Growth engine

POUND WISE

Cummins India will benefit from strong demand in the user industries coupled with capacity additions across its products.

Engines are the most critical mechanical device used in producing motion or movement, and thus, these devices find application across many product categories.

Cummins India, which is the leading player in the domestic diesel engine industry, would be the key beneficiary of the ongoing investments in the construction and infrastructure in the country.

Besides, robust industrial capex and the power deficit situation in the country are promising factors that will contribute to its growth. Little wonder, the company is doubling its capacities and plans to invest in new products.

Cummins India is the country's leading manufacturer of engines ranging 15 kVA to 2,000 kVA and other related technologies.

The company's products are extensively used in all major refineries, petrochemical industries, automotive, oil & gas, ports, power plants, water supply, irrigation, high rise buildings, hotels and so on.

Infrastructure boost
The lack of quality infrastructure in the country have already led to attempts being made to fill the burgeoning demand for power, ports, airports, roads, bridges, etc.

The potential opportunity is visible in the monetary allocation of about $500 billion for the current five-year plan ending 2012. This opportunity will cascade down to every player operating in infrastructure space, which will further require a lot of ancillary activities such as construction equipments to support the main activity.

Cummins India will directly benefit as it manufactures engines ranging 65 hp (Horsepower) to 525 hp, which find application in major earthmoving equipment, road construction machinery, material handling equipment etc.

Power generation
Besides products for the construction industry, the company is also in the captive power generation sets and systems space, which accounts for over 30 per cent of its total revenue. Within power generation segment, the engines are supplied to OEMs, who subsequently sell it to the end users.

The company offers power back-up for industrial and commercial establishments of all sizes including IT, call centres, buildings, hospitality, shopping malls and, industrial users including textiles, auto, etc.

Cummins is the leader in this segment commanding 55 per cent of the market share. So far, the revenue from the power generation segment has been growing at about 23 per cent and expected to remain high on the back of growth in areas such as IT, retail, multiplexes, telecom, residential townships and hospitals.

Also, existing power shortage (about 9-10 per cent peak power shortage) in the country is positive for sustained demand for power back-up facilities.

Likewise, there are substantial opportunities in the telecom sector on account of investments planned to set up telecom towers, which are based in remote locations and require consistent power supply and power backup.

Typically, generator sets used for telecom towers could be in the range of 10-30 kVA, with average cost of about Rs 3 lakh.

According to the industry estimates, telecom capex for FY08 is estimated at about Rs 22,600 crore and Rs 12,800 crore for FY09, which translates into a potential opportunity of Rs 1,300 crore and Rs 770 crore, respectively.

For Cummins, which enjoys a market share of about 25 per cent in this segment, the potential revenue opportunity is over Rs 540 crore over FY08 and FY09.

Automotive
Cummins India generates about seven per cent of its revenue from the automotive segment. The company has been developing several products, which are compliant with the stringent emission norms that are expected to be implemented from the year 2010, thus reflecting huge opportunity.

Besides, the improving road infrastructure and shift in demand for high-powered engines are promising demand drivers.

The company has a plant on the Pune-Ahmednagar road, which supplies diesel engines to commercial vehicle manufacturers such as Tata Motors, Ashok Leyland, Eicher, etc.

However, considering higher demand from the automotive segment, it is planning to expand its capacities for high-powered engines used in heavy commercial vehicles.

Moreover, restrictions on the loading and increasing prevalence for CNG engines are also positive for the long-term growth of this segment.

The company also manufactures the CNG engines, which have already been deployed in buses in the Delhi region. Going forward, the company may benefit from the deployment of the CNG engines in the other regions as well.

Exports
On the export front too, which accounts for 34 per cent of the total income, over the years, Cummins has spread its presence and has exported engines to countries like USA, UK, France, Germany, Belgium, Holland, Singapore and Korea.

Though exports have been growing, margins have been impacted on account of the appreciation in the rupee in the recent past. Notwithstanding the constraints, the company is expecting exports to grow on account of better demand and sustainable realisation on account of price revision.

The company plans to spend Rs 1,200 crore over the next five years to expand its capacities. Cummins is doubling its existing capacities in the less than 100 hp engines segment at Pirangut.

While in the 300"�500 hp and above 500 hp categories, the company has added capacity at its Kothrud plant which has become operational this month. Cummins is currently operating at full capacity, however post expansion (in FY09), it is likely to have sufficient capacities in the small and heavy engines segments. 
 

POWERING AHEAD
Rs crore	FY08E	FY09E	FY10E
Sales	2610	3290	4160
Net profit	338	430	525
EPS (Rs)	17	22	27
PE (x)	16.6	12.9	10.5

Investment rationale
The recent decline in the stock market has seen the share price of Cummins India correct significantly by about 38 per cent, thus making its stock valuations attractive.

At the current price, the stock is trading at 13 times its FY09 estimated earnings and 10.5 times its FY10 earnings.

Given that the growth drivers such as robust demand from user industries including international customers and the company's initiative to double its production capacities, the stock has the potential to provide healthy returns in the medium- to long-term.