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Cummins: Vital stats...

Aug 28, 2003

The stock price of Cummins India has been consistently on the rise since last 6 months. After having gained around 65%, the question in one's mind is whether the pace will sustain. To answer this, let's take a look at Cummins' business profile and future growth prospects. Cummins India Ltd., incorporated in 1962, (formerly known as Kirloskar Cummins Limited) is a 51% subsidiary of Cummins Engines USA. It has organised its operations around three business sectors, namely power generation, industrial business and automotive sector. Its engines find use across a range of industries like gensets, earthmoving/construction equipments and other industrial applications.

In power business Cummins provides a wide range of products offering power backup for industrial units of all sizes. It designs and develops environment friendly and technologically advanced power solutions to ensure economical power supply. It manufactures diesel, gas and dual-fuel engines ranging from 5-5000 HP, for power generation and industrial applications. It also provides market support systems, parts and products services through its subsidiary CDS&S (Cummins Diesel Sales and Services (India) Ltd.).

Challenges ahead... The fuel price (especially diesel) has increased by 26% since the dismantling of the Administered Pricing Mechanism. This has resulted in higher cost of generation on liquid fuels and is likely to affect the company's product and spares sales going forward. This remains as a big threat for the power business going ahead. Going forward, the implementation of the Electricity Bill is likely to have a strong short term and long term impact on the industry. The provisions of the Bill will provide a fillip to captive generation, rural electrification and improvement in the overall electricity infrastructure in the country. Improved distribution performance in areas such as Delhi by private sector T&D ventures will see a reduction in load shedding and improved power supply. This is likely to hamper the demand of diesel engines.

Industrial business unit markets diesel & gas engines in the range of 65 to 2,700 HP. These engines are available on a variety of mobile and stationary equipment used in various sectors like construction, mining, defense etc. Engines are customized to the demands of the application and are offered with cooling, exhaust and air intake systems fully integrated with equipment design for optimum performance. Going forward, the increase in railway expenditure will fuel demand for track maintenance machines, safety equipments and power cars. The increased number of projects in coal and steel will increase the demand for earth moving and mining equipments, which is a positive for the company.

The automotive sector focuses on owners and operators of Trucks and other heavy-duty vehicles. It is primarily engaged in distribution of parts & components, service support and value added services for 'bumper to bumper' support. As the consumers get more sophisticated, the service initiative will help Cummins build a rapport and higher customer recall.

Cummins registered a 12% growth in topline, but its bottomline increased by 9% in FY03. Improvement in sales was also due to the merged subsidiaries contributing to Rs 1,336 m. The company's domestic sales grew significantly (up 44%) but exports declined sharply by 36% YoY. The softening in global demand for power generation equipment (heavy duty and high horsepower engines) was the main reason for decline in exports. However, the company has restated that its focus will remain on exports and is taking new export initiatives such as component exports and export of generator sets to offset the low demand for high horsepower products. Company has done well in the 1QFY04 with exports going up by 42% and domestic sales up by 12%. The net sales of the company were up by 17% (excluding merged companies) YoY and bottomline was up by 56%.

Though company keeps updating its technology through joint venture with various national and international companies it needs to change its technology for diesel engines to some cheaper source of energy so that electricity generation remains economical and hence, the company remains competitive. At the current price of Rs 83, stock trades at P/E multiple of 17.2x FY03 earnings.

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