Domestic growth to power near-term performance of Cummins India

The stock of Cummins India is up 59 per cent since the start of November and has been hitting its 52-week highs on a regular basis post the strong December quarter results.

The quarterly performance was boosted by strong top line growth as well as margin performance. 

Riding on a 36 per cent year-on-year (Y-o-Y) growth in the domestic market, the company posted an overall revenue growth of 16 per cent.

Growth in the domestic business was led by the power generation (powergen) segment. Here, demand trends remain strong from sectors such as data centres, infrastructure, manufacturing, commercial and residential realty.

The beat on the top line front was in part due to execution of large non-recurring orders in data centres. 

Powergen revenues spurted 51 per cent on the back of a 20 per cent volume growth.

The growth was led by improved realisation of primary pre-orders during the energy transition phase, higher pricing for CPCB IV+ gensets, which are up 20-30 per cent, and higher contribution from high horsepower (HHP) gensets.

Among others, while distribution sales were up 26 per cent, industrial business saw a growth of 20 per cent.

The growth in the industrial market was led by compressors, construction, and railways.

While the domestic market remained strong, exports declined 40 per cent Y-o-Y due to weakness in the key markets of Cummins. 

Teena Virmani and Harsh Tewaney of Motilal Oswal Research expect the company’s exports to remain weak in the near term.

But they will be supported by an opportunity from its global parent and the export of CPCB IV+ products to the US and Europe.

We, thus, believe that Cummins will benefit from a strong underlying demand environment in most of its segments, they add.

Other gains in the results were at the operating level. Operating profit margins saw an improvement of 230 basis points (bps) Y-o-Y to 21.2 per cent. It was on the back of increased sales of a large project, higher realisation, cost measures and lower raw material prices. 

Motilal Oswal has revised its valuation multiple upwards taking into account long-term sustainability of demand, bottoming out of exports, and better-than-expected margins. They have maintained a buy rating on the stock with a target price of Rs 2,910. 

Amit Anwani and Shirom Kapur of Prabhudas Lilladher Research, too, are positive on Cummins.

They cite strong domestic demand in powergen across sectors with CPCB-IV products witnessing traction, improving margin profile and ample room for growth in distribution business.

They have revised their P/E multiple and target price upwards. The target price is at Rs 2,480 a share and the brokerage has maintained its hold rating. 

While Elara Capital has raised its earnings estimates by 15 per cent for FY24 and 10-12 per cent for FY25/26  due to rise in domestic powergen and margin expansion, led by product mix and pricing with lower exports demand, they have downgraded the stock to reduce. This is on the back of higher valuations with downgrade risks being maintained if the government focuses on clean energy rather than diesel gensets.