Q3FY24 Review: Cummins India: Continues to outperform

9 Feb 2024 , 11:25 AM

Cummins India continued to exude confidence in the domestic demand and cost competitive solutions fortifying its leadership stature post new emission standards (CPCB IV+). While exports sail through near term uncertainties on the pace of recovery in global demand, aggressive investments in customising solutions with targeted cost competitive products should drive faster rebound for KKC. Operating leverage and ability to sustain and enhance OPMs with varied mix has surprised street and continues to be a catalyst for earnings re-rating. Analysts of IIFL Capital Services raise FY24/25/26 EPS by 8/4/5%, resp. and believe there is sufficient headroom for further upgrade in FY25-26 if domestic market continues to hold up. Reiterate BUY with revised TP of ₹3,049 (44x FY26), implying 18% upside potential. 

Domestic demand anchors growth: 

Robust demand (20% volume growth, ex-DC project) led by Data Centers, infra and manufacturing, coupled with pick up in Industrial and Distribution segments charged domestic sales to jump 51% YoY. CPCB II continues to dominate sales mix while KKC sold 3,000 nos. of CPCB IV+ products in H2CY23 despite 100% roll-out due from Jul’24. Notwithstanding 25% YTD growth, KKC is confident of sustaining double digit growth in FY25 as well. 

Exports bottom out, but expect gradual recovery: 

Weakness across key global markets (esp. EU, US, ME) and disturbances in the Red Sea exacerbated the seasonal destocking. Mgmt believes exports have bottomed with initial stocking trends in early CY24, but the pace to recovery needs to be watched out. Further, aggressive targets on new launches from India under the Fit-for-market 3.0 will steer higher share for KKC in the global supply-chain over medium to long-term. 

Earnings upgrade continue: 

Ebitda margins beat by strong volume growth with favourable mix, gains from price transmission amidst benign commodity costs and on-going cost actions may consolidate a bit from the current elevated levels in the near term. But KKC strives to sustain GM at 34%+ levels even as one transits towards CPCB IV+ regime in FY25. Key risk remains sustained weakness in exports.