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Cummins Ltd: One time gain boosts profits
Aug 26, 2014

Cummins India Ltd has announced its first quarter results for financial year 2014-2015 (1QFY15). During 1QFY15, topline was flat while bottomline increased by 27.6% YoY. Here is our analysis of the results.

Performance summary
  • Net sales declined by 0.4% YoY during 1QFY15. Domestic sales declined 15% YoY while exports increased by 40% YoY.
  • Operating profits increased by 2.4% YoY during 1QFY15 as the company was able to improve its material margins due to better cost control. Operating margins improve by 5o bps YoY to 17.2% during the quarter.
  • Despite a modest performance at the operating level, net profits increase 27.6% YoY due to a 59.8% YoY rise in other income. Other income jumped sharply because of a onetime non-recurring gain of Rs 823 m pertaining to sale of KPIT shares. Depreciation expenses increased 58.4% YoY due to changes in accounting policy while employee expenses were up by 8.7% YoY due to changes in actuarial accounting of pensions.

Standalone performance snapshot
(Rs m) 1QFY14 1QFY15 Change
Income from operations  10,493 10,451 -0.4%
Expenditure 8,737 8,653 -1.0%
Operating profit (EBDITA) 1,756 1,799 2.4%
Operating profit margin (%) 16.7% 17.2%  
Other income 668 1,067 59.8%
Interest 12 13 2.5%
Depreciation  117 186 58.4%
Profit before tax 2,294 2,667 16.3%
Tax 632 547 -13.5%
Profit after tax/(loss) 1,662 2,120 27.6%
Net profit margin (%) 15.8% 20.3%  
No. of shares   277.2  
Basic & Diluted earnings per share (Rs)   7.65  
P/E ratio (x)*   29.7  
* On a trailing 12-months basis

What has driven performance in 1QFY15?
  • Revenues declined 0.4% YoY during 1QFY15. The power generation set business contributed Rs 2.9 bn, industrial business Rs 1 bn, auto Rs 260 m, while the distribution business contributed Rs 2.2 bn during the quarter. The domestic revenues stood at Rs 6.4 bn while the export share stood at Rs 3.9 bn.

  • The company's revised growth guidance is as follows: On the domestic side growth expectations are in the region of 0-5% while management expects a 30+% growth on the exports business. This translates into overall growth expectation of about 10-15% for the fiscal.

  • Operating profits increased 2.4% YoY during the quarter with margins improving by 50 bps on a YoY basis. Expansion in material margins led to a growth at the operating level.

  • Net profits increased 27.6% YoY during the quarter despite muted performance at the operating level due to a rise in other income.

  • For FY15, management expects capex to be in the range of Rs 5-6 bn while tax rate is expected to be in the region of 20% odd.
What to expect?
At the current price of Rs 698, the stock is trading at a multiple of 29.7x its TTM earnings. Despite poor demand conditions, revenues were flat while profits jumped sharply due to exceptional gain on sale of investments during the quarter.

We observe that despite muted demand conditions and poor financial performance (sales and profits were down by 13.4% YoY and 21.5% YoY respectively in FY14) the stock price has remained resilient due to expectations that growth may materialize in future. As a result, we are likely to revisit our growth estimates and introduce FY17 figures into our model. We shall update our subscribers with a revised view on the stock soon.

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