Cummins India derives its revenues from power shortages in the country, especially in the Southern states
Power genset manufacturer Cummins India derives its revenues from power shortages in the country, especially in the Southern states of Karnataka, Tamil Nadu and Andhra Pradesh.
Why you should add Cummins India to your portfolio?
Cummins India, the Indian subsidiary of US-based Cummins Inc., has been designated as a key export hub for gensets below 200 KVA. These low HP gensets are increasingly turning out to be very successful. The 15 KVA-62.5 KVA segment was up 4 per cent in the June 2013 quarter over the immediately preceding quarter.
Cummins is not letting the slowdown in the economy come in the way of its capacity expansion plans. It plans to invest over Rs 600 crore in its India office campus over the next two years. Additionally, Cummins has also invested Rs 270 crore in building of the group's 300 acre Megasite in Phaltan, Maharashtra. Cummins has commissioned six facilities in the Megasite which will manufacture engines, generators and allied products.
In some sections of the market there is also talk of a possible buyback. The fall in the value of the rupee makes it cheaper for parent Cummins Inc. to hike its stake in the Indian subsidiary from 51 per cent to 75 per cent. However, this remains unsubstantiated as of now.
One overbearing reason to accumulate Cummins India is its attractive valuations. Down 22 per cent this year, Cummins now trades at around 15 times P/E - much lower than its 10-year median valuations of 21 times earnings.
But investors should be in no doubt that the current financial year is going to be a tough one. Improved power deficit, lower power demand and sluggish overseas demand for engines may put pressure on revenue growth. Cummins could report a run rate of 5 per cent in FY14, estimates Kotak Securities. However, it is still your best bet in the engines space and access to new technology gives it a durable advantage over local competitors.