Cummins India rides on exports, likely to gain as demand for power grows

Diesel engine maker projected to benefit as companies planning to build data centres seek power providers

Expectations of a revival in key segments such as infrastructure, market share gains, hig­her exports, and improving margins led to a spurt in stock prices of Cummins India, which has risen 50 per cent since the start of this calendar year.

Says Amit Mahawar of Edelweiss Research: “The confluence of demand drivers — construction, real estate, industrial capex, data centres, and exports — coupled with sharper cost control/potential pricing benefit could translate into a stronger-than-expected earnings trajectory.” Brok­erages have revised their earnings estimates by 5-20 per cent for financial year 2021-22 (FY22) and FY23. In the domestic power generation (power gen) market, one segment that is expected to see strong growth is data centres. Given the slew of investments by corporations, data centre capacity is expected to treble over the next five years. 

As Cummins is the market leader, it is likely to gain the most from this fast growing segment worth Rs 250-300 crore annually. Recovery in commercial and residential real estate, health care, and pharmaceuticals verticals should also support growth in the power gen market. In the industrial market, construction activity is led by roads and mining. These sectors deploy higher tonnage dumper trucks, powered by Cummins engines. While the Union Budget’s focus on infrastructure is positive, sustained industrial activity will be critical for growth. Analysts at Kotak Institutional Equities, however, say the industrial market could falter, given higher commodity prices and related impact of cost overruns for contractors. After a muted FY21, the management is hoping for a revival in demand from the railways. 

To counter the rise in raw material costs, the company is looking to raise prices judiciously so as not to impact dem­and significantly. The management believes that it will be able to neutralise the higher raw material costs and reversal of variable cost cuts. This will be achieved on the back of sales momentum and operating leverage. Margins are expected to expand in FY22 by over 100 basis points to 15 per cent.

In the exports segment, growth will be driven by 5G rollout across Asia and data centres. Higher demand from countries in the West Asia and North Africa region, which benefit from higher crude oil prices, is the other positive.

While there are multiple triggers, at 32 times FY22 valuations, the stock is trading significantly higher than its average and, thus, near-term upsides are limited. Investors will have to wait for a better entry point.