Near term demand, price stability concerns for Cummins India stock

Brokerages upbeat on long-term prospects after company's strong Q3 results

Cummins India posted better-than-expected results in the December quarter (Q3FY25). The company, which makes diesel and alternative fuel engines, reported a 22 per cent jump in revenues for the quarter. In addition to the domestic performance, exports rebounded after many quarters, riding on growth in select regions. While brokerages are positive on the long-term prospects, some are cautious in the near term, given lower government capex, pricing pressures, and lack of uniform export demand.

 

The top line performance was aided by higher sales in the power generation or powergen segment, which account for more than half of its revenues. The traction in the segment was due to a demand uptick from data centers and mission-critical sectors. Also, a healthy offtake of CPCB IV+ portfolio and steady pricing led to an 18 per cent growth in the powergen segment sales.

 

While the transition to CPCB IV+ led to a pricing uptick, increased competition may impact the pricing scenario in the upcoming quarters, say analysts at Elara Capital. The brokerage reiterates an ‘accumulate’ rating with a lower target price due to potential pricing pressure in powergen, export uncertainty and slower government capex. Harshit Kapadia of the brokerage remains positive in the long-term due to the company’s market leadership and industry-leading margins. Industrial segment revenues were up 24 per cent over the year-ago quarter and were driven by pick-up in construction, mining, and railways.  

Given steady demand across major segments, the company has maintained its FY25 guidance of double-digit growth. Cummins India has achieved an 18 per cent year-on-year (Y-o-Y) growth in the first nine months of FY25.

 

Exports, which account for 15 per cent of revenue, saw a recovery, rebounding 43 per cent Y-o-Y. The company is, however, cautious as most regions except West Asia and Latin America are witnessing weak demand. While the company is in the process of evaluating the exposure of changes in the tariff rates from the US, it is looking to invest to improve the channel presence, and bring a diversified global portfolio to new markets, while expanding its mission-critical segments. 

 

IIFL Research believes that there could be a silver lining related to the US tariff issue. “While exports have bottomed out, we see the recent US tariff structures placing sourcing from India in a relatively sweet spot,” said analysts led by Renu Baid Pugalia of the brokerage. Any new mandates catering to the North American market (outside of Cummins India’s current portfolio), though less probable, can be a big re-rating trigger. Valuations are attractive at 31 times FY27 earnings, say the analysts.

 

On the profitability front, gross margins declined by 227 basis points due to the higher contribution of projects in the total revenues. Operating profit margins fell 179 basis points Y-o-Y due to 19.4 per cent due to the one-off impact of large project delivery and provision reversal in Q3FY24.

 

Motilal Oswal Research continues to remain positive for the company. Analysts led by Teena Virmani of the brokerage cite its strong market positioning across all segments, its ability to sustain market leadership despite volatile demand, and margins at higher levels, as well as benefit from the fast-growing data center market for their ‘buy’ stance.

 

Kotak Research, too, has a ‘buy’ rating on the stock. Margin cuts are a risk for the entire capital goods coverage “but we see this as a limited risk in the case of Cummins and consider a meaningful part of its uptick in margin as sustainable,” says the brokerage. Beyond margin accretive mix effects over the past five years, the company has also benefited on account of higher localisation, say analysts led by Aditya Mongia of the brokerage.