Why In­vestors are Tak­ing a Fancy to Cum­mins In­dia

Com­pany beats note-ban woes, re­tains its rev­enue growth guid­ance of 10-12%

The Economic Times - - Companies: Pursuit Of Profit -

ET In­tel­li­gence Group: The stock of Cum­mins In­dia, an In­dian sub­sidiary of Cum­mins Inc, USA and maker of power gen­er­a­tors, gained 6.3% on Thurs­day’s trade af­ter the com­pany main­tained its growth guid­ance for do­mes­tic busi­ness. In the post-earn­ings con­fer­ence call, Cum­mins In­dia said that bar­ring the lowwatt gen­er­a­tor seg­ment, its sales vol­umes re­main un­af­fected by the de­mon­eti­sa­tion. As a re­sult, the com­pany’s stock gained the most in the past one year.


Rev­enue growth guid­ance At a time most industrial com­pa­nies are trim­ming their growth guid­ance or are re­luc­tant to fore­cast growth for the next fi­nan­cial year, Cum­mins In­dia has main­tained its rev­enue growth guid­ance of 1012% for the do­mes­tic mar­ket in the cur­rent year. An­a­lysts be­lieve the com­pany is quite con­ser­va­tive with an­nounc­ing its out­look as ro­bust third quar­ter re­sults

have given it enough el­bow-room to raise its guid­ance fur­ther. On the ex­port side, the com­pany has lifted its guid­ance to flat growth from the ear­lier pro­jec­tion of neg­a­tive-to-flat growth. Do­mes­tic sales and ex­port rev­enue in­creased 16% and 23%, re­spec­tively, in the De­cem­ber quar- ter. Im­proved de­mand of equip­ment from min­ing, and con­struc­tion com­pa­nies drove sales growth.

Gross mar­gin ex­pan­sion The gross mar­gin of the com­pany ex­panded 21 ba­sis points YoY to 34.11% in the De­cem­ber 2016 quar­ter be­cause of cost sav­ings and a more prof­itable prod­uct mix.

Min­i­mal im­pact of im­po­si­tion of bor­der tax in the US Ex­ports at Cum­mins In­dia con­sti­tute about 30% of its to­tal sales. Of the ex­ports, less than 10% is from the US, the home coun­try for its par­ent. Thus, any im­po­si­tion of bor­der tax in the US is un­likely to have a ma­jor im­pact on Cum­mins In­dia’s ex­ports.

Com­fort­able val­u­a­tions The stock is trad­ing at 23.5 times of its pro­jected next-year earn­ings, a val­u­a­tion that ap­pears rea­son­able given that the com­pany is op­er­at­ing at 60% of its ca­pac­ity, in­di­cat­ing sig­nif­i­cant fu­ture gains in op­er­at­ing lever­age.

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