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Cummins Ltd: Exports drive growth
Nov 17, 2014

Cummins India Ltd has announced its second quarter results for financial year 2014-2015 (2QFY15). During 2QFY15, topline increased by 22.7% YoY while bottomline increased by 39.8% YoY. Here is our analysis of the results.

Performance summary
  • Net sales increased by 22.7% YoY during 2QFY15. Domestic sales were up 4% YoY while exports increased by 60% YoY.
  • Operating profits increased by 24.4% YoY during 2QFY15 due to strong topline growth. Operating margins more or less remained flat on a YoY basis.
  • Due to a strong performance at the operating level and a 30.1% YoY rise in other income, net profits increased 39.8% YoY. Other income for the quarter includes profit on sale of long term investments worth Rs 826.3 m. However, a 55.4% YoY increase in depreciation expenses curtailed profitability growth to an extent. Depreciation charges were higher due to changes in accounting policy whereby the charges were computed based on estimated economic useful life of the asset.
  • The board of directors has declared an interim dividend of Rs 5 per share.

Standalone performance snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Income from operations  9,327 11,441 22.7% 19,820 21,892 10.5%
Expenditure 7,801 9,541 22.3% 16,538 18,194 10.0%
Operating profit (EBDITA) 1,526 1,899 24.4% 3,282 3,698 12.7%
Operating profit margin (%) 16.4% 16.6%   16.6% 16.9%  
Other income 558 726 30.1% 1,226 1,794 46.3%
Interest 9 10 5.4% 22   22 3.7%
Depreciation  131 204 55.4% 249   390 56.8%
Profit before tax 1,944 2,412 24.0% 4,239 5,079 19.8%
Tax 496 388 -21.8% 1,129 935 -17.1%
Profit after tax/(loss) 1,448 2,024 39.8% 3,110 4,144 33.2%
Net profit margin (%) 15.5% 17.7%   15.7% 18.9%  
No. of shares         277.2  
Basic & Diluted earnings per share (Rs)           14.9  
P/E ratio (x)*          32.3  
* On a trailing 12-months basis

What has driven performance in 2QFY15?
  • Revenues increased 22.7% YoY during 2QFY15. The domestic sales were up by only 4% YoY while exports jumped 60% YoY. The growth in exports is attributed to strong uptick in both high & low horse power segments. Africa and other emerging markets witnessed strong growth in terms of geographies. Considering that the domestic demand still remains muted, management reiterated its revenue growth guidance of 5-10% for the year.

  • Operating profits increased 24.4% YoY during the quarter amidst stringent cost control measures and strong revenue growth. Operating margins registered a marginal improvement of 20 bps YoY.

  • Net profits increased 39.8% YoY during the quarter due to strong performance at the operating level and higher other income. Lower tax rate (16.1% in 2QFY15 vis-a-vis 25.5% in 2QFY14) further boosted profits.
What to expect?
At the current price of Rs 820, the stock is trading at a multiple of 32.3x its TTM earnings. In the current quarter, exports registered a sharp jump of 60% YoY but demand conditions in the domestic market continue to remain muted. For FY15, export growth guidance is in the region of 30%. Sales from low horse power engines that started in February is expected to touch Rs 15-20 bn over a period of 4-5 years triggering sharp growth in exports. Based on these factors we are likely to revise 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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