Kirloskar Cummins Ltd (KCL) reported an excellent performance for 1996-97. The company's turnover at Rs 800.73 crore registered a jump of 21.66 per cent over the previous year.

While operating profit at Rs 144.34 crore grew by 19 per cent, net profit too at Rs 80 crore reported a smart jump of 26.44 per cent over previous year. The earning per share for 1996-97 works out to Rs 20.2, up by 26.56 per cent over the previous year.

Cummins Engine Co Inc, the $5.3 billion diesel engine major and joint venture partner of Kirloskars, recently acquired management control in KCL. With this, a 35 year old relationship came to an end. Kiroskar Oil Engines Ltd (KOEL), a Kirloskar group company in the same business line, will divest one per cent of its 25.5 per cent stake in KCL in favour of Cummins which currently holds 50 per cent in KCL.

Though KOEL will continue to hold the balance 24.5 per cent equity in KCL, it will have no representation on the board. So effectively, now Cummins will call the shots. Once Cummins gains controlling stake, KCL will be renamed as Cummins India Ltd. KOEL may later decide to sell off its balance holding in KCL. After all, a minority holding with no management control makes little sense for the Kirloskars.

The decision to part ways makes sense as both KOEL and KCL are in businesses which are overlapping. Also, the joint venture has had more than its share of bitter moments as well. While KCL makes engines with a range of 100 hp to 2,000 hp, KOEL makes engines between 3 to 300 hp and 2000-8000 hp range. Following the separation, KOEL is free to introduce mid-sized engines in which the company does not have a presence. In effect, both the companies will now directly compete with each other.

Likewise, Cummins will also be unconstrained in introducing its vast range of engines in India. Cummins is a leading worldwide designer and manufacturer of diesel engines and related products. These engines provide power for trucking, power generation, bus, industrial, marine and government markets worldwide and range from 64 to 6000 hp. Cummins has sales and service sites in over 130 countries around the globe and with nearly 4,500 distributor and dealer locations. The future certainly looks bright for KCL.The KCL scrip is trading at Rs 450, discounting 1996-97 earnings of Rs 20.2 about 22 times. The valuation reflects the strong business prospects perceived by investors. In fact, the KCL scrip will now truly conform to its blue chip MNC status.

The stock needs to be closely tracked and the investment strategy of the parent company will remain the key factor. While Cummins' increasing interest in the Indian market is well recognised, investors will be keen to know how KCL will actually benefit from these investments. That depends on whether future investments are routed through KCL or whether Cummins too follows the more popular strategy of investing through fully-owned private companies.

Now that Cummins has a management control in KCL, it is not unfair for investors to expect that Cummins recognises KCL as its flagship company and utilise it to launch its latest products in India and thereby ensure a high growth for the company.

Future investment trends of Cummins and KCL's export performance are the key pointers that will determine future valuation. Until that is certain, however, the stock appears fully priced.

(Contributed by KenSource Information Services Pvt Ltd, Mumbai)

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.