Business Standard

Domestic growth to power Cummins’ near-term performanc­e

- RAM PRASAD SAHU

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 yearon-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 nonrecurri­ng 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 ~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 ~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.

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