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Cummins India: Eyeing the global pie - Views on News from Equitymaster
 
 
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  • Aug 24, 2000

    Cummins India: Eyeing the global pie

    Cummins India, one of India’s largest diesel engines manufacturer has unveiled ambitious plans at its Analyst’s meet yesterday. Presently, Cummins’ engines range between 30 HP to 2000 HP. The company plans to broaden that range to cover engines from 5 HP to 5000 HP.

    In addition to this product range target the company wants to IT enable its business. Till now the company provided mechanical devices. Now it is looking at electronically intelligent products (viz. engines). Its aim is to provide total solutions to its customers right from providing engines, to maintaining them for a fee, to upgrading them when the need arises and all this is planned via its new IT pronged strategy. The strategy is to package both engines and value added services and assume full responsibility of assured power generation.

    Though the Cummins group wants to retain engines as its core focus, it is looking at other avenues to add to its growth potential. Cummins Incorporated, USA (the company’s parent) has 12 entities in India. Cummins Diesel Sales and Services (CDSS), Tata Cummins, Power Systems India Limited are some examples. The group is looking at having a finger in every conceivable pie. It has a joint venture (JV) with Crompton Greaves for alternators. Its Tata Cummins JV shows its presence in the automotive engine segment.

    But one of its most ambitious forays is Cummins Infotech, its proposed software development, ERP implementation and e-business (B2B) arm. The company has invested Rs 4.8 m in this subsidiary and is looking to rope in Cummins Inc, USA as a majority stakeholder. The aim is to provide solutions not only for its Indian operations but also to use the same knowledge for Cummins worldwide network. The aim is to becoming a leading provider of IT solutions and services for Cummins’ organisations across the world.

    The management is aiming at a compounded annual growth rate (CAGR) of 196% by FY03 in its revenues from Cummins Infotech. This looks ambitious but gettable if the parent does back it up.

    Cummins Infotech revenue projections …..
    (Rs m)
    FY01 4.4
    FY02 19.8
    FY03 38.6
    CAGR 196.0%

    The group projections estimate that turnover will grow at a compounded annual growth rate (CAGR) of 19% and the net profit by 22%.

    The Cummins Group India projections …..
    (Rs m) Turnover Profit
    FY00 12,110 1,157
    FY01E 16,700 1,300
    FY02E 16,700 1,807
    FY03E 20,390 2,099
    CAGR 19.0% 22.0%

    These projections are too export dependent, going by the current trends. In FY00, the company logged in an impressive 28% growth in turnover and a 25% growth in net profit over FY99. But most of this growth came from a huge 116% surge in exports. The company’s domestic turnover was stagnant. The company says that this growth in exports to other global Cummins companies is sustainable. In 1QFY01, Cummins achieved a 10% rise in topline on the back of a 21% rise in exports. Though the rise in exports is expected this year too, but it is unlikely that it will touch the magic 116% as in FY00.

    The domestic market remains stagnant. Cummins mining customers are postponing sales because of a bad market outlook. Though there is no doubt that India is an important market for Cummins Inc., but the parents’ many forays and entities in India worries investors, who believe that too many resources are locked in different forays, which adversely affect his shareholder value.

    It must be said that the management of the company is sound and knows the business well. The company is a dominant player in most of segments it is present in and is better geared than most to take the advantage when the outlook improves. The company’s stock currently trades at a P/E multiple of 17 times its FY00 earnings. Historically, the stock has traded at P/E levels of 30-35 times its earnings. But the story is same for most old economy stocks.

     

     

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