Cummins India – Softening Steel + Weak INR

The softening of steel prices to benefit equipment makers like Cummins India. Raw material (mainly steel and cast iron) costs accounted for 64% of the revenues for Cummins India in FY08. In response to the sharp increase in material prices (Steel and Cast iron) in Jan-June 2008 period, Cummins had taken price hikes between 2-2.5% across its product categories in the first quarter. The full impact of these hikes is expected in current quarter.

Exporters on an ongoing basis contribute around 35% of revenues of Cummins. During the current quarter, Rupee is down 6.5% from the beginning of the quarter. We expect the company to benefit from rupee depreciation but the extent would depend on forward cover that the company has taken to hedge receivables.

CIL is a front-runner in the lean-burn engines segment which is being used to power the buses in New Delhi. Towards the preparation for the Commonwealth Games 2010, the Delhi Transportation Authority has given the entire order of 2500 engines based on the lean-burn technology to Cummins.

The company is expected to report an EPS of Rs 19.6 and Rs 23.4 for FY09 and FY10 respectively.