Muted exports, gradual domestic powergen recovery may hit Cummins sales

Cummins India’s September quarter performance was a mixed bag with revenues disappointing the Street, but operational metrics beating expectations. Its consolidated sales were down 3 per cent y-o-y with domestic sales and exports falling 2 per cent and 5 per cent, respectively.

This was expected as June quarter sales were up 43 per cent y-o-y on account of pre-buying amidst a shift from the Central Pollution Control Board (CPCB) II to CPCB IV+ emission norms. The domestic power generation business sales thus fell by 28 per cent y-o-y.  

The customer response to CPCB IV+ engines was strong in the Delhi-NCR market and other metros with the former witnessing higher early adoption. The company expects this segment to stabilise gradually in the second half of FY24 and achieve normalcy by Q2FY25.

Demand in the industrial and distribution segments was robust reflecting in the growth of 23 per cent and 20 per cent, respectively. While the former gained from traction in roads, railways, compressor and defence sectors, the latter grew on the back of service contracts.

Exports were on a weak wicket falling by 4 per cent over the year ago quarter. The fall was led by North America and EU geographies which fell by over 50 per cent y-o-y, while Asia Pacific, the Middle East and Latin America dropped 5-10 per cent. The slowdown in the global economy amidst rising geopolitical conflicts, US bond yields, and crude prices dented the company’s international business, said Elara Capital. Most brokerages expect this segment, which accounts for 27 per cent of sales, to witness sluggish demand in developed as well as developing markets.

Also Read: Cummins India's Q2 net profit rises 23% rise at Rs 329 cr on lower costs

Even as revenue growth was muted, margins saw a sharp expansion. Gross margins improved by 500 basis points y-o-y to 37.1 per cent in the September quarter led by falling commodity costs as well as a rising share of higher horsepower engines. It was able to maintain prices even as raw material costs fell which helped boost the profits at the gross level. Operating profit margins too, saw a robust 320 basis points increase to 18 per cent.

Going ahead, the company has guided for a double-digit sales growth (twice the GDP growth) and annual operating profit margin expansion by 100 basis points on the back of cost control measures.

YES Securities has increased its FY24/25 earnings per share estimates by 4 per cent factoring in higher gross margin given strong quarterly performance. It has a reduce rating valuing the company at 30 times its FY25 earnings.

BOB Capital Markets has also increased its earnings estimates post Q2 results and maintained its buy rating. We see visibility for sustained long-term growth in the domestic power genset market, with Cummins India best positioned to manage the ongoing transition to new emission norms, said analysts led by Vinod Chari of the brokerage.