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Cummins Ltd: Demand slowdown hurts profits

Jun 20, 2014 | Updated on Oct 30, 2019

Cummins India Ltd has announced its fourth quarter results for financial year 2013-2014 (4QFY14). During 4QFY14, both topline and bottomline declined by 15.8% YoY and 24.8% YoY respectively. Here is our analysis of the results.

Performance summary
  • Net sales declined by 15.8% YoY during 4QFY14. Domestic sales declined 26% YoY while exports increased by 14% YoY. Growth in exports was attributable due to introduction of new horsepower generators manufactured from the new plant. For the full year, sales were down by 13.4% YoY as domestic revenues declined by 17% YoY and exports declined by 6% YoY.
  • Operating profits decline by 11.8% YoY during 4QFY14 as fixed cost absorption becomes difficult (capacity utilization is between 50-60% currently) amidst declining sales. Nonetheless, operating margins improve by 8o bps YoY to 17.6% during the quarter due to better cost control measures.
  • Net profits decline 24.8% YoY due to muted performance at the operating level, rise in depreciation expenses and fall in other income. Other income fell as the company recognized profit on sale of long term investments during 4QFY13. However, in 4QFY14, there was no such non-recurring gain leading to a fall in other income. Depreciation expenses increased 17.9% YoY amidst the expansion plans undertaken by the company.
  • The board has recommended a final dividend of Rs 8 per share. In addition, an interim dividend of Rs 5 was already recommended earlier.

Standalone performance snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Income from operations  11,543 9,716 -15.8% 45,894 39,767 -13.4%
Expenditure 9,604 8,007 -16.6% 37,545 32,799 -12.6%
Operating profit (EBDITA) 1,939 1,709 -11.8% 8,349 6,967 -16.5%
Operating profit margin (%) 16.8% 17.6%   18.2% 17.5%  
Other income 824 315 -61.8% 2,067 1,777 -14.0%
Interest 11 11 -5.4% 46 42 -9.3%
Depreciation 124 146 17.9% 473 528 11.6%
Profit before tax 2,627 1,867 -28.9% 9,897 8,175 -17.4%
Exceptional items  - - NA 616 - -100.0%
Tax 742 450 -39.4% 2,872 2,175 -24.3%
Profit after tax/(loss) 1,886 1,418 -24.8% 7,641 6,000 -21.5%
Net profit margin (%) 16.3% 14.6%   16.6% 15.1%  
No. of shares          277.2  
Basic & Diluted earnings per share (Rs)          21.6  
P/E ratio (x)*         30.2  
* On a trailing 12-months basis

What has driven performance in 4QFY14?
  • Revenues declined 15.8% YoY during 4QFY14. The domestic revenues stood at Rs 6.17 bn while the export share stood at Rs 3.39 bn. The export growth is likely to be in the region of 5-10% while the domestic business is likely to grow in the region of 0-5% during next fiscal. Thus, the overall topline growth for next year is likely to be in the region of 5% odd.

  • Operating profits declined 11.8% YoY during the quarter with margins improving by 80 bps on a YoY basis. However, the gross margins improved by 180 bps due to various cost control programs the company has undertaken. And management stated that the same may improve in future as the economic environment improves. For the full year, operating profits were down by 16.5% YoY.

  • Net profits declined 24.8% YoY during the quarter due to poor performance at the topline level and fall in other income. Absence of non recurring gains from sale of investments in this quarter led to 61.8% YoY fall in other income. Increase in depreciation expenses by 17.9% YoY further impacted bottomline growth. For the full year, profits were down by 21.5% YoY. However, adjusting for the non-recurring items, profits were down by 14.6% YoY during the year.
What to expect?
At the current price of Rs 645, the stock is trading at a multiple of 30.2x its TTM earnings. Amidst poor demand conditions, revenues and profits have declined in FY14. Management expected to end the year with 10-15% decline in revenues. And quite expectedly reported a 13.4% decline in revenues amidst poor demand conditions. However, for FY15, management expects topline growth to be in the region of 5% as demand may gradually improve though domestically the power generation market is struggling. While margins have shown some improvement on quarterly basis due to better cost control measures, it would be interesting to see if they are sustainable considering that competition is heating up. Thus, based on overall slowdown in domestic and export markets, we maintain our view of buying the stock at lower levels.

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