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Lumpy shipments amid structural debate

Boosted by large data centre-based deliveries and across-the-board demand revival, KKC beat top-line consensus forecast by a wide 30% with better OPMs. Powergen in domestic and exports is an outlier

In spite of no guidance (citing uncertainty), management’s commentary seems to be getting better sequentially, evident in strong reported growth. KKC’s H1 has already exceeded the past 2Y average number on both top line and margins, implying an improved demand scenario. Even as some part of conventional portfolio in India faces structural phase-out risk, KKC remains confident about long-term sustainability. Our current optimism stems from strong cyclical tailwinds. Retain ‘BUY’.

Q2/H1 beat amid structural challenge versus cyclical boost debate

Cummins’s Q2, even ex-lumpy order (USD20mn) and ongoing supply-chain constraints, implies healthy growth, largely at pre-covid levels. Power generation, high/low HP exports led growth in Q2/H1. Asia Pacific has sustained (China) for some time now, which suggests a favourable mandate shift, in our view, towards KKC. Margins despite a decade-low GM fared better than expected, largely led by operating leverage. While domestic for H1 seems robust, exports ex-large shipment is still close to pre-covid levels. KKC took price hikes over the past few quarters, but management indicated a lag given a sharper cost rise, which explains the pressure on its gross margin.

Key triggers/value drivers over 12–24 months; key risk to hypothesis

Momentum in exports (high margin) and large HP powergen remains key to both its top-line growth and OPMs. Any major policy shift w.r.t. conventional DG sets could further impact investor perception on KKC as new technologies/range is still unclear. At the current stage, while KKC is benefiting from cyclical volumes with new mandates, a bigger question is the long term positioning by the parent given sustainability is a clear global trend, and where KKC stands thereof.

Outlook and valuation: Demand bunching up; retain ‘BUY’

Solid H1 reinforces our confidence on consensus-leading estimates, suggesting stronger-than-expected bunching-up of demand (local, exports). We retain estimates and ‘BUY/SO’ with a TP of INR1,150 (vs INR1,115) rolling over to Mar-23E. We are removing KKC from top picks on 12M outperformance and rising policy risk.

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