Margin scale-up key trigger for Cummins India

Easing commodity prices and exports to drive profitability for genset manufacturer, say analysts

The stock of Cummins India is up about 12 per cent over the past month on better-than-expected September earnings and expectations of margin gains as the company looks at hiking prices. Healthy demand outlook and implementation of new pollution norms are the other triggers for the genset maker.

Led by exports, the company posted a 13 per cent Year-on-year (y-o-y) growth in revenues in the September quarter. Exports, which account for about 28 per cent of the company’s sales, grew 21 per cent over the yearago quarter.

The growth was powered by demand from Latin America, Asia Pacific and West Asia, especially for low horsepower products.growth in the domestic market was led by the distribution (sales/support) segment, which posted a 22 per cent growth. Distribution was followed by industrial and power generation segments, which had growth in the 6-10 per cent range.

Demand has remained resilient with increased orders from data centres, pharmaceuticals, defence, mining and other sectors.

The company expects to benefit from pre-buying for existing range of products in the first half of CY23 given the implementation of Bharat Stageiv emission norms from July 1, 2023. The new products are expected to be priced higher. Besides demand, the key trigger for the stock would be the margin trajectory. Gross margins were down 123 basis points y-o-y to 32.1 per cent due to increased commodity costs and supply chain issues. Given the softening raw material costs and price hikes in select segments and more to follow, the company is eyeing the 34-35 per cent gross margin levels over the next 18-24 months.

Aditya Mongia and Teena Virmani, analysts with Kotak Institutional Equities, believe that Cummins may alter its defensive stance on pricing after witnessing the gross margin improvement and positive outlook on margin by its key peer, Kirloskar Oil Engines.

They factor in quick pricing moves and a 60 basis points higher operating profit margin (OPM) in revised fair value for the Cummins stock at ~1,560 as against the previous ~1,510 per share. The stock finished at ~1377 a share after the close of trade on Thurday.

Rahul Jain and Prem Khurana, who work with Anand Rathi Research, believe new launches, cost controls and better sourcing would help margins for Cummins in the coming years. The brokerage has a hold rating with a target price of ~1,410.

Nuvama Research, however, is cautious on the margin front.

While the brokerage maintained OPM scale up would be in the next two years, it said that upcoming emission norms could pose a challenge to OPMS due to costs and competition. It has a reduce rating with target price of ~980.

There are other triggers in the long term in addition to margins, said analysts at Prabhudas Lilladher Research.

The company, according the brokerage, should benefit from a healthy demand outlook, continued momentum in exports, new pollution norms and technology driven new product launches. It has revised its earnings per share estimates by about 10 per cent each for FY23 and FY24.

Investors should await the scale up in margins going ahead before considering the stock on dips.