Strong outlook, robust domestic demand to support Cummins India stock

Riding on a 36 per cent growth y-o-y in the domestic market, the company posted an overall revenue growth of 16 per cent

Genset manufacturer Cummins India has seen its share price rise by 45 per cent in the past three months. The management has reaffirmed that growth would be in double digits over the coming two fiscal years.

Growth is expected to be driven by a pickup in domestic infrastructure spending. The Q3FY24 net revenue rose 16 per cent Y-o-Y to Rs 2,530 crore, well ahead of estimates, led by robust demand across sectors like data centres (DC), real estate, infrastructure, and manufacturing. The top line street-beat was partly due to the execution of a non-recurring large data centre order. However, exports were weak due to global factors.

Domestic revenue rose 36 per cent Y-o-Y to Rs 2,180 crore. Segment-wise, the powergen revenue rose 51 per cent Y-o-Y, led by 20 per cent volume growth due to primary pre-orders during the energy transition phase, better pricing for CPCB (Central Pollution Control Board) IV+ gensets, up 20-30 per cent, and higher contribution from high horsepower (HHP) gensets.

The distribution revenue rose 26 per cent while the industrial segment was up by 20 per cent. The company sold 3,000 CPCB IV+ gensets in Q3, contributing about 25 per cent to powergen revenue. Demand from markets such as compressors, construction, and railways aided growth in industrials.

Export contraction

The slowdown in the global economy and geopolitical conflicts and inflation hurt exports. Revenue from the EU fell 59 per cent Y-o-Y, the Middle East dropped by 53 per cent, the US by 47 per cent, other regions by at least 20 per cent. Overall, export revenue fell 40 per cent Y-o-Y to Rs 330 crore in Q3FY24. The Red Sea crisis led to 2-4 week delays in deliveries. As per management, there are early signs of recovery visible post-Q3, and the global market could be bottoming out.

Analysts project annual earnings growth of 19 per cent over FY23-26 with a return on equity (RoE) of 24 per cent and a return on capital employed (ROCE) of 23 per cent. But there is the policy risk implicit in the focus on green energy. The implementation of CPCB IV+ norms in July 2024 could be a factor in the demand shift and prices should stabilise in the next year as operating leverage kicks in. Genset makers appear braced for these changes.  

Strong domestic demand

Currently, CPCB 2 products contribute 75-80 per cent of the genset sales and the remaining comes from CPCB IV/IV+ units. Inventory levels for CPCB 2 gensets will reduce sharply from April 2024 onward as production has stopped. Demand may see minor disruptions during the elections. But underlying growth drivers remain intact. Pricing is higher by 20-40 per cent and there’s enough pricing power to pass it onto customers from Q2FY25. Companies are also looking at export revivals.

The domestic demand momentum is strong across low-to-mid kVA ranges, driven by manufacturing, hospitality, residential and commercial construction. Inventory will be mopped up by pre-buying in low-to-mid kVA range ahead of the CPCB-IV implementation. Data centres remain a key growth driver for HHP gensets, which is growing faster. Between them, Kirloskar Oil Engines (KOEL), Cummins, and Mahindra Powerol hold 70 per cent of genset market share by volume. 

Cummins is trading at 35 times its price to earnings or PE while Kirloskar which has not seen much recent share price movement is trading at 19 times. The valuation difference is significant. Given a positive outlook for the sector, KOEL could see a pickup while Cummins remains on the radar for bulls.