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Cummins: Focus is the key - Views on News from Equitymaster
 
 
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  • Oct 4, 2001

    Cummins: Focus is the key

    Cummins India, the diesel engines major, has not had a great FY01. The company recorded a 17% growth in profits and a 4% rise in topline for the year ended March '01. The company's revenues in the fourth quarter dropped by about 2% and operating margins fell by 60 basis points. This affected the overall financial performance.

    Cummins India is a 51% subsidiary of Cummins Engines USA, and is engaged in the manufacture of various types of engines (5-5,000 HP) and reciprocating gas turbines. Its engines find use across a range of industries – i.e. in gensets, earthmoving/construction equipment, compressors and other industrial applications. Exports (mainly to its parent) accounts for 40% of revenues. After sales services are offered by a 100% subsidiary company.

    During FY01 the company’s management had stated that it would focus on products and services that take care of the client’s total power needs. 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 parent, has 12 entities in India with a turnover of Rs 17 bn. Cummins Diesel Sales and Services (CDSS), Tata Cummins, Power Systems India Limited are some of these. 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 has 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 35 m in this subsidiary, with 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 networks.

    However, despite these ambitious plans, the domestic market remains stagnant. Cummins mining customers are postponing purchases because of a bad market outlook. Though there is no doubt that India is an important market for Cummins Inc., its many forays and entities in India worry investors.

    However, 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 the segments and is better geared than others to take advantage when the outlook improves. At Rs 48 the stock trades at a P/E of 8.8x FY01 earnings.

     

     

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