Cummins India shows remarkable ability to control costs during times of revenue slowdown, says Nomura
Moneylife Digital Team 02 February 2013

The Cummins India stock has already priced in medium-term growth potential. Nomura Equity Research recommends investors to wait for a better entry point to enter the stock and remains ‘Neutral’ for now

Cummins India posted strong results for the third quarter of the current fiscal driven by a positive margin surprise, which in turn continues to benefit from the company’s strong cost control initiatives. Key result takeaways, according to Nomura Equity Research include:

  1. Net sales of Cummins India in the third quarter of FY13 stood at Rs10.9 billion (+9% year-on-year);
  2. EBITDA margin of Cummins India was at 19.2%, the highest level in over two years;
  3. Higher other income and extra-ordinary gains (Rs475 million) from the sale of Cummins India’s stake in KPIT Cummins also helped drive a 66% year-on-year net profit growth to Rs2.341 billion;

Cummins India has a remarkable ability to control costs during times of revenue slowdown, in Nomura’s view. This has been evident time and again and 3QFY13 numbers further confirm the belief. For the nine months FY13 EBITDA margin has expanded by 240 basis points (bps), led primarily by control in other operating expenses and also by raw material costs. This reinforces strong management capability in controlling costs in a challenging macro-environment.


The positive quarterly performance being in EBITDA margins, Nomura forecasts, “While our revenue estimates are declining modestly for FY14F-15F (as we build in slightly lower growth in the export business), we raise our margin expectations on the back of strong cost control and price hike that the company has been able to deliver even in the current challenging environment. On account of this, we now build in 75 bps and 125 bps increase in margin over FY14F and FY15F, respectively.”


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Cummins India is now close to its peak margins and accordingly Nomura has assigned mid-cycle multiple of 16x one year forward earnings. Nomura’s target price for the company’s share is thus increased to Rs499 on the back of 5%-10% earnings upgrade over FY14/15F. Given about 2% potential upside to the stock, Nomura has maintained its ‘Neutral’ rating. The brokerage has a positive outlook on the company and its long-term competitive advantages in the business.


Pick-up in the exports market and implementation of emission norms are positive triggers, while incoming competition from new players and exports shock are negative triggers, in Nomura’s view of the business prospects of Cummins India. 


Nomura concludes the company analysis with the argument, “Despite a solid long-term business story and near-term potential upside on the back of strong results, we think the stock is already pricing in medium-term growth potential. We would thus wait for a better entry point to enter the stock and remain neutral for now.”


It may be added that India’s industrial sector offers the unfolding of a substantial opportunity over the coming years. Potential opportunities are there in niche segments.

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