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Cummins: Volumes drive growth
Jul 25, 2008

Introduction to results
  • Net sales grow by 30% YoY in 1QY09 aided by strong performance from the company’s diesel engine business.

  • Operating margins contract by 0.3% YoY, largely due to a 5% increase in raw material costs (as percentage of sales).

  • Net profits grow by 38% YoY during the quarter on the back of strong revenue growth along with higher other income and lower tax outgo.



(Rs m) 1QFY08 1QFY09 Change
Net Sales 5,423 7,070 30%
Expenditure 4,684 6,133 31%
Operating profit (EBITDA) 740 938 27%
Operating profit margin (%) 13.6% 13.3%  
Other income 232 377 63%
Depreciation 76 99 30%
Interest 2 6 206%
Profit before tax 894 1,210 35%
Tax 253 327 29%
Profit after tax/(loss) 640 882 38%
Net profit margin (%) 11.8% 12.5%  
No. of shares (m)   198.0  
Earnings per share (Rs)   15.4  
P/E ratio (x)   18.2  

What has driven performance in 1QFY09?
  • Cummins’ revenues grew by 30% YoY during 1QFY09, mainly due to a 25% growth in its diesel engines business. The company’s other segment, which includes leasing of gensets, energy solutions and sale of small generators, grew by 78% YoY. This segment’s contribution towards the revenues increase to 14% as compared to 10% in the corresponding quarter of the previous year. Exports formed about 38% of revenues as compared to approximately 33% in 1QFY08. The company has been able to maintain a robust growth in revenues mainly because of higher volumes along with other factors such as improving productivity, better product mix and an increase in products prices.

    Segment wise performance table
    (Rs m) 1QFY08 1QFY09 Change
    Engine business
    Revenue 4,908 6,156 25.4%
    % share 89.8% 86.1%  
    PBIT margin 14.4% 13.7%  
    Others
    Revenue 558 992 78.0%
    % share 10.2% 13.9%  
    PBIT margin 14.5% 23.1%  
    Total*
    Revenue 5,466 7,149 30.8%
    PBIT Margin 14.4% 15.0%  

  • At the operating level, the company’s margins dropped by 0.5% YoY, mainly on account of a 31% increase in expenses. This was on the back of higher input and purchase of traded goods costs, which grew by 39% YoY and 206% YoY respectively. As percentage of sales, these cost heads increased by 4.5% and 3% respectively.

  • Cummins recorded a bottomline growth of 38% YoY on the back of stable performance at the operating level along with higher other income and lower tax rates. The company recorded net profit margins of 12.5% during the quarter as compared to 11.8% during the corresponding quarter of the previous year.

What to expect?
At the current price of Rs 281, the stock is trading at a multiple of 18.2 times its trailing twelve months earnings. As Cummins provides equipment and services to clients from various segments, the company has been able to de-risk its dependence on a particular segment, in a conference call held today the company’s management stated that it has been witnessing a slowdown in demand from clients present in the auto and construction sectors. The management also informed that business from the these sectors has been growing at a slower pace of 5% in recent times as compared to a 20% to 30% growth achieved during the period 2004 to 2007.

Being a manufacturing unit, Cummins is bound to feel pressures on the input cost front. However, during the quarter, the company was able to offset the cost pressures marginally by increasing the product prices along with having better product mix. However, input cost pressures will continue to remain as its primary concern going forward. The company has planned a capex of between Rs 700 m to Rs 1000 m for the current fiscal, mainly towards expanding capacities.

  • View the 1QFY09 result scoreboard

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