Cummins India Ups Margin Guidance For This Year On Strong Demand Outlook

Power generator maker Cummins India Ltd. is expecting a 100-basis point gross margin improvement in the current financial year, after it reported a bounce back in margins in April-June, following five straight quarters of contractions.

The company also sees 50-basis point improvement in its earnings before interest, tax, depreciation and amortisation margin guidance, the management said in a post-earnings conference call. Despite strong growth in the first quarter, Cummins India has maintained a conservative guidance for both domestic and export margins.

Key Highlights From Q1 Earnings:

• Revenues down 1 percent over last year.
• Profits down 18 percent due to an exceptional gain in base quarter.
• Ebitda rose 10 percent, with an operating margin of 16 percent.
• Domestic revenues declined 7 percent, while exports surged 12 percent.

Here are the key highlights from Cummins India’s conference call:

• Guides for 100 bps gross margin improvement for FY19 due to product mix and better pricing. The company has indicated that cost rationalization measures, export recovery in low horse power machines and resolution of supply constraints in domestic markets.
• Ebitda margin guidance for the current financial improved by 50 basis points.
• Confident of domestic growth of 5-10 percent despite flat revenues in the first quarter which was because of supply constraints with few vendors in India. Cummins is hopeful of recovering the lost sales due to vendor issues in the balance of the year. The company is looking at 13-16 percent sales growth in remaining nine months of the year.
• Domestic revenues for July were also impacted due to 10 days of transporters’ strike and further by Maratha quota protests.
• Seeing growth in India coming in from the manufacturing sector apart from the usual infrastructure, ITes and data centers.
• Growth drivers of the power generator business are set to see a shift from telecom genset to other sectors.
• Maintained export guidance for 0-5 percent growth for FY19 despite 12 percent growth in the June quarter. The management has indicated that the export guidance may be revised upwards in case of a strong second quarter.
• Improvement in demand from emerging markets such as the Middle East and Latin America as commodity prices sustain. Recovery taking place in the global economy and commodity markets, coupled with favourable forex.
• Hoping to leverage domestic recovery in the coming quarters and will upgrade export guidance only after seeing a sustained uptrend for a few quarters.
• Tax rates going ahead will be higher as the SEZ has entered the five-year phase where they will get close to a 50 percent tax break rather than the 100 percent benefit that they enjoyed earlier. Going ahead the tax rate will be 27 percent compared to 22 percent earlier.
• The company has not seen any price hike impact from competitors at customer level, while it continues to maintain a premium on pricing.

Brokerages’ Take

Brokerages remain upbeat on Cummins India’s commentary. Macquarie raised the target price of Cummins to Rs 975 and said in a report that it's the cheapest Indian industrial stock.

Credit Suisse believes that the stock could possibly carry an upgrade in the next quarter. Citi upgraded the stock to ‘Buy’ from ‘Neutral’ with a revised target price of Rs 779 on valuations and commentary. Deutsche Bank remains bullish and sees a 15 percent FY20 earnings per share growth on supportive base.

Shares of the company opened 1.2 percent higher at Rs 680 on the BSE today.