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Cummins: Eyeing an elusive turnaround

Dec 5, 2001

Cummins India, the diesel engines major, continues its bad run. Though in FY01 the company recorded a 17% growth in profits and a 4% rise in topline, signs of slowdown had begun to creep in during the company's fourth quarter FY01.

(Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
Net Sales 2,040 1,813 -11.1% 3,997 3,655 -8.6%
Other Income 56 73 29.6% 88 133 51.2%
Expenditure 1,644 1,531 -6.9% 3,283 3,126 -4.8%
Operating Profit (EBDIT) 396 282 -28.7% 714 529 -25.9%
Operating Profit Margin (%) 19.4% 15.6%   17.9% 14.5%  
Interest 4 4 -12.7% 10 7 -27.2%
Depreciation 63 54 -15.0% 124 127 2.6%
Profit before Tax 385 298 -22.5% 669 528 -21.0%
Tax 103 71 -31.3% 184 137 -25.4%
Profit after Tax/(Loss) 282 227 -19.3% 485 391 -19.4%
Net profit margin (%) 13.8% 12.5%   12.1% 10.7%  
No. of Shares 39.6 198.0   39.6 198.0  
Diluted Earnings per share* 5.7 4.6   4.9 3.9  
P/E Ratio   13.2     15.3  
*(annualised)            

The company's revenues in the fourth quarter dropped by about 2% and operating margins fell by 60 basis points. The first quarter and the second quarter of FY02 have been even worse. In the September quarter of FY02 Cummins reported 11% decline in topline and a 19% dip in bottomline. For the consolidated 1HFY02, the company reported a 9% dip in topline and 19% dip in net profits.

Cummins was not able to prune its expenditure in line with the sales slowdown. As a result operating margins took a hit. Even a fall in interest and tax burden was not able to shrug off a fall in company's net margins.

Cost break-up
(Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
Raw material cost 1,190 1,135 -4.6% 2,387 2,263 -5.2%
Staff cost 173 173 0.3% 355 367 3.3%
Others 281 223 -20.8% 543 497 -8.4%
Total expenditure 1,644 1,531 -6.9% 3,284 3,126 -4.8%

But despite these odds, the company's stock price has run up 27% in the last two months. This may be because investors believe that the worst is over and are hoping for a turnaround in Cummins fortunes. Despite its lacklustre performance Cummins efforts at pruning its debt burden would stand it in good stead when the situation improves. Already, India's No. 1 enginnering company, Bhel, has reported a turnaround in September quarter results and is expectant of better quarters ahead. This feeling may have washed down to Cummins India as well.

The company is a dominant player in most of the segments it operates in and is better geared than others to take advantage when the outlook improves. However, Cummins Incorporated, USA, the parent, has 12 entities in India. This is a sign of Cummins doing too much and in future there is a fear that it may take away the company's focus. At the current price of Rs 61 the stock is already trading at 15x annualised 1HFY02 earnings. The stock price may have run ahead of fundamentals.


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