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Purring Back

Cummins India is down 32% since touching an all-time high in August 2015. Does that make it a value buy?

It has been a one-way ride down for Cummins India since the stock touched an all-time high of Rs.1,247 on August 7th 2015, on the back of a strong June 2015 quarter. Since its all-time high, the stock is down 32%, as declining exports has dragged its overall performance. Thankfully for the company, the domestic business is helping them stem the fall with a slow recovery. Over the past three months, Cummins India has corrected nearly 9% and its market cap has eroded by Rs.2,375 crore, partly driven by market sentiment and partly on concerns related to the growth prospects of the company. Analysts now believe that the concerns have been overdone and the current underperformance (absolute: -20% YoY and relative: -22%) gives long-term investors a good entry point as the crude oil price is starting to look up and domestic demand is also gathering momentum. At the current valuation, analysts believe all the negatives seem to be priced in, while the positives of having strong technical expertise, dominant market share in the segment it operates, and access to a wide range of products in the parents’ portfolio remain undermined.

Cummins India’s business is spread across two key product categories — power gensets and industrial engines. Gensets are used for power back up in industries where access to grid may be limited or in industries that need continuous access to power. The industrial business caters to the diesel engine requirements of the industrial sector. The company has more than 50% share of the power generator market in the medium and high horsepower segment, and has been the focus area of the company. The genset business accounts for 38.4% of the domestic business, while the industrial engine business accounts for 17.6%. The remaining revenues are contributed by auto, distribution and exports.  

While 65% of the company’s revenue comes from the domestic market, exports contribute a chunky 35% to the topline. Cummins’ key export markets like Latin American countries — Argentina, Brazil, Venezuela and countries in Africa and Middle-East, have their economies linked to crude oil and the sharp fall in global crude prices have hurt the demand in these markets. Falling crude prices saw the oil-rich nations cutting their capital expenditure plans. 

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