India, declared a 14% decline in FY02 topline and a 21% drop in bottomline. The drop in bottomline came despite a 61% surge in other income.

(Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Net sales 2,333 2,086 -10.6% 8,603 7,409 -13.9%
Other Income 77 143 86.1% 227 364 60.5%
Expenditure 1,914 1,685 -12.0% 7,103 6,323 -11.0%
Operating Profit (EBDIT) 419 401 -4.2% 1,500 1,086 -27.6%
Operating Profit Margin (%) 18.0% 19.2%   17.4% 14.7%  
Interest 5 4 -27.0% 19 15 -24.2%
Depreciation 72 65 -10.3% 262 247 -5.8%
Profit before Tax 418 475 13.7% 1,445 1,189 -17.8%
Lumpsum VRS 0 -49   0 -49  
Tax 71 111 55.6% 356 277 -22.2%
Profit after Tax/(Loss) 347 316 -8.9% 1,089 863 -20.8%
Net profit margin (%) 14.9% 15.1%   12.7% 11.6%  
No. of Shares (m) 198.0 198.0   198.0 198.0  
Diluted Earnings per share* 7.0 6.4   5.5 4.4  
Current P/E ratio (x)   8.5     12.4  

The company incurred a lumpsum VRS expense during FY02, excluding which the net profit for the year would have fallen 16% YoY. Cummins expenses could not fall in tandem with its topline and consequently, operating margins for the year fell by 270 basis points to 14.7%.

However, the company's 4QFY02 showed signs of improvement where sales fell by 11% but bottomline declined marginally by 9%. If we exclude the VRS expenses, 4QFY02 net profit has actually shown a marginal improvement of 5% YoY. Also, during 4QFY02 Cummins seemed to have greater control on costs and thus, OPM surged to 19.2% during the quarter.

Cost break-up
(Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
(Increase)/decrease in stock-in-trade -23 27 - 5 100 -
Consumption of raw materials 1,411 1,171 -17.0% 5,204 4,441 -14.7%
Staff Cost 181 245 35.4% 723 790 9.2%
Other expenditure 346 242 -30.0% 1,171 992 -15.2%
Total expenditure 1,914 1,685 -12.0% 7,103 6,323 -11.0%

Cummins is a direct play on the health of the domestic and the international economy in general and industrial / commercial and infrastructure development in particular. Consequently, the domestic slowdown and the economic weakness in different parts of the world has hit the performance of the company. However, since Cummins is one of the better managed engineering companies in India, it is well poised to take the advantage when the economy recovers.

However, the company has its own share of concerns. The Cummins group has a clutch of JVís and subsidiaries in India. This raises fears of a loss of focus, going forward. Also, sharp fluctuations in the cost of diesel, post APM, might act as a dampener on the usage of diesel engines to generate power in India. There looms constantly the threat of import of good quality but low priced power generation engines from abroad.

At Rs 54 the stock trades at a P/E multiple of 12x FY02 earnings. The company's 4QFY02 improvement is a heartening sign and if this continues we have a turnaround story on our hands.

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