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Growth momentum loses steam

Cummins India’s (Cummins) revenue dropped 12% sequentially to Rs12.5bn, impacted by weak exports, domestic powergen segment. In addition to the advent of the second covid wave, issues in terms of supply-side logistics, weakness in certain export geographies impacted the overall momentum. Growth in next 2-3 months will be muted impacted by the second wave, and delay in terms of supply of components and raw materials etc. Domestic industrial and infrastructure demand and export momentum may gain traction post normalisation of operations. Government is likely to adhere to emission norm deadline and this can result in market consolidation in medium to long term. Factoring in muted nearterm demand and margin stress, we cut FY21E and FY22E earnings by 12.9% and 7.1%, respectively. Given the rich valuation and overall near-term growth and margin stress, we downgrade the stock to ADD from Buy with a revised SoTPbased target price of Rs822 (previously: Rs838).

Sequential slowdown in domestic and weak exports:

Powergen declined 17% QoQ in Q4FY21 impacted by 51% QoQ decline in LHP and 20% dip in MHP and heavy duty; HHP marginally grew 5% QoQ. However, due to low base in Q4FY20, powergen grew 26% YoY. Supported by construction and compressor growth offsetting weak demand from railways and mining, industrial segment grew 4% QoQ and 9% YoY.

High commodity prices impacted gross margins:

The steep rise in commodity prices led to 180 bps YoY increase in raw material proportion and the company has recently taken price hikes. Focus towards control on fixed overheads limited the overall slippage in margins. The impact of price hikes is likely to get reflected in the financials with a lag and hence, gross margins are expected to normalise going forward.

Export outlook is healthy albeit at a gradual pace:

Exports from Lat-Am, Middle East and Africa continue to remain weak, while North America and Europe are witnessing recovery. Demand from China and ASEAN countries had been healthy and continues to remain strong. The overall lull in the global economy under powergen is showing signs of turning around with a medium- to long-term perspective.

Downgrade to ADD on near-term growth and margin stress:

Given the near-term growth uncertainty and margin stress due to commodity prices and the recent run up in valuation, we downgrade the stock to ADD. We believe long-term growth potential is intact with the introduction of CPCB-IV+ norms. We revise our SoTP-based target price to Rs822 (previously: Rs838).

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