There are two things that accomplished investors always advice. The first is that you must buy a stock at the point of greatest pessimism and when all seems lost. The second is that when you are buying a stock you must be careful to protect the downside so that even if you don’t make much money, you must not lose any.
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As to the first point, we saw from the Muthoot Finance and MCX examples how buying at the point of pessimism meant that you weren’t risking your capital and were able to rake in the big gains that came when the pessimism lifted.
Cummins India fits that bill on both counts nicely.
First, because Cummins has reported poor results over the past few quarters, its’ stock has been battered. It has lost nearly 15% + on a YOY basis.
Second, there is no denying that Cummins has a lot of things going for it such as:
(i) Technological superiority: Cummins has maintained its dominance in the market in the field of diesel power generators. The sales have fallen because of the economic conditions and not because the product is out of favour. Over the past 5 years, sales have grown at a CAGR of ~ 16%;
(ii) High ROE: Cummins has always had a ROE ranging from 28% to 31%. Despite adverse market conditions, the high ROE has been maintained;
(iii) Good demand for the products: Due to India’s status as a power-deficient Country, there is huge demand for diesel power generators.
(iv) Debt-free: Cummins has no borrowings. The only liabilities in its Balance Sheet are the dealers’ deposits and provisions for employees’ benefits. On the other hand, it has huge cash & bank balances of Rs. 354 crore and investments of Rs. 498 crore which will fund expansion;
(iv) Huge expansion at Megasite, Phaltan: Cummins is implementing a “mega-site” at Phaltan where all Cummins’ entities in India will set up projects. The SEZ and power project here is expected to contribute about Rs. 1500 crore to Cummins India’s topline;
(v) Reasonable valuations: At the CMP of Rs. 471, Cummins is trading at a P/E of about 18 times. The P/E ratio is not unreasonable given the ROE and market dominance of Cummins. Also, given that the earnings will spurt in FY 2015 and thereafter, the P/E is only about 15 – 16 times, which is lower than the historical P/E.
Positive trigger for Cummins:
The Central Pollution Control Board has notified new emission norms called “CPCB-II” for diesel generator sets, which is equivalent to EU Stage IIIA norms. The new emission norms are to be implemented from April 1, 2014 and will change the dynamics of the Indian genset industry. Typically, engines form 50-60% of gensets and compliance to new norms will increase diesel engine prices by 15-20%. This is a positive development for Cummins India as it is the market leader in the Indian diesel power generation segment and stands to benefit due to its technological edge over its competitors. One can expect sharp earnings recovery in FY 2015.
Speaking for myself, I have recently bought a nice little chunk of Cummins. I am feeling quite gung-ho about the stock. If the price slips a bit on the Q3 results, I will add more. When the mood and the sentiment changes, you can be sure that Cummins will be one of the first to spurt. However, till then, you must have the patience to sit tight without fidgeting.
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