Cummins India: Overseas binge

Exports will continue to drive growth at Cummins India

Cummins India's reported a 12 per cent growth in sales for the year ended March 2004, which is exactly what it did even in FY03. But unlike FY03, when a jump in domestic sales made up for the a 36 per cent decline in exports, revenues were driven by strong exports this fiscal.

Exports jumped 28 per cent last fiscal and accounted for almost half the company's incremental sales. Domestic sales were lagging behind with a nine percentage growth, although they account for over 75 per cent of total sales and, hence, represent a higher base.

Exports account for around 24 per cent of revenues, but its proportion would be higher going forward. In a conference call with analysts, the management said that it expects a 20-25 per cent growth in exports in FY05.

In the domestic market, it expects revenue growth to be in the teens, lower than the expected rise in exports.

Analysts, in fact, expect growth in exports to be even higher, given the fact that its parent is now sourcing 38-litre (K38) and 50-litre (K50) power-generation engines exclusively from the subsidiary.

The sourcing of the K38 began late in FY04 and had good demand, while the company started exporting the K50 in a small measure in the March quarter. Hence, the full impact of this arrangement will be seen only in FY05.

Besides, the company launched three new products in January 2004 in the low and mid-range of its product offering, which have been well received. Again, the full impact of these new introductions will be seen only in FY05.

Coming back to the results of last year, operating margin fell 260 basis points to 10 per cent. But this was partly because of some one-off items.

Superannuation benefits to managers and associates increased by Rs 4.5 crore, apart from which there was a VRS charge of Rs 9.8 crore.

Leaving these extraordinary items out, the decline in operating margin is lower at 120 basis points. Evidently, this is because of the increase in prices of inputs particularly that of metals.

But while cost pressures and extraordinary items led to a 11 per cent drop in operating profit last year, higher other income came to the company's rescue. Income from subsidiaries jumped 75 per cent, with Newage Electricals India also contributing to the kitty.

The company's 100 per cent service subsidiary, Cummins diesel sales and services, also increased its payout by around 45 per cent. The upshot: profit before tax improved by 14 per cent, despite the drop in operating profit.

Going forward, some analysts have estimated marginal gains on the profitability front, with input costs expected to ease and also because of further gains from the Turbo Kaizen and Six Sigma cost reduction programmes.

Aurobindo Pharmaceuticals

Despite an 8 per cent growth in sales, Aurobindo Pharmaceuticals reported a 4.46 per cent drop in profit to Rs 27.84 crore (excluding other income).

The reason is other expenditure jumped 22 per cent to Rs 97.71 crore last quarter and analysts point out this is on account of an increase in regulatory expenses related to drug master files and abbreviated new drug application (ANDA) filings in the European and American markets.

As a result, operating profit dropped 10.4 per cent to Rs 58.95 crore and operating profit margin have dropped 334 basis points to 16.2 per cent.

Things could have been worse, but Aurobindo managed to keep a tight check on its raw material cost by sourcing 6- APA, the key intermediate for SSP and cephalosporin, from its production facilities in China.

Hence, raw material cost increased a mere 1.27 per cent in the March quarter to Rs 190.18 crore. Also staff costs have been kept under tight control and in fact they have declined 3.4 per cent to Rs 14.17 crore.

Improved demand conditions for cephalosporin, semi synthetic penicillin - sterile and anti- virals in the domestic and export markets, helped the company grow its top line last quarter.

It is anticipated that the company would ramp up its revenues earned from the booming Chinese market. The company had recently invested approximately Rs 155 crore in production facilities for making penicillin, 6-APA and formulation facilities in the Middle Kingdom.

Margins in the Chinese market are estimated at 15-17 per cent and are higher than the approximately 6 per cent earned for sales of generics in Western markets.

Also the company's product pipeline for the Western market are strong, as it has filed for 4 ANDAs in the March quarter for US markets.

The company raised close to Rs 183 crore through a preferential issue earlier this year. Not only will this result in lowering debt and, hence, interest cost, but also the needs for research and development, potential acquisitions and working capital.

With contributions from Mobis Philipose and Amriteshwar Mathur