Cummins is a world leader in power capital goods equipment. It is also one of the few multi-national capital goods companies in India, which houses the global research and development center in India. Cummins does global Research & Development in Pune, the spend on which is equally shared between Cummins Inc and Cummins India.
What is also comforting is that Cummins like its peers MNC peers has sufficient cash and very low debt on its books o accounts. Therefore, as the cycle of infrastructure activity in India takes an upward turn over the next five years, Cummins India could be amongst the few capital goods companies, powering it with its R&D capabilities.
Cummins India, given its market leadership in the domestic Genset segment, strong after-sales service and distribution, and its preparedness to take advantage of the upcoming changes in emission norms, seems very well poised to ride the upturn in infrastructure CAPEX.
Cummins India is a market leader and is currently holds 50% market share of the generator market in the medium-high horsepower category.
Cummins India’s business is diversified in two key product categories — power gensets and industrial engines. Gensets are normally utilized for power back up in factories where availability or scope to the grid may be very limited or in industries that need consistent power supply around the clock. The mechanical business takes into account the diesel motor prerequisites of the modern part. The organization has over half a portion of the power generator segment in the medium and high horsepower horizon and has been the center zone of the organization. The Genset business represents 38.4% of the residential business, while the mechanical motor business represents 17.6%. The rest of the incomes are contributed via auto, distribution, and exports
While 65% of the organization’s income originates from the residential market, trades contribute a thick 35% to the topline. Cummins’ key fare markets like Latin American nations — Argentina, Brazil, Venezuela and nations in Africa and Middle-East, have their economies connected to the crude oil market and the sharp fall in worldwide rough costs has harmed the interest in these business sectors. Falling global crude oil costs saw the oil-rich countries cutting their capital consumption plans.
Overall, the company benefited from domestic market recovery; the domestic side of the business has been the saving grace for Cummins off-late. The company believes that this was largely the impact of momentum arising from government actions to increase investments as well as improve infrastructure. Capitalizing on this, the company has grown its domestic sales.
Among other things, weak demand from export markets has also taken a toll on profitability. The company continues to drive cost reduction activities. Exports may continue to remain a bleak spot in the near term given the decline in demand for HP engines from its parent. But, we are upbeat on the long-term prospects of exports as we expect Capex cycle recovery in the key markets of Europe and Africa, post firming up of oil and base metal prices.
Further, Cummins India has done much better with rising production mandates from the parent entity, over the past two to four years. This reflects the latter’s higher confidence in Cummins India. The management has opined that it is seeing gradual improvements in the domestic market as compared to a year ago, but the growth is not robust yet. Thus, the pace of investments in the capital goods sector still remains tentative.
The global economy too is sluggish and has impacted the company’s exports. With uncertainties in the overall global economy which seem likely to continue into the short to medium-term future, the company intends to strengthen its focus on market share gains and cost-efficiency.
After the recent correction, the stock price has come to our best buy level of around Rs 348. We recommend our readers and followers to consider buying the stock of Cummins at the current price of Rs 348 or buy in parts till 320. Our FY22 target price for the stock is Rs 800. The stock is expected to generate a CAGR of around 15% (including 2.2% dividend yield) over the next three years from the recommended buy level.