Cummins set to outperform the industry

Cummins is a subsidiary of Cummins Inc, USA – a global manufacturer of engines and other power generation products. The company comprises three businesses – Engine Business, Power Systems Business (serving Mining, Marine, Rail, Oil and Gas, Defense, and Power Generation), Distribution Business. The company’s product range primarily includes diesel engines/gensets for various power/industrial uses.

Cummins is the world leader in the diesel engines/gensets industry, with a 40% market share. The company’s domestic business, which is separated into power generation, industrial, and distribution areas, accounts for 60% of its sales. Exports account for roughly 40% of total sales.

FY22: Highest revenue figures in Last five years

The company experienced strong growth in FY22, with a 41.2 percent increase in consolidated revenue from operations on a YoY basis, as well as significant profit growth. When compared to Q4FY2021, sales increased 17.7% in the last quarter, although QoQ growth has fallen 13.6 percent in the previous quarter.

Highest Revenue in last 5 years with 41.2% increase in consolidated revenue from operations on a YoY basis

FY22 revenues were higher YoY for every quarter compared to FY21

Broad based economic recovery aids growth:

Cummins India benefited greatly from a broad-based recovery in both domestic and international markets during the FY22, resulting in strong sales and profit growth.

It boasts a high EPS growth rate, as well as a low debt level and a promoter pledge. In the last five years, the current book value per share has increased to 185.60.

Cummins boasts of a high EPS growth rate, and in the last five years, the current book value per share has increased to 185.60

Cummins has pricing leverage as the industry leader, allowing them to pass on increases in material prices to customers. However, with a quarter-and-a-half lag, the favorable impact of this would be reflected in the margins. Long-term, the company intends to increase its EBITDA margins by focusing on increasing the share of high-margin items, notably in exports, as well as cost-cutting initiatives involving better engineering, designs, and automation. Nonetheless, given the ongoing surge in raw material prices, we expect the margin to continue under pressure in the near term, but we expect it to improve in the long run.

Peers & Sectoral Comparison:

Cummins India is the market leader with a market share of 40 percent whereas one of its major competitors is Swaraj Engines which is a Diesel engine manufacturer.

Its PE ratio at 30.4 is greater than Swaraj Engines at 17.74 and the industry PE of 29.14

Similarly, its PB ration is higher at 6.14, which is higher than Swaraj Engines at 4.99.

Peers and sector comparison for FY22

Cummins India outperforms its peers and is far above the industry average in terms of PE and PB ratio, although it lags behind swaraj engines in terms of dividend yield. Because it is one of the largest makers of diesel engines, the reason for this is obvious.

Conclusion:

It can be said that a company is functioning well after carefully studying many essential aspects of its financials. Despite a drop in revenue in the most recent quarter, revenue and earnings after tax have grown steadily year over year.

Furthermore, data centers, healthcare, infrastructure, rental, and retail have all begun to gain traction in the local market. This is projected to increase demand for high- and mid-horsepower diesel generator sets. The deployment of 5G technology, expanding storage data, rising OTT, and other factors are all contributing to a healthy data center demand picture. As a result, significant growth is predicted over the next five years, particularly for high-capacity engines, providing a positive indication for Cummins India.

Technical analysis:

Current share price of Cummins India is 1030.40 which has been trading at 7.22% up from 3 months level and 8% down from peak in last month.

Long run aspects

Stock has been on bull run for an exceedingly long time and shows no prominent sign of falling

• 50 days EMA line is above 100- and 150-days EMA.
• On a monthly chart the MACD line is well above its signal line indicating important levels of strength.
• RSI is taking support at 60 for monthly chats.

So, we can say that stock is in a bullish phase in the long run.

Stock has been on bull run for an exceedingly long time and shows no prominent sign of falling

50 days EMA line is above 100- and 150-days EMA.

Short term technical aspects

Short run aspects

• Recent bullish Crossover by MACD on 19^th may and MACD line is still well above signal indicating very less chances of downward movement in MACD line.
• RSI is at 51 taking neutral stance.
• Talking about support and resistance, stock is currently taking a support at 960 and big resistance at 1054.

For the time being, it’s a wait-and-see situation, as we can wait for the stock to break past its resistance level with sufficient volume before making a good up move.

Our view:

Cummins India has performed admirably on both fundamental and technical parameters. Long-term investors can take a position and hold it as long as the EMA and MACD continue to show bullish indicators. While the majority of indicators are indicating a bullish trend, short-term investors can expect to gain 10-20% with a 4-5-month maturity time and a target of 1250+, as suggested by many eminent stock brokers.

Because the stock is now trading at its support level, we can expect a brief sideways trend before an up move. Investors should also be aware of two key concerns that Cummins India may encounter in the near future, namely, a slowdown in the local macro-environment, which might have a negative impact on the company’s business outlook and profits growth. The current geopolitical conflict between Russia and Ukraine has weakened global market demand, posing a significant downside risk to exports.