Cummins India Ltd’s revenues fell 60% in the June quarter, and operating profits nearly vanished. Ebitda, or, earnings before interest, tax, depreciation and amortisation fell 98% to ₹2.9 crore. Still, the company’s shares rose over 3% after the results were announced.
Analysts say this isn’t much to do with the results announcement, given the sharp deterioration in performance and the fact that the company didn’t give any guidance on a recovery. While the broad markets were flat, some beaten down stocks rallied on hopes of a vaccine being ready for launch.
As far as Cummins’ results go, the only silver lining was that gross margin expanded by more than 600 basis points year-on-year (y-o-y) to 39.5%. One basis point is one hundredth of a percentage point.
In a post earnings conference call with analysts, the management said, gross margins were supported by a combination of factors, mainly a comparatively lower decline in the distribution business, which enjoys relatively higher gross margins than other segments. Lower raw material costs and reduction in other expenses, also aided gross margin growth to some extent.
But Ebitda margins fell to merely 0.6% from the 10-14% range of the past few quarters. Also, analysts are sceptical of this performance on gross margins sustaining. “Making a comeback on operating margins would be challenging in the current environment of subdued demand,” said an analyst requesting anonymity.
Further, the management said that its business segments have started to bounce back, but the pace of recovery will vary for each segment. It also doesn’t expect its business to fully recover in a short period of time. The July to September quarter will give a better indication of how quickly things will recover, the management added.
Compared to its pre-covid highs, the Cummins stock is down about 28%. At its lows during March, the stock had more than halved. On the valuations front, the stock is trading at one-year forward price-to-earnings multiple of 22 times, as per Bloomberg’s estimates. Analysts see some correction in valuation considering that the company could take longer-than anticipated to recover.
