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Sowmya Sundar

STRENGTH in exports, introduction of engines for the domestic market and rising income from services continue to contribute to the growth story of Cummins India.

The earnings performance for the June 2004 quarter has been encouraging. Even as Cummins India scouts for other opportunities for growth, the rise in the price of raw materials and the upward trend in diesel prices could, however, dampen the growth momentum.

Exports to remain strong

After a brief fall, exports have picked up and have remained strong over the past three quarters. A widening of the product basket to include new engines with higher capacity has increased the export potential.

Earlier, Cummins India was the sole sourcing base for 28-litre engines for the group's global operations. Now, it is the sole sourcing base of the other two ranges — 38-litre and 50-litre.

The export growth has primarily come from the new engines added to the export basket, which contributed close to 30 per cent of exports in the June 2004 quarter.

Cummins has yet reached only half the growth potential for these engines. As the export of new range of engines commenced only recently, one can expect this growth momentum to continue for few more quarters.

Earlier, Cummins had also begun exporting components for global entities to counter the slowdown in the offtake of engines.

However, with engine exports picking up, Cummins is now concentrating on volume growth in the engines segment. As its exports are to Cummins entities worldwide, there is limited pricing power.

Domestic market

Cummins, primarily a high capacity engines manufacturer, has moved into other segments as well. At the mid- and lower-end, its main competitor is Kirloskar Oil Engines.

Cummins still derives 50 per cent of its turnover from high-end engines, which are mainly export oriented.

In the domestic market, introduction of new engines in the mid range and its entry into the lower end segment propped up growth.

Domestic sales rose 21 per cent for the June 2004 quarter. The demand for engines has been growing at a faster pace in the low and middle end rather than the higher end. Cummins strategy to enter these by introducing products has enabled it to take a share of the expanding market.

The improving natural gas infrastructure in the country is expected to shift the demand from diesel engines to natural gas based engines in the long term. Cummins is working with Tata Motors to develop a gas-based engine for automotive applications.

This product is expected to be launched in April 2005, when India will upgrade to more stringent emission norms. This could be a new growth area for Cummins in the long term. On the flip side, the rising diesel prices could slowdown the usage of diesel generator sets, at least temporarily.

The improving power infrastructure in the country, too, could change the demand pattern for diesel engines from a prime power source to a standby application.

Moreover, the lower usage and the resultant lower wear and tear could reduce the income from services and sale of spare parts.

Impact of inflation

Rising raw material costs have so far been neutralised by a combination of moderate price increases and cost-cutting. Cummins has achieved just over half the targeted Rs 100-crore cost-reduction planned over a three-year period even as it has moved into year three of this plan.

Despite the cushion, rise in raw material prices could impact margins. Cummins has limited pricing power and has been able to increase prices only in the range of 2-3 per cent.

Alternate revenue streams

Cummins' service subsidiary and the highway automobile servicing businesses continue to grow at impressive rates.

Cummins Auto Services has achieved break-even at the operating level. Its other businesses run through associate companies and joint ventures such as New age Electricals, Nelson and Valvoline Cummins have also reported double digit growth rates.

These businesses could prop up the consolidated earnings picture and also improve dividend income for Cummins India. The stock could see moderate gains from the current levels. Shareholders could remain invested and contemplate paring exposures at higher levels.

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