Why Investors are Taking a Fancy to Cummins India
Company beats note-ban woes, retains its revenue growth guidance of 10-12%
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.
HERE ARE A FEW REASONS INVESTORS LIKE THE STOCK:
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.