Cummins in India is a Group of eight legal entities, collectively operating 21+ manufacturing facilities and 200+ locations in the country. Out of the eight, the largest entity is listed as Cummins India Ltd. Formed in 1962, it is a manufacturer of diesel and natural gas engines. Cummins India comprises three business units namely Industrials, Power Systems, and Distribution. It is a 51% subsidiary of Cummins Inc.
The company’s shares have 52 weeks price band of INR 801-280 and a total market capitalization of INR 98 billion which makes it a Mid-Cap company. The shares have a P/E ratio of 14.21 and a dividend yield of 4.80%
NoNow, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 parameters and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The parameters are as follows.
1. Economic Moat
2. Business Model and Management
3. Growth Ratios
4. Profitability Ratios
5. Cash Flow Ratios
6. Liquidity and Solvency Ratios
8. Valuation Ratios
9. ROE (Du Pont Analysis)
10. Future Prospects
(All units are INR Millions except ratios and per share data)
You can get the complete excel model used for this analysis from below:
1.Economic Moat (★ ★ ★ ★ ☆)
The company operates in the power generation and manufacturing industry where market dominance is achieved through scale, innovation, market presence and distribution. Cummins has 5+ decades of presence in the Indian market and a manufacturing capacity of over 75,000+ engines per annum. The company powers 8 out of every 10 excavators, 9 out of 10 rail engines, 4 out of 10 gensets and each and every water rig in the Indian market. Cummins is also one of the largest exporters of engineering products in India. The company also invests heavily in R&D for design improvements and process efficiencies.
On the distribution front, the company has 25+ dealerships, 450+ service points and 200+ branch offices in India. The service division covers lifecycle management for 5,25,000+ engines across 2,00,000+ customers in off-highway segments. The spares and after-sales business has seen a CAGR growth of 19% since the last few years and has improved prospects for the company. Overall the company operates in an asset-heavy industry and has a solid market presence and distribution network which gives it a wide economic moat. Therefore this category gets 4 stars in Cummins India fundamental analysis.
2. Business Model and Management (★ ★ ★ ☆ ☆)
The business model is such that the company operates in 3 main divisions namely Industrial, Power Generation and Distribution. The revenue breakup is such that 17% comes from the Industrial segment, 29% from the Power generation and 24% comes from the distribution segment. The other portion of the revenue is from Exports and Spares. The company is looking forward to expanding its local business and has the guidance of domestic growth of around 3-4% per annum and a decline in exports by 20% in the near future. The company will also continue to look at cost optimization to maintain and improve gross margins.
Mr Ashwath Ram is the Managing Director of Cummins India Limited. Mr Pradheepram Ottikkutti is the Chief Technical Officer and Mr Ajay Shriram Patil is the Chief Financial Officer. The management is qualified but has not been able to create much value for the shareholders of the company. This is also due to the nature of the business and increasing competition from Kirloskar, Crompton Greaves and Swaraj Engines. Therefore this category gets 3 stars in Cummins India fundamental analysis.
3. Growth Ratios (★ ★ ★ ★ ☆)
The revenue has grown at a CAGR of 7.9% over the last 10 years. The operating income and net income margin have also increased by a moderate 2.4% and 5.8% CAGR respectively. The working capital has been positive and increasing which shows a surplus of current assets over current liabilities. The Cap-Ex has also been stable over the years which indicates linear capacity expansion. Therefore this category gets 4 stars in Cummins India fundamental analysis.
4. Profitability Ratios (★ ★ ★ ☆ ☆)
The gross margin has almost remained stable and has seen some signs of improvement in recent years. The other margins along with return on assets have seen a steady decline over the years. This is due to the increasing costs and competition in the market. The net income margin, however, is not expected to improve in the near future. Therefore this category gets 3 stars in Cummins India fundamental analysis.
5. Cash Flow Ratios (★ ★ ☆ ☆ ☆)
The net income margin and Cap-Ex as a percentage of sales both have seen a steady decline. This indicates a weak or moderate upcoming growth for the company. The exports will also drastically decline due to disrupted global supply chains affecting the cash flow of the company. The free cash flow as a percentage of net income has remained positive but operating cash flow growth has been negative. Therefore this category gets 2 stars in Cummins India fundamental analysis.
6.Liquidity and Solvency Ratios (★ ★ ★ ★ ☆)
The company does not have any long term debt in its capital structure and hence the debt to equity and financial leverage ratio is flat over the years. The company has seen some deterioration in profitability margins, but still, there is no significant concern regarding its solvency. The current and quick ratio is also significantly above their minimum threshold. Therefore this category gets 4 stars in Cummins India fundamental analysis.
7. Efficiency Ratios (★ ★ ★ ☆ ☆)
The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.
Overall the business efficiency has remained stable over the years. The inventory days have reduced from 94 to 63 days. The payable period has declined from 96 to 85 days and the receivables period has seen an increase from 80 to 94 days due to increased competition and loosening of credit terms by the company. The cash conversion cycle has only seen a small improvement and is still positive. Therefore this category gets 3 stars in Cummins India fundamental analysis.
8. Valuation Ratios (★ ★ ★ ★ ☆)
The company has started trading at increasingly lower multiples due to slow market growth, reducing profitability and intense competition. But now due to the implementation of CPCB4+ emission norms from July 2021, the company is well placed to gain market share. The firm not only has access to its parent’s product pipeline but is also developing products for the local market at its technical centre in Pune. Hence valuation can see recovery in the near future. Therefore this category gets 4 stars in Cummins India fundamental analysis.
9. ROE 5 way Du Pont Analysis (★ ★ ★ ☆ ☆)
The leverage ratio has been flattened but has seen a slight increase in recent years. The asset turnover has declined along with the tax efficiency. The interest burden ratio has remained at almost 100% levels due to zero long term debt in the capital structure. Overall the Return on Equity has declined steadily due to reduced profitability and tax efficiency. Therefore this category gets 3 stars in Cummins India fundamental analysis.
10. Future Prospects (★ ★ ★ ★ ☆)
Some insights for the coming years from management discussion & analysis (MD&A) and con calls are as follows.
- While the fall in share price has made valuations attractive and it has long-term triggers, there are short-term worries on the demand side, both in the domestic and export segments. The disruption of supply chains due to Covid-19 will have a double-digit impact on export volumes in the coming years. Domestic demand growth is also expected to be negative.
- A positive indicator for the company is its focus on controlling costs in the situation of weak exports. The Export segment accounts for nearly 30% of the revenues. Given falling crude oil prices, demand from oil-dependent economies in West Asia and Russia will remain weak.
- In terms of new compliance and emission norms, the company is better placed than its competitors like Kirloskar and Swaraj as it already has access to the product pipeline of Cummins Inc. (their Parent Company). Given the higher cost of creating new products, Indian peers will have to spend more to make products compliant.
- The ratio of Genset to aftermarket sales has also reduced in favour of aftermarket, offering a steadier revenue profile for the company in the coming years.
Overall the company has decent fundamentals along with better positioning in the new product and compliance requirements as compared to its competitors. This can lead to an increase in market share in the near future along with valuation multiples. Therefore this category gets 4 stars in Cummins India fundamental analysis.
The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above 0.5 and rounded down if it is below 0.5.
Overall Fundamental Rating:
CUMMINS INDIA (3.4/5)
Therefore it is a 3-star stock
★ ★ ★ ☆ ☆
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|Economic Moat||★ ★ ★ ★ ☆|
|Business & Management||★ ★ ★ ☆ ☆|
|Growth Ratios||★ ★ ★ ★ ☆|
|Profitability Ratios||★ ★ ★ ☆ ☆|
|Cash Flow Ratios||★ ★ ☆ ☆ ☆|
|Liquidity & Solvency||★ ★ ★ ★ ☆|
|Efficiency Ratios||★ ★ ★ ☆ ☆|
|Valuation Ratios||★ ★ ★ ★ ☆|
|ROE (Du Pont Analysis)||★ ★ ★ ☆ ☆|
|Future Prospects||★ ★ ★ ★ ☆|
|Overall Fundamental Rating||★ ★ ★ ☆ ☆|
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(Note: All the research done by me is only for educational purposes and should not be seen as Investment recommendations. I am a Research analyst and not a SEBI registered Investment Advisor. My research completely reflects my personal opinions and not of my employers. Kindly do your own due diligence before Investing)