(Investment Idea)

Cummins India (CIL)

CIL, 51% subsidiary of Cummins Inc, USA, the world’s largest diesel engine designer and manufacturer,
has reported commendable performance for Q4 FY 2007. Net Sales grew @ 30.2% to Rs. 504.91 crore (Rs.
387.66 crore) OPM% improved to 16.3% (15%) mainly because of saving in material cost to 66% (67%) of
sales. Consequently, PBT soared up by 40.6% to Rs. 97.49 crore (Rs. 69.35 crore). However, higher tax rate
of 32.6% (22%) restricted growth in PAT of RS. 65.68 crore (Rs. 54.9 crore) to 21.4%.

For FY 2007, Standalone Net sales rose by 25.8% to Rs. 1840.8 crore (RS. 1462.8 crore) led by strong 33%
growth in domestic sales of Rs. 1221 crore (Rs. 918 crore) and 13.7% rise in Exports of Rs. 620 crore (Rs.
545 crore). OPM% improved to 16% (13.9%) owing to enhancing of Six Sigma deployment and
productivity enhancement initiatives. As a result, PBT shot up by 40.7% to Rs. 346 crore (Rs. 245.7 crore)
and PAT rose by 37.8% to Rs. 242 crore (Rs. 175.7 crore).

On Consolidated basis, net sales of Rs. 2122.82 crore (Rs. 1775.06 crore) registered 19.6% increase. OPM%
enhanced to 16.3% (14.3%) despite strengthening of rupee and inflationary pressures. PBT grew @ 42.9%
to Rs. 392.03 crore (Rs. 274.32 crore), while PAT surged to Rs. 267.97 crore (Rs. 183.64 crore), growth of
45.9%. During the year under review, company has accounted for loss of ~ Rs. 5 crore in CASL (Cummins
Auto Services). CIL has discontinued loss making services business of CASL and will be selling its assets in
FY 2008. Hence, this loss will not recur in FY 2008. It may also be noted that since, all subsidiaries,
associates and joint venture companies, which are consolidated, have all been doing well except CASL. This
is reflected in higher profit earned by these entities at Rs. 25.9 crore in FY 2007 (Rs. 7.9 crore), after taking
into account loss of Rs. 5 crore in CASL.

CIL derives 40% of revenues from power generation, 15% from industrial segment (construction, marine,
mining, etc.), 3% from Auto, 7% from spares and 35% from exports. Going ahead, power generation
segment would be main growth driver. Prolonged power cuts & deficits, increasing demand and need for
alternate source of power, such as DG sets (capable of using natural gas as alternate fuel), would continue to
propel the segment’s growth. To cater to such growing demand, company is enhancing capacity and also
setting up new facility at Pune.

Industrial segment is also expected to sustain growth momentum in view of strong corporate capex cycle,
government’s thrust on infrastructure and investments taking place in mining sector.
Auto segment’s contribution is expected to shot up to 15% of sales (3%) in next 5 years. Given the Supreme
Court directive for enforcement against overloading, demand for high horsepower trucks and engines is
expected to witness strong growth.

Another growth driver would be supplying of CNG engines to buses. Company has won Delhi Transport
Tender. It is looking at supplying CNG engines to ~ 600 buses in FY 2008. Ramp up would happen with
other state transport organizations moving to CNG engines. But then gas availability has to be there. Still
company hopes to scale up this business to ~ 1,500,- 2,000 buses p.a. over next couple of years as gas
availability will improve in next 3-4 years with KG basin gas and LNG terminals.
However, strengthening of rupee is the cause of concern. Company would be booking exchange loss of ~
Rs. 20 crore in FY 2008. Besides, strengthening of rupee has made India less competitive than China.
Nevertheless, that does not mean that global sourcing will stop. India will continue to be a hub for parent
company.

At CMP of Rs. 305/-, the share (Rs. 2/- paid up) is trading at 22.5 times FY 2007 actual consolidated EPS of
Rs. 13.5 and 18 times FY 2008 expected consolidated EPS of Rs. 17/-. In view of excellent business
prospects, we recommend to “BUY” the share at CMP.

Disclosures:
The author may have held / hold the above-mentioned securities in their personal accounts or on behalf of the clients.
The information contained has been obtained from sources believed to be reliable. While taking utmost care in making
the report, the authors or the company does not take responsibility for the consequences of the report. All investment
and information and opinion are subject to change without notice. The investment recommendations may not be
suitable to all the investors.
June 01, 2007