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Cummins India - Batti Gul; Genset Chalu

Updated: Jun 18, 2023


Company Name – Cummins India Limited (Cummins)


Current Share Price – INR 1,579 (February 22, 2023)


Market Cap – INR 43,768 cr


 

1. What is interesting about the stock?


How many of us remember frequent power cuts? Watching an interesting cricket match and power goes off – just like that.


I still clearly remember going to my village and we had an electricity supply for a maximum of 2-3 hours a day. Yes, a good outcome was that we were not so dependent on gadgets and television.


Power cuts were a common occurrence in India, especially in the pre-2000 period. The frequency and duration of power cuts varied depending on the region and time of year, with some areas experiencing daily power cuts that could last for several hours.


The lack of reliable electricity supply had a significant impact on people's daily lives. Without electricity, households were unable to run household appliances such as refrigerators, fans, or air conditioners, which made life uncomfortable, particularly in the hot and humid summers. People also relied on candles or kerosene lamps for lighting during power cuts, which could be hazardous and contribute to indoor air pollution.


Businesses also suffered from power cuts, which disrupted operations and resulted in significant losses. Industries that required a continuous power supply, such as manufacturing or healthcare, were particularly affected.


The situation was exacerbated in rural areas, where access to electricity was limited, and power cuts were more frequent and longer in duration. Many villages were without electricity, and those that did have access to it faced frequent power cuts, which affected the provision of essential services such as healthcare and education.


Power cuts have had a significant impact on people's lives, affecting everything from daily routines to economic development. The situation has improved in recent years, but power cuts are still a reality in many parts of India.


Cummins India Limited is a part of the Cummins Inc. Group USA. It designs, manufactures, distributes, and services diesel and alternative fuel engines from 2.8 to 95 liters, diesel and alternative-fueled power generator sets of up to 3000 kW (3750 kVA), as well as related components and technology.


Sector outlook


Power diesel generators are popular in India for several reasons, including:

  • Reliable power supply: Many parts of India suffer from frequent power cuts, particularly in rural areas. Power diesel generators provide a reliable backup power source, allowing individuals and businesses to continue functioning during power outages.

  • Cost-effective: Diesel fuel is less expensive compared to gasoline or other fuel types, which makes diesel generators more cost-effective in the long run. Additionally, diesel engines are more efficient, meaning that they consume less fuel and have lower running costs.

  • Durability: Diesel generators are known for their durability and can withstand heavy use and extreme weather conditions, making them a popular choice in India, which experiences a range of weather conditions.

  • Availability: Diesel fuel is readily available in India, which means that diesel generators can be easily refueled, even in remote areas.

  • High power output: Diesel generators are capable of producing a high amount of power, making them suitable for a range of applications, including commercial and industrial use.

However, it's important to note that diesel generators also have some drawbacks, such as noise pollution and environmental concerns. It's essential to use diesel generators responsibly and in compliance with local regulations to minimize their impact on the environment and surrounding communities.


India’s diesel generator market is highly consolidated, where the top six players –Cummins India, Kirloskar Oil Engines, Caterpillar India, Mahindra Powerol, Greaves Cotton, and Ashok Leyland account for a majority of the market share. The diesel generators market in India is expected to grow over the next few years, primarily due to the establishment of industrial parks, chemicals investment regions, increased emphasis by the government on infrastructure projects such as metro rails, and smart cities, and the expansion of state and national highways.


One of the biggest demand drivers of the agricultural sector has been the unavailability of unskilled labor, which has resulted in labor wages shooting up by 4x in the last 8 years. Addressing this concern, several state governments have launched campaigns to promote the use of mechanized equipment and this including generators too.


Business segments


Engines Business Division


This business division is divided into 4 main segments:


1) Engine Business Unit: It designs and manufactures diesel and natural gas-powered engines. The business also offers new parts and remanufactured parts and engines.


2) Power Systems Business Unit: It provides power generation systems in standby power and distributed power generation for individual and institutional customers in various segments, such as infrastructure, IT/ITES, data centers, realty, and healthcare.


3) Components Business Unit: It consists of four businesses with key technologies for delivering integrated solutions: Cummins Filtration, Cummins Turbo Technology, Cummins Emission Solutions, and Fuel Systems.


4) Distribution Business Unit: Cummins in India serves customers through their network of 3 Generator Original Equipment Manufacturers (GOEMs), 21 dealerships, and more than 120 dealership and branch offices in India. It supports more than 5,75,000 engines out in the field with more than 2,25,000 + customers across various markets in India, Nepal, and Bhutan.


Lubes Business Division

The lubricants division comprises the JV viz. Valvoline Cummins Pvt Ltd in which the company holds a 50% stake. The company sells Valvoline-branded lubricants under this division.


Geographical Split

  • Domestic: 73%

  • Exports: 27%

The Company exports its products to the United States, the United Kingdom, Mexico, Singapore, and China.


Four key capabilities


Cummins has focused on developing technology leadership, scale advantage, distribution network, and partnerships with OEMs and customers as its four capabilities that allow it to maintain its core growth in its existing business segments of Power Generation, Industrial, and Distribution. In addition, these capabilities will allow the Company to seamlessly leapfrog into new growth areas such as telematics, alternative fuel technologies, and electrification.


Investing in new areas: Telematics, Renewables, and Electrification


The Company has identified new areas of growth beyond the conventional generator set market, and it has started to work on them with its global parent. The new areas include:

  • Telematics, helping in the predictive maintenance of products,

  • Renewables, alternate fuels like gas gensets,

  • Advance analytics, along with

  • Electrification involves working on battery technology.

Foray into Electric mobility


Cummins is investing in electric automotive battery packs as the world leader in conventional engines for commercial vehicles gearing up for emerging opportunities in electric mobility. Company will continue to focus on the commercial vehicle segment.

Cummins group globally is already building capabilities in the battery segment. It recently completed the acquisition of British chemicals group Johnson Matthey’s automotive battery systems business, which specializes in making high-voltage batteries for electric and hybrid vehicles. Earlier it acquired another battery maker, Brammo, which is known for designing and developing low-voltage battery packs.


2. Key Historical Financials

  • Company revenue and profit have been growing 4% and 2% on a CAGR basis respectively in the last 5 years. Management expects to maintain revenue growth of 15-20% (2x GDP) in the next few years

  • Revenue growth has been strong in FY22 and Q3FY23 – increase in sales of power gensets and an upturn in the capex cycle

  • EBITDA margin has improved from 11% in FY20 to 14% in FY22 and further to 19% in Q3FY23 due to a mix of operating leverage and lower raw material prices

  • Cash flow conversion (CFO/EBITDA) is quite healthy

  • ROCE and ROE are at 21% and 19% respectively in FY22

3. What is my view on company valuation?


The Company is trading at a P/E (TTM) of ~40x as against the 5-year median P/E of 28x.


Competitors like Kirloskar Oil and Swaraj Engines trade at a P/E (TTM) ratio of 14x and 16 respectively.


Cummins Inc. trades at a P/E (TTM) ratio of ~17x.


So, the Company is expensive given the growth expectations of 15-20% in the next few years. Long investors could evaluate entering the stock at around its median P/E levels.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • Cummins India’s growth is geared to the economic cycle so any slowdown or adverse macro event which impacts business

  • Any substantial increase in costs can affect Company’s future growth

 

About the Author


I have over 18 years of experience in private equity and public markets. I am an engineer by background and MBA from a premier institute in India.


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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