Shares of Cummins India Ltd did not react adversely to the company’s weak June quarter performance. The stock closed 1.68% higher on Thursday in spite of the 14% drop in net profit when compared with a year back.

What went down well with investors is that demand, especially in overseas markets, was not as bad as expected. Exports, which account for a third of the total sales, fell by 22% year-on-year. But it was better than the 29-30% drop that most analysts had penciled in. That says a lot about the level of expectations in the sector.

Meanwhile, demand for Cummins engines in the domestic market improved, leading to a 9% rise in sales. Total revenue, however, fell by 4%. The high base of the year-ago period, when revenue grew by 25%, may be another reason, besides weak exports, for tepid revenue growth.

In spite of low sales volumes, the low input costs shielded profitability. Operating margin was a tad lower than the year-ago period but in line with what the Street had estimated.

Weaker sales growth also trickled down to a 7% drop in operating profit at ₹ 206 crore, again managing to keep abreast of the consensus forecast.

The Cummins India stock has been running downhill for about a year and currently underperforms both the Sensex and the BSE Capital Goods index. At ₹ 840.15, it trades at around 30 times FY17 estimated earnings.

This is rich given that the macroeconomic outlook in global markets is still weak. Cummins engines are exported to Latin America, China and Europe where demand is wobbly. According to a company statement, even the strong improvement in exports when compared with the March quarter “is an internal supply chain correction, and not an indicator of global economic revival".

Investors must note that robust sales growth in the domestic market and pricing power would give the company a leg-up in the coming quarters. Otherwise, parent firm Cummins Inc. trimmed its growth estimates for 2017, just two days ago. This will certainly weigh down on exports from Indian operations.

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