Cummins: Growth recovery to aid revenues in FY19

Strong growth in higher horsepower segment, gradual recovery in exports are positives

The Cummins India stock recorded 12 per cent fall in the last month on margin pressures and cut in revenue growth guidance for 2017-18. The cut in revenue growth guidance to 0-5 per cent from 5-10 per cent earlier was brought on by a 15 per cent decline in the high horsepower segment in the domestic market and weak demand conditions in the key export markets of West Asia and Africa.

Even though, 2017-18 revenue growth is likely to be flattish, given improvements in some segments, the company could see a 5-10 per cent growth in domestic business in 201819. Within the power generation segment (40 per cent of domestic revenues), the high horsepower segment, which contributes about 10-15 per cent of sales, is witnessing an uptick. Demand within this segment is being led by large commercial real estate projects and data centres, where the company has 75 per cent market share. The company might also see a recovery in manufacturing and residential real estate, which would boost overall power generation segment growth to 12-15 per cent in 2018-19. Cummins is expected to end 2017-18 with a growth of about 1.5 per cent in this segment.

To achieve higher growth rates, the company needs demand to surge for select categories in the medium horsepower segment. Further, analysts are expecting the industrial segment to double its revenues over the next four years from the current ~8 billion. Growth is currently being led by rail and construction business, followed by mining and construction.

Despite the higher competitive intensity, the company has been able to maintain an increasing market share in various segments. Given the reduction in pricing premium in the higher horsepower segment, the company is focusing on optimising operational cost to improve margins. Slower revival in exports, coupled with higher overheads, has been impacting margins. Analysts expect margins to stabilise at 14-15 per cent over the next couple of years.

With the improvement in commodity prices, exports, which account for 32 per cent of overall revenues, could see an uptick. While the timeline and quantum of recovery in exports is still unclear, revival in construction activity is expected to rub off positively in the West Asian business. In US and European Union markets, growth is led by demand for higher powered engines.

Analysts at Prabhudas Lilladher are positive on the company’s medium- and longterm potential in the domestic market to be driven by structural factors such as revival in infrastructural/industrial demand, unreliable quality of power in India, and lack of credible power back-up options. Similarly, JM Financial forecasts a pick-up in the domestic demand, which is expected to drive 17 per cent growth in operating profit over the next couple of years.