Demand triggers remain strong for Cummins India, Kirloskar Oil Engines

The share prices of both KKC and KOEL have more than doubled in the last 12 months but KOEL has gained 239% while KKC is up 121%, both are on the buy lists of brokerages

Genset demand has been strong through Q1FY25. Inventory for CPCB 2 sets is exhausted and there are good sales for CPCB IV+ sets ahead of CPCB IV+ norm implementation in July. Companies like Cummins India (KKC) and Kirloskar Oil Engines (KOEL) are looking to market their CPCB 4+ portfolios.

The genset market is worth around Rs 10,000 crore, split into three roughly equal segments across Low horsepower or LHP, midrange, and High HP (HHP). Demand is stronger across low-to-mid ranges. Overall demand may moderate in July-Sep'24 due to pre-buying and seasonal factors.

KKC, KOEL, and Mahindra Powerol hold high market share with KOEL and Mahindra Powerol being more dominant in the LHP range. KKC is ramping up across all ranges of LHP, covered in CPCB 4+. The HHP market is not covered under CPCB 4+. Data centres are a key customer segment for HHP, and KKC is the HHP leader, while KOEL’s Opti-prime product for 1500/2000 kVA is picking up.

Pricing for CPCB 4+ is higher by 30-40 per cent. In addition, KKC pricing is at an 8-10 per cent premium to others. KKC has indigenised nearly 70-75 per cent and is looking to localise more. KOEL is working on indigenisation to around 85-88 per cent. After 2-3 quarters of norm implementation, a pricing reduction of 5-10 per cent is likely.

KOEL reported Q4FY24 revenue of Rs 1,392 crore, up 21 per cent Y-o-Y. The industrial segment (up 28 per cent) and exports (up 70 per cent) were big growth segments. Construction, railways and defence did well. The operating profit margin (OPM) is at 12.8 per cent, up 420 basis points, while the net profit of Rs 118 crore rose 81 per cent. Arka - the financial subsidiary - reported revenue of Rs 162 crore, up 41 per cent Y-o-Y and a profit of Rs 28 crore, up 129 per cent Y-o-Y with assets under management of Rs 4,803 crore, up 21 per cent Y-o-Y.

Management said the unit contribution of CPCB IV+ sales is 20 per cent and CPCB IV+ gensets have 35-40 per cent higher realisations. Guidance is for similar overall volumes in FY25. Capex will be Rs 400 crore in FY25 with flat debt levels. The company seems well positioned for the transition to higher realisation CPCB IV+ gensets from July.

Cummins India's (KKC) Q4FY24 performance was also ahead of estimates. KKC reported revenue of Rs 2,320 crore (up 20 per cent Y-o-Y), with strong domestic growth (up 38 per cent Y-o-Y). Adjusted operating profit was Rs 480 crore (up 49 per cent Y-o-Y), supported by OPM of 21 per cent which was up 400 basis points Y-o-Y.

Adjusted net profit rose to Rs 500 crore due to higher other income. The gross margin expanded 330 basis points Y-o-Y to 36 per cent supported by soft commodity prices & higher localisation. Operating profit was adjusted for a one-off of Rs 60 crore drop in cross charges.

For FY24, KKC reported revenue of Rs 8,960 crore (up 16 per cent Y-o-Y), operating profit was Rs 1,760 crore (up 42 per cent Y-o-Y) with a margin of 19.7 per cent (up 360 basis points), and adjusted net profit Rs 1,660 crore (up 47 per cent Y-o-Y). Management guided for double-digit revenue growth in FY25 and said CPCB IV+ products are being well-received. Exports declined 30 per cent Y-o-Y to Rs 3,440 crore in FY24 and were weak across all regions. Recovery could come only from a medium to long-term perspective.

The share prices of both KKC and KOEL have more than doubled in the last 12 months but KOEL has gained 239 per cent while KKC is up 121 per cent. Both companies are on the buy lists of brokerages.