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Cummins Ltd: Slowdown hurting growth

Nov 29, 2013 | Updated on Oct 30, 2019

Cummins India Ltd has announced its second quarter results for financial year 2013-2014 (2QFY14). During 2QFY14, both topline and bottomline declined by 14.2% YoY and 10.0% YoY respectively. Here is our analysis of the results.

Performance summary
  • Net sales declined by 14.2% YoY during 2QFY14. Domestic sales were down 19% YoY due to faltering demand in the power generation sets market while the export growth was relatively flat on a YoY basis.
  • Operating profits decline by 23.6% YoY during 2QFY14 as fixed cost absorption become difficult amidst declining sales. Operating margins fell by 2oo bps YoY to 16.4%.
  • Net profits decline 10% YoY due to muted performance at the operating level. Other income increased by 65.1% YoY due to substantial rise in dividend income (Rs 230 m in 2QFY14 compared to Rs 30 m in 2QFY13) thereby cushioning profits.
  • Capex in 1HFY14 was Rs 1.8 bn. For the full year management expects capex to be in the region of Rs 4.5-5 bn.

Standalone performance snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Income from operations  10,869 9,327 -14.2% 23,457 19,820 -15.5%
Expenditure 8,870 7,801 -12.1% 19,132 16,538 -13.6%
Operating profit (EBDITA) 1,999 1,526 -23.6% 4,324 3,282 -24.1%
Operating profit margin (%) 18.4% 16.4%   18.4% 16.6%  
Other income 338 558 65.1% 723 1,226 69.6%
Interest 13 9 -27.9% 26 22 -18.6%
Depreciation 117 131 12.0% 231 249 7.6%
Profit before tax 2,207 1,944 -11.9% 4,790 4,239 -11.5%
Tax 598 496 -17.0% 1,375 1,129 -17.9%
Profit after tax/(loss) 1,609 1,448 -10.0% 3,415 3,110 -8.9%
Net profit margin (%) 14.8% 15.5%   14.6% 15.7%  
No. of shares         277.2  
Basic & Diluted earnings per share (Rs)*         11.2  
P/E ratio (x)*         16.1  
* On a trailing 12-months basis

What has driven performance in 2QFY14?
  • Revenues declined 14.2% YoY during 2QFY14. This was mainly due to a 19% YoY fall in domestic sales amidst fall in gen sets demand. Export growth was also flattish. Considering the 1HFY14 performance management indicated that the initial guidance (flat to 5% decline in revenue growth) may well be missed and sales may decline by 10-15% (assuming there is no pre-buy impact as CPCB 2 implementation is delayed) on a worst case basis. For the full year, management expects domestic sales to be down by 15% and exports to be down by about 10%.

  • Operating profits declined 23.6% YoY during the quarter with margins declining by 200 bps on a YoY basis to 16.4%. The decline in margins was primarily due to falling sales which made absorption of fixed cost difficult. However, the gross margins have shown improvement due to various cost control programs and rupee depreciation (benefited export margins).

  • Net profits declined 10.0% YoY during the quarter due to muted performance at the operating level. However, a 65.1% YoY rise in other income curtailed the fall in profits at the net level. Other income increased due to rise in dividend income. Dividends for the current quarter stood at Rs 230 m compared to Rs 30 m in the same quarter previous year. However, management indicated that current dividend payout from subsidiaries is not sustainable in future.
What to expect?
At the current price of Rs 425, the stock is trading at a multiple of 16x our estimated FY16 earnings estimates. Considering the 1HFY14 performance, management has lowered the full year revenue guidance. The export markets are likely to decline by 10% as there has been a slowdown in mining markets worldwide. It may be noted that Cummins supplies excavators and other products to miners worldwide. Further, globally, the power generation market is also struggling. This is likely to hurt export growth. The domestic markets are also likely to be down by 15% for the year due to slowdown in investment climate which has impacted the demand. Based on overall slowdown in domestic and export markets, we maintain our view of buying the stock at lower levels.

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