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Cummins: Merger bonanza

Aug 13, 2003

Cummins India Ltd. reported good results for June quarter, showing a healthy growth of about 92% in bottomline on the back of 45% growth in topline and a huge increase in other income. The net profit margin was up 250 basis points. However, operating margins were lower by 300 basis points as compared to same quarter last year.

(Rs m)1QFY031QFY04Change
Net Sales1,467 2,125 44.8%
Other Income61 169 177.0%
Expenditure1,293 1,938 49.9%
Operating Profit (EBDIT)174 187 7.2%
Operating Profit Margin (%)11.9%8.8%
Interest2 4 114.0%
Depreciation61 70 14.8%
Profit before Tax172 281 63.5%
Tax57 60 5.4%
Profit after Tax/(Loss)115 221 92.3%
Net profit margin (%)7.8%10.4%
No. of Shares (m)198198
Diluted Earnings per share*2.3 4.5
P/E Ratio 19.0
*(annualised)

Both domestic sales and exports have contributed to the growth in topline. The export revenues have grown substantially from Rs 322 m to Rs 457 m (up 42%). The company has reiterated that exports will be one of the key focus areas going forward. The domestic sales grew by 12% YoY.

The sales break-up reveals that the reason for the huge growth in topline is the merging of two entities - Power Systems India Limited (PSIL) and Cummins Power Solutions Limited (CPSL) with Cummins India. If we look at the numbers in isolation, the company has registered a topline growth of 17% YoY and a bottomline increase of 56% as compared to 1QFY03. The two companies contributed around 20% to topline and around 18.5% to the consolidated bottomline numbers.

Lets have a look at the cost break-up

(Rs m)1QFY031QFY04Change
(Increase)/decrease in stock-in-trade-122 1
Consumption of raw materials1,039 1,363 31.2%
Staff Cost 194 228 17.5%
Other expenditure 182 250 37.4%
Retirement scheme0 96
Total expenditure1,2931,93849.9%

Though total expenditure as percentage of sales has gone up from 88% to 91% for the June quarter, but the cost break-up shows a different picture. The raw material cost as percentage of sales has come down from 71% to 64%. Even staff cost as a percentage to net sales has come down from 13% to 11%. The reason for drop in operating margins is the compensation paid by the company for the VRS, which was not there in 1QFY03. If we exclude this extraordinary VRS expenses, then operating margins actually improve by around 150 basis points. The VRS will show positive effects in the coming quarters.

The higher other income is on the account of interim dividend of Rs 60 m declared by Cummins Diesel Sales and Service (India) Limited, a wholly owned subsidiary of the company.

At the current price levels of Rs 86, the stock trades at a P/E multiple of 19x annualised 1QFY04 earnings. Cummins has done well to restructure itself. The company is now well positioned to take advantage of the vitality in the Indian economy. However, the company is the leading diesel engine manufacturer, any increases in the crude oil prices or hike in the diesel price will have a negative impact on the topline, because it will increase the cost of power generated by diesel engines.

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