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Cummins loses power on weak operating performance

A combination of weak June quarter earnings and a gloomy outlook felled the shares of Cummins India Ltd by 5.1% on Thursday toRs.407.5. The poor performance was a fallout of weak sales. Net revenue dropped by 16.6% from a year ago to Rs.1,049.3 crore, considerably short of Bloomberg’s consensus estimates.
About a week ago, the company’s US parent Cummins Inc., in spite of announcing better results for the June quarter, had expressed concerns on the business milieu in India adding that it may not turn around quickly. The Indian unit accounts for about 4% of its annual sales. Cummins Inc.’s statement highlighted that growth in Brazil and China were offset by Europe, India and Mexico.
In India, revenue from power generation (generators) and industrial products business declined, while that commercial vehicle engines unit was flat.
Another key point to note is that net revenue at Cummins India has been flat for nearly eight quarters, barring a marginal increase in the June 2012 quarter. Despite several cost cutting measures, staff costs and other expenses as a percentage to sales are showing an increasing trend. That squeezed profitability and operating margin contracted by 180 basis points (bps) from a year ago to 16.7% in the June quarter, in line with consensus estimates. One basis point is one-hundredth of a percentage point. Operating profit fell by 24.5% to Rs.175.7 crore.
However, a 74% jump in other income minimized the impact of weak operations on profits. Net profit contracted by 8% from a year ago to Rs.166.2 crore.
A report by Emkay Global Financial Services Ltd says that the generators industry is under pressure, with other firms such as Kirloskar Oil Engines Ltd also showing a 10-15% drop in demand in the June quarter.
Hopes for a revival hinge on a strong pull back in industrial activity. That, however, is not very likely in the near term given the strained economic situation. The recent index of industrial production numbers depict a contraction in manufacturing, while the July manufacturing Purchasing Managers’ Index shows a slowdown to 50.1, down from 50.3 the previous month.
Not surprisingly, shares of Cummins and peers that comprise the BSE capital goods index have widely underperformed the benchmark Sensex in the past 52 weeks. The stock trades at barely 16 times its one year estimated earnings. If that looks cheap compared with its historical price to earnings multiple of 25 times, the gloomy outlook caps upsides for now.

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