Q1FY24 Review: Cummins India: Exports dampen near-term outlook

7 Aug 2023 , 01:55 PM

While the domestic demand outlook continues to be robust, Cummins India (KKC) cautioned on QoQ decline in global markets hurting export outlook for H2CY23. KKC guides for double-digit revenue growth in FY24. The company targets to defy the declining trend in key end-markets for exports, by increasing the aggression for share gains with customised GTM strategies and new product introductions. Even as CPCB-II products continue until Jun’24, tighter NGT compliance in key large industrial and commercial markets is simultaneously driving volumes (new build + replacement) for CPCB-IV+ compliant cleaner products. Analysts of IIFL Capital Services cut FY24 EPS by 5% on flat exports, while that for FY25/26 remains unchanged. Analysts of IIFL Capital Services expect earnings to consolidate in FY24 (11% YoY) before eyeing 20% Cagr in FY24-26. They continue to like the shortcycle high-quality industrial franchise of KKC and retain BUY with TP of Rs2,135. 

CPCB-IV+ implementation muddled, but has strong orders for FY24: 

KKC has firm orders for CPCB-II (up to Jun’24), which it targets to deliver by end-FY24, ensuring growth visibility. Further, it has launched new electronic products for CPCB-IV+ across all major nodes ahead of peers, with price increase in 20-50% range. Internally procured SCR from CTIL and ~80% localisation to start with, make KKC’s portfolio cost competitive vs peers. Even as gross margins on new products are softer due to significant cost of after-treatment – higher localisation, operating leverage and in-group sourcing ensure OPMs are broadly intact. 

Exports remain flat on weak global demand: 

While HHP/LHP exports grew 6%/4% YoY, LHP witnessed sharp QoQ contraction of 12%. Demand from EU grew YoY, but dropped QoQ. APAC, LatAm were flattish, keeping Africa as the only market with YoY & QoQ growth. KKC has started reconfiguring the new CPCB-IV range for exports. 

Trim earnings on weak export outlook: 

Analysts of IIFL Capital Services cut FY24 EPS by 5%, led by flat export outlook for FY24 vs 15% growth forecasted earlier. KKC has been operating at 100% of manned capacities and operating leverage should aid when volumes bounce back towards H2FY24.