• SEPTEMBER 26, 2012

1992 batch of Sensex stocks: Cummins

If performance was the only criteria to be a Sensex constituent, Cummins India's place would have been undisputed. Investing Rs 100 into Cummins India Ltd (Cummins), erstwhile known as Kirloskar Cummins, about two decades back would have fetched investors 10 times their principal. That translates into compounded annual growth rate (CAGR) of 12.4% over the same period. Pretty decent, isn't it?

Even the comparative performance over the same period is noteworthy. If one were to passively hold the Sensex basket over the same period he would have gained a CAGR of 9.1%. Thus, Cummins has outperformed Sensex over a 20 year period as well.

The price outperformance has come in on the back of a strong financial track record. Between 1992 and 2012, the company's sales and net profits have grown 12 times (14% CAGR) and 32 times (19% CAGR) respectively. Now despite that kind of a performance Cummins was ousted from the Sensex.

Cummins was replaced in 1996. Thus, evaluating its performance between 1992 (when it was a part of Sensex) to 1996 is also critical. It is interesting to note that between the same intervals its performance was noteworthy too. Both revenues and net profits grew at a CAGR of 19% and 37% respectively over the four year period.

So, with the overall performance being so robust, what could have led to Cummins' exclusion? May be there were other companies that fared much better than Cummins. For instance, Cummins was replaced by Indian Petrochemicals Corporation Ltd (IPCL), now part of Reliance Industries Ltd (RIL). In FY96, IPCL had sales of Rs 38.7 bn. Now this was almost 6 times the sales of Cummins in the same year. Thus, for one, IPCL was a much larger company in size than Cummins. Secondly, in FY96 the average market cap of IPCL was Rs 34.3 bn. This was much better than Cummins calling for a replacement for a better representation of index. Thus, IPCL scored on major cards to be a better option.

But what happened after 1996? Why was Cummins never able to make a comeback in the Sensex list?

Well, over the same period other companies in the capital goods sector like Larsen & Toubro (L&T) and Bharat Heavy Electricals Ltd (BHEL) stood out. They grew leap and bounds over the same period and grew to a much larger size than Cummins. Thus, they were better fits for sectoral representation (index has a wide sectoral representation) in the Sensex.

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