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Sunday, Jun 16, 2002

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Cummins India: Buy

Sowmya Krishnan

SLUGGISH business prospects continued to affect the performance of the diesel engine manufacturer, Cummins India, for the second consecutive year.

Despite sluggish topline growth, the company posted an impressive bottomline in 2001, because of internal efficiencies.

But for 2002, the sharp dip in topline pulled down the bottomline, despite various cost-cutting measures undertaken by the company.

For the year-ended March 2002, Cummins India announced a 13.87 per cent drop in turnover at Rs 740.90 crore.

Despite liberal help from `other income', which rose 60 per cent to Rs 36.4 crore, profitability suffered at the net level, recording a 20.77 per cent dip to Rs 86.31 crore.

The steep fall in turnover was due to sluggish demand — both at the global and domestic levels. Exports took a knock due to accumulation of stocks at the global level, subsequent to the September 11 attacks.

Considering that exports contributed close to one-third of the total revenues, this was a major blow to the company. Exports for the year-ended March 2002 are pegged at around Rs 260 crore compared to Rs 285 crore the year before.

Tight domestic demand conditions added to its woes. The decline in domestic sales was steeper at 17 per cent for 2001-02.

After three consecutive quarters of sluggishness, the fourth quarter actually showed signs of improvement both in terms of turnover and margins.

While the drop in turnover was arrested at 10 per cent in the fourth quarter compared to 15 per cent in the first nine months, operating margins improved to 17 per cent from 13 per cent for the same period.

One silver lining is the improvement in the cash position. Rationalisation of capacity and better working capital management has resulted in better cash flows.

The free cash generated during the year was much higher at Rs 104 crore compared to Rs 76 crore the year before.

During the year, various initiatives were taken to consolidate raw material purchases and indigenisation of components.

Cummins also rationalised its manpower during the year. It shelled out a lumpsum Rs 4.87 crore towards compensation under the voluntary retirement scheme. All these efforts are expected to improve operational efficiencies in future.

Outlook: Though March 2002 was not a very good year for Cummins India, prospects for year 2003 appear better. Several internal initiatives and a pick up in the external environment could have a bearing on its profitability. Though exports are expected to be sluggish for the next two quarters, the company's decision to export components to its parents could pep up revenues in the next couple of years.

Also, its decision to merge its two profit-making subsidiaries — Power Systems India and Cummins Power Solutions — with itself will help it grab a better share of the market in the power sector.

Together, they generated a profit of Rs 4.6 crore on a turnover of around Rs 57 crore in 2000-01.

The demand for diesel engines is expected to grow due to the deficit power situation in the country.

Recommendation: At the current market price of Rs 53, the stock trades at a discount of 12 times to its March 2002 earnings.

Considering the not-so- good near-term prospects, risk-averse investors can wait till the company declares its first quarter results and then evaluate a fresh investment.

Shareholders can stay invested. Those looking at a long-term investment, say, two to three years, can consider fresh exposures at the current market price.

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