Companies & Sectors
Cummins India displays strong margins even as revenues decline

Investors are worried that rising power availability could impact sale of back-up power genset. In this context, the drop in power deficit especially in South India does lead to some slowdown concerns for Cummins India’s power gen segment, says Nomura 

Cummins India displayed a strong hold on margins during times of revenue decline (similar to the downturn in 2009) in its quarterly performance for first quarter of FY14 and this will be seen as a key positive. On the negative side, the investors would start getting increasingly worried on the top-line decline. Even recent management commentary of Kirloskar Oil Engines on power genset sales for FY14 has not been encouraging, says Nomura Financial Advisory and Securities (India) Pvt Ltd in a report.


“In fact, sales (for Cummins India) declined 17%, which was the worst in the last 12 quarters. However, year-on-year decline in employee expense as well as other expenses provided support to the margins. As a result, miss on EBITDA by 17% was largely led by miss on the topline. Other income +74% y-y boosted net profitability and made up for the weak operating performance,” Nomura said.  The first quarter performance of Cummins India is given in the table below:

According to Nomura, investors are worried that rising power availability could affect sale of its back-up power genset. In this context, the drop in power deficit especially in South India does lead to some slowdown concerns for Cummins India’s power gen segment.  However, an analysis of CEA data reveals that the sharp drop in power deficit in June 2013 was not on account of higher power availability but because of a sharp drop in demand for power. In Nomura’s view, the demand was impacted by seasonality (above average rainfall) as well as low demand for power on the back of a weak economic environment. In fact, availability of power on an All India basis as well as in South India has remained flat compared with same period last year. 


The increase in diesel prices will increase the operating cost of gensets and could impact the demand in small HP segment in the shorter terms, as demand is more price elastic, points out Nomura. However, gensets in MHP and HHP segments are used in industrial where we believe the demand is relatively inelastic as these gensets are used for critical applications.


Nomura sees Cummins India as a fundamentally strong company with its long-term competitive advantages in the business. But given the worsening of the macro environment with tightening of credit availability in the market by RBI, sharp depreciation of the rupee, no clear timelines for implementation of CPCB norms, we believe the confidence on near-term earnings has reduced. As a result, we have lowered our valuation multiple from 18x to 16x (mid cycle multiple). With the cut in the multiple along with downward revision in the earnings (2% over FY14-FY15F) Nomura’s target price has been cut to Rs434/share from Rs496/share previously. Nomura maintains its Neutral rating on the stock. 


Nomura’s valuation is based on the following estimates:



In the long run, Nomura believes that India’s industrial sector offers the unfolding of a substantial opportunity including opportunities in niche segments.




3 years ago

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3 years ago

Cummins is currently trading at a price to earnings multiple of 17x, based on its earnings over the last 12 months.

Why is Power Grid Corp doing a share placement?

Why propose a 15% FPO (follow-on equity offering)? –   Power Grid does not require equity infusion and yet announced an FPO citing margin of safety, growing investment avenues as prime considerations 

Power Grid Corporation of India (PWGR) still does not require equity issuance to execute its base-case business plans and yet has announced a follow-on public offering (FPO). The company management attributed the 15% FPO to growing investment opportunities and margin of safety that it needed. The management expects to conclude the FPO within CY13, subject to the government’s views on the quantum of issuance and its decision to simultaneously divest part of its holding in the company, says Nomura Financial Advisory and Securities (India) Pvt Ltd in a note.


In the past few weeks PWGR has won a bid-based project (taking the tally to three), has inked a MoU with the Railways for a nationwide transmission/ traction project, and has garnered visibility on a chunk of the ‘Green Transmission Corridor’ project coming its way (Figure below).


Potentially in FY14, there is a risk of assets capitalized having equity contribution below the 30% threshold. Hence, the company management stated that the margin of safety is low, which is not a preferred situation. Even though the lenders have not asked for equity infusion, the company has proposed an FPO of 15%.


According to Nomura, this would provide reasonable financial flexibility. “Should the equity raised be lower (vs. its base case), the company management stated it would still have enough financial comfort as the capex-capitalization gap narrows going ahead,” Nomura said.


Nomura said it expects that funds raised (through the FPO) would generate returns above its cost of equity (12%-13%). The impact of proposed equity offering in FY14 on Nomura’s forecast EPS/BVPS is given in the table below:

Nomura has given a ‘Buy’ recommendation with a target price of Rs142.


NSEL halts trading in e-series contracts as well

E-series contributed about 40% of NSEL’s turnover of Rs18,315-crore in June

National Spot Exchange Ltd (NSEL) on Tuesday stopped trading in the last available e-series contracts of items like gold and silver on its bourse, in anticipation of the government’s order banning trade of these products.


The development has led to a complete halt of operation on NSEL platform as the exchange on 31st July had suspended trading of all contracts other than e-series contracts.


NSEL offers e-series contracts in gold, silver, copper, zinc, lead, nickel and platinum. Under e-series contracts, retail investors can buy and sell commodities in demat form.


E-series contributed about 40% of NSEL’s Rs18,315-crore total turnover in June.


“We have not yet received Government order, but as abundant precaution, we will not commence trading in e-series at 10am,” NSEL said on its website.


The exchange said, “It will check with the authorities to find out the facts. In any case we will fully comply with the government order.”


A company spokesperson said the entire trade is suspended on NSEL today.


E-series contracts is a unique market segment, which functions like the cash segment in equities, but offers commodities in the demat form in smaller denominations.


The clearing and settlement, pay-in and pay-out mechanism on the NSEL is based on T+2 (settlement in 2 days) cycle.


NSEL is currently grappling with the problem of payment settlement of an estimated Rs 6,000 crore to the investors after the suspension of trade.


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