A powerful surge in the share price of Cummins India Ltd has come on the back of strong profit growth in the June quarter (Q1). Importantly, the management commentary during the recent analysts’ call is optimistic about demand across segments, including exports.
Cummins India’s Q1 results was lifted by 10% increase in exports. The Saarc (South Asian Association for Regional Cooperation) and MENA (Middle East and North Africa) countries drove revenue on the back of rising oil prices and demand from the oil and gas segment. This is likely to continue for the next few years. In the developed world, while Europe is not too exciting, the US markets are strong and stable.
Although domestic business weighed down revenue growth, the company is confident of sustained demand recovery from hereon. The fall in Q1 revenue was primarily on account of higher sales in the year-ago period, when customers advanced purchases to circumvent and lower the impact of the GST (goods and services tax) rollout.
Meanwhile, the realty, construction, and power generation and distribution sectors are also showing green shoots of recovery. According to Edelweiss Securities Ltd, the “power generation segment is likely to pick up, led by improving demand from commercial real estate/data centre and improved infrastructure spending”. Analysts expect the power generation market to grow by 8-10% annually.
A few analysts said that a recent trend of increasing product prices by competitors, such as Kirloskar Oil Engines Ltd, has added to the optimism in the sector.
June quarter Ebitda (earnings before interest, tax, depreciation and amortization) grew by 10% year-on-year. Along with cost control, a healthy product mix with higher share of large (power) engines favoured profitability, as a result of which the Ebitda margin expanded by 160 basis points year-on-year.
Of course, favourable currency impact on exports also supported profitability.
All these factors indicate that the business environment is improving. The recent surge in the company’s share price to ₹ 763 implies improving valuations, too. The Cummins India stock trades at a one-year forward price-to-earnings multiple of 28, which leaves room for appreciation, provided the management’s optimism and analysts’ forecast are met in the performance of the coming quarters.
What may dampen the company’s earnings forecast is a possible increase in tax rates. Given that Cummins India’s five years of exemption at the special economic zone has lapsed, margin and Ebitda expansion may be offset by higher tax payouts, which may not translate into a commensurate increase in earnings per share.