Shareholders can retain their exposure to the stock of Cummins India, a leading manufacturer of diesel oil engines in the country. Recent events such as the softening in the prices of steel and pig iron (its main inputs), depreciation of the rupee and reversal of import octroi levied earlier are likely to provide near-term relief to Cummins. The coming quarters may also see the company benefit from price hikes carried out by the company last quarter.
At the current market price of Rs 312, the stock trades at about 16 times its likely FY-09 per share earnings. While the valuation does not appear unreasonable given the company's strong balance-sheet and return ratios, the risk of moderation in growth, as a result of uncertainties on the demand front (linked to the slowing economic growth), does not make a strong case for fresh exposure to the stock now.
Short-term positives
The recent cooling off in the prices of commodities such as steel and pig iron, which form a significant input for the company, would provide it with the much-needed relief on the margin front.
In the last two quarters, the company's performance had come under the scanner as the operating profit margin had dipped due to the mounting pressure on the raw material front.
The OPM had dipped to about 11 per cent in March '08 quarter but improved to 13.3 per cent in the June quarter.
March quarter, however, was exceptional as the company had to shell out extra money following the unexpected increase in import octroi from 3 per cent to 7 per cent by the Pune Municipality that quarter.
This has however been reversed, positively impacting margins with immediate effect. The recent fall in oil price also bodes well for the company.
On a more sustainable basis, the price hikes of over 2-3 per cent that were carried out last quarter by the company may also help Cummins maintain its overall margin performance from hereon.
For the June quarter, Cummins reported 30 per cent growth in sales and 38 per cent increase in profits.
Demand dynamics
Cummins India caters primarily to three user segments — power generation, industrial and automotive. The power generation segment, which made up over 45 per cent of the total sales in FY-08, has been its key revenue driver over the last couple of years.
But considering the perceptible slowdown in the growth of its user industries such as IT, realty and retail, the growth for Cummins is likely to be riddled with many challenges.
While the demand for gensets may remain robust given the continuing power deficit in the country and the buoyant spending in the telecom sector, it still remains to be seen whether its main user industries would continue spending on developing infrastructure when faced with a slowing growth scenario themselves.
Cummins' industrial segment, which caters to construction and earth-moving equipment, compressors and pumps, may also see lower growth in the coming quarters.
The mining segment, which continues to remain on a strong footing, may be an exception even as the demand from other segments such as construction may remain uncertain under a high interest rate scenario.
The industrial segment contributed to about 15 per cent of the total sales last year.
However, amidst all the noise of a slowing demand scenario, Cummins appears best-placed among its peers to weather the slowdown given its diverse portfolio and balanced exposure to various user industries.
Growth drivers
Exports, which contributed to over 30 per cent of sales, may continue to remain strong for Cummins. It may also get a lift from the recent depreciation in rupee, which will make its exports more competitive and strengthen Cummins India's position as the global sourcing hub for Cummins Inc, its parent company. The other growth driver for the company may come from the compressed natural gas (CNG) segment.
Although insignificant at present in terms of its contribution to the overall revenue pie, this business holds potential to develop into a significant segment for the company in the next couple of years. It has already, in a joint venture with Tata Motors, supplied 600 buses to the Delhi Transport Authority.
That the Delhi Government has further floated tender for introducing 2,500 more CNG buses offers more growth opportunity for Cummins, which has a virtual monopoly in the lean burn natural gas fuel systems (each engine is worth around Rs 3-4 lakh).
With most cities looking to move towards cleaner and greener modes of transportation, this segment holds tremendous growth potential.
Another factor that speaks in favour of the company is its zero-debt status and healthy operating cash flows.
This especially appears significant in the current market scenario when some of its peer companies are struggling with the increasing interest burden.
At the current market price of Rs 312, the stock trades at about 16 times its likely FY-09 per share earnings. While the valuation does not appear unreasonable given the company's strong balance-sheet and return ratios, the risk of moderation in growth, as a result of uncertainties on the demand front (linked to the slowing economic growth), does not make a strong case for fresh exposure to the stock now.
Short-term positives
The recent cooling off in the prices of commodities such as steel and pig iron, which form a significant input for the company, would provide it with the much-needed relief on the margin front.
In the last two quarters, the company's performance had come under the scanner as the operating profit margin had dipped due to the mounting pressure on the raw material front.
The OPM had dipped to about 11 per cent in March '08 quarter but improved to 13.3 per cent in the June quarter.
March quarter, however, was exceptional as the company had to shell out extra money following the unexpected increase in import octroi from 3 per cent to 7 per cent by the Pune Municipality that quarter.
This has however been reversed, positively impacting margins with immediate effect. The recent fall in oil price also bodes well for the company.
On a more sustainable basis, the price hikes of over 2-3 per cent that were carried out last quarter by the company may also help Cummins maintain its overall margin performance from hereon.
For the June quarter, Cummins reported 30 per cent growth in sales and 38 per cent increase in profits.
Demand dynamics
Cummins India caters primarily to three user segments — power generation, industrial and automotive. The power generation segment, which made up over 45 per cent of the total sales in FY-08, has been its key revenue driver over the last couple of years.
But considering the perceptible slowdown in the growth of its user industries such as IT, realty and retail, the growth for Cummins is likely to be riddled with many challenges.
While the demand for gensets may remain robust given the continuing power deficit in the country and the buoyant spending in the telecom sector, it still remains to be seen whether its main user industries would continue spending on developing infrastructure when faced with a slowing growth scenario themselves.
Cummins' industrial segment, which caters to construction and earth-moving equipment, compressors and pumps, may also see lower growth in the coming quarters.
The mining segment, which continues to remain on a strong footing, may be an exception even as the demand from other segments such as construction may remain uncertain under a high interest rate scenario.
The industrial segment contributed to about 15 per cent of the total sales last year.
However, amidst all the noise of a slowing demand scenario, Cummins appears best-placed among its peers to weather the slowdown given its diverse portfolio and balanced exposure to various user industries.
Growth drivers
Exports, which contributed to over 30 per cent of sales, may continue to remain strong for Cummins. It may also get a lift from the recent depreciation in rupee, which will make its exports more competitive and strengthen Cummins India's position as the global sourcing hub for Cummins Inc, its parent company. The other growth driver for the company may come from the compressed natural gas (CNG) segment.
Although insignificant at present in terms of its contribution to the overall revenue pie, this business holds potential to develop into a significant segment for the company in the next couple of years. It has already, in a joint venture with Tata Motors, supplied 600 buses to the Delhi Transport Authority.
That the Delhi Government has further floated tender for introducing 2,500 more CNG buses offers more growth opportunity for Cummins, which has a virtual monopoly in the lean burn natural gas fuel systems (each engine is worth around Rs 3-4 lakh).
With most cities looking to move towards cleaner and greener modes of transportation, this segment holds tremendous growth potential.
Another factor that speaks in favour of the company is its zero-debt status and healthy operating cash flows.
This especially appears significant in the current market scenario when some of its peer companies are struggling with the increasing interest burden.
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