Cummins India: Focusing on the Core & delivering growth

11 Mar 2024 , 10:25 AM

During analysts of IIFL Capital Services recent meeting, KKC management highlighted 1) Strong demand tailwinds in the domestic power-gen and distribution segment, 2) Wider acceptability of CPCB-IV products and pricing which is not dilutive at current gross margin levels, 3) Bottoming-out of exports, but awaiting firm clues on strong demand rebound, 4) Thrust on localisation and development of new solutions for railways & exports and 5) Availability of sufficient capacity to fuel growth over 2-3 years. Valuations have seen sustained re-rating alongside earnings upgrade cycle. Though valuations at 40x FY26 EPS look rich now, analysts of IIFL Capital Services believe there is headroom for further earnings upside and continue to like KKC as preferred cyclical bet (with 9% implied upside).

Domestic demand and CPCB4+ ramp-up:

After pre-buy effect of old CPCB2 range in H1FY24, domestic demand offtake in H2FY24 has been strong with shipments broadly tracking orders and normalised channel inventory. Last leg of CPCB2 engine shipments should be in early Apr’24 before the final knock-out of old emission products by end-Jun’24. CPCB4+ shipments on the other hand is scaling up well with wider acceptability of the pricing (+25-50%) which is not gross margin dilutive. KKC claims to offer the best engine after-treatment solution in the market, results of which will be visible in H2CY24.

Playing it right in exports:

Inflationary impact and demand correction is loud in LHP exports, which is expected to show a U-shaped recovery. While competition is rampant based on lower price points in LHP exports, strong local after-market support with easy availability of parts and services places Cummins at an advantage. Fit-for market approach for new products will driver faster-than-market recovery for KKC with share gains in the global supply-chain.

Driving OPMs + volume growth:

GMs in Q2-Q3FY24 were favourably impacted by mix and input prices while CPCB4+ was not margin dilutive, reinforcing its targeted GM range of 34-35%. KKC guides operating leverage to be a larger driver of OPM over the medium-term given rated capacity utilisation of 65% levels (90% of manned capacity).