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Cummins India shares pare initial gains, Q3 margin beat looks unsustainable


Shares of Cummins India Ltd vaulted 11% jump in Wednesday’s opening trade as the December quarter’s (Q3FY20) operating performance surpassed the Street’s expectations. However, no sooner than the analysts call detailed a few one-offs that revved up the profitability, the stock pared most of its gains.

Q3’s Ebitda (earnings before interest, tax, depreciation and amortization) margin of 14.8% was 200 basis points (bps) higher than Bloomberg’s consensus estimate. This was in-line with the year-ago period. One basis point is one hundredth of a percentage point.

The initial euphoria on the Street was due to better-than-expected revenue growth in domestic market. This offset the pain in exports, which contracted by 17% year-on-year (yoy).

However, the stock pared gains when the management explained that domestic revenue growth was bolstered by a one-off 70 crore income in the distribution segment, from a one-off order. Further, the company incurred lower royalty spend that led to a drop in other expenses. Hence, it is clear that the Ebitda of 216 crore, which was way higher than 183 crore pencilled by analysts, may not sustain in the near term.

Meanwhile, domestic revenue grew with traction in marine and railway businesses although construction equipment business continued to lag. Revenue from power generation segment also declined 11% yoy as both local and international markets showed demand weakness.

According to Umesh Raut, analyst- industrials and capital goods, Yes Securities (India), the bleak outlook and growth concerns imply no scope for a re-rating in valuations as the stock trades at 23 times the estimated FY22 earnings.

Also, the slowdown in gross domestic product (GDP) growth and private sector capital expenditure has pushed hopes of a recovery in economic activity by several quarters.

The company’s management maintained its FY20 guidance of a 3-5% growth in revenue with soft exports that are likely to decline by 0-20%.

Even so, at 12:30 pm, Cummins India shares were up 5% from Tuesday’s closing. Indeed, some analysts remain optimistic. According to IIFL Securities Ltd, Cummins India offers a good proxy to infra investments in India, with negligible risks of increased working capital/ balance sheet risks. Its short cycle nature should be able to capture the pick-up in the ground construction activities faster than peers.

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