The Hindu Business Line : Cummins India: Buy

The parent company has targeted a five-fold growth in consolidated sales from India by 2010. This emphasises the parent company's commitment and potential for India.

Exposure can be considered in the Cummins India stock at Rs 185. The stock has shed close to 30 per cent in value over the last few weeks from its year high of Rs 260. We believe, at the current levels, valuations appear attractive at 15 times the expected FY-07 per share earnings. Our optimism stems from the strong growth prospects for the company both on the domestic and export fronts. Moreover, the parent company has targeted a five-fold growth in consolidated sales from India by 2010. This emphasises the parent company's commitment and potential for India.

Demand from the construction, retail and automobiles segments is expected to keep up growth on the domestic front. On the export front, Cummins Inc is expected to increase outsourcing from the Indian subsidiary. Export of emission-compliant K-38 and K-50 litre engines hold promise. Cummins has planned investments of Rs 70-100 crore in FY-07 to expand capacities for the lower-end and export series of engines for the domestic market.

Auto engines, the growth driver

Over the past couple of years, demand from the domestic market has been on an uptrend due to the infrastructure boom in the country. The key growth drivers are the C series engines for the commercial vehicle segment, small engines for the retail and telecom sector and the large engines used for mining and earth-moving.

Cummins has also managed some market share gains in the mid-range (140-250 KVA range) and at the lower end (15-25 KVA).

Recently, Cummins has commenced supply of C series engines for use in heavy commercial vehicles; however, now, the supply is restricted to Tata Motors. However, this segment holds great promise as the new laws on overloading and phase-out of old vehicles areexpected to spur demand for commercial vehicles. This segment now contributes 5 per cent of sales and is expected to grow three-fold in the next one-two years.

Demand is also picking up for the lower-end generators in the 10-50 KVA segment primarily coming from the retail, banking and telecom sectors. As retail, real-estate and commercial space are expected to grow substantially in the next few years, this segment holds promise. There is demand for large engines from the construction, mining and earth-moving segments. We expect Cummins to maintain its revenue growth of 20-25 per cent in the next couple of years.

Emission norms to fuel exports

Cummins has bought the necessary technology from Cummins US to make the K-38 and K-50 engines (two main export-oriented products) emission-compliant for the export market, post-2007. These engines are expected to create fresh export demand once the old ones get phased out. The potential from this segment alone is likely to be in the tune of Rs 150-200 crore by 2007. For the nine months ended December 2005, exports have been on a rise, registering a 48 per cent growth to Rs 409 crore.

New products

Cummins is working on various new product ranges such as the lean burn engines for the power generation and commercial vehicle segment and the duel fuel engines that could derive demand from the Railways. Lean burn engines can be added to the product portfolio by this year-end. Cummins is also planning to expand its export portfolio by including 19 litre engines.

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