Slow recovery to dent Cummins' India FY21 prospects, say analysts

June quarter washout could keep FY21 muted

The Cummins India stock was down 4 per cent in trade on Thursday because of disappointing results in the March quarter (Q4) of financial year 2019-20 (FY20) and weak revenue outlook for domestic and export markets.

In the domestic segment, which accounts for 74 per cent of overall revenue, weak industrial production and muted construction activity are impacting revenues. The company said while customers were not cancelling orders, they were deferring new orders and capital expenditure. 

Within the domestic power generation (diesel gensets) business, demand is holding up in hospitals and data centres, but is yet to pick up in commercial and residential real estate. However, despite falling revenues, the company has been able to hold on to its market share. The firm reported a 33 per cent fall in domestic power generation segment in Q4FY20.

In the industrial segment, compressors, mining and marine businesses were weak, while recovery in construction and defence businesses will depend on revival of government spending.

The situation is no different in the export market. Among the top five markets, which account for three fourths of its revenues, only the China business has recovered. Each of its top three markets of Europe, West Asia, and Africa saw 40 per cent drop in business last year.

 

 

The company is banking on faster recovery for the high horsepower business, driven by demand from data centres and high-end applications. Though exports contribute slightly over a quarter of revenues, margins in the segment are higher than in the domestic market.

With weak revenue visibility, the company is focussing on cutting costs. It has cut its workforce by 15 per cent and is looking at ways of further reducing costs. However, despite the measures, falling demand and the impact of Covid-19 led to the lowest operating profit margin (OPM) in two-and-a-half decades in the March quarter, according to Edelweiss Research. The company reported an OPM of 6.3 per cent, which was half of the year-ago levels. Revenues fell 22 per cent, while operating profit was down 61 per cent on weak operating leverage. 

While the company refrained from providing guidance on revenue growth, analysts expect a muted financial year 2020-21 (FY21) given the wash out in the June quarter and slow recovery ahead.