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Continuously beating estimates

Cummins India (KKC)’s 3QFY25 results exceeded our and consensus estimates, with 22%/12%/13% YoY growth in revenue/EBITDA/PAT. Revenue growth was driven by strong YoY growth in the powergen, industrial, and distribution segments, along with a 43% YoY growth in exports. EBITDA margin remained in line with management’s guidance. KKC was not impacted much by the demand pressure during 3QFY25, particularly in the low to mid-kVA ranges of gensets, and has benefited from the right product mix in the powergen segment, resulting in an 18% YoY growth. Export markets have been consistently improving QoQ since the last four quarters. We continue to remain positive on KKC, led by: 1) its strong market positioning across all segments, 2) its ability to sustain market leadership despite volatile demand, 3) its ability to sustain margins at higher levels, and 4) its ability to benefit from the fastgrowing data center market. We largely maintain our estimates and reiterate BUY on the stock with a TP of INR4,100.

Results much ahead of our estimates

KKC reported a strong result with a beat on all parameters. Revenue came in at INR30.9b, up 22% YoY/24% QoQ, (our est. INR26.9b). The company delivered good YoY growth, even on the high base of last year, which included a one-off element from the data center project delivery. We had anticipated a 6% YoY growth in revenues for 3QFY25. Domestic revenue at INR25.8b grew by 18% YoY, while exports at INR4.6b grew by 43% YoY. Exports have been continuously moving up since 4QFY24. Gross margin at 34.8% saw a contraction of 220bp YoY/100bp QoQ, while EBITDA margin for 3QFY25 stood at 19.4% versus our estimate of 19.5%. EBITDA margins were down YoY, mainly due to the one-off impact of large project delivery and provision reversal in 3QFY24. These margins are in line with management’s outlook of 19-19.5% margins for the full year. PAT came in at INR5.1b, 9% ahead of our estimates, driven by better-than-expected revenue growth and slightly lower tax rate (YoY). For 9MFY25, the company has delivered revenue/EBITDA/PAT growth of 19%/27%/26%.

Powergen segment benefits from high sales in HHP range

During the quarter, demand was particularly impacted in the low to mid-kVA ranges, and competitive intensity also increased, putting pressure on the prices. However, KKC’s product portfolio was not impacted much, and the company benefited from a larger share of 70% of sales coming from HHP during 3QFY25. Demand was primarily driven by data centers, mission-critical power equipment, as well as manufacturing, real estate, and other segments. FY25 is a transition year for the genset market, with price stability expected to become more evident from FY26 onwards.

Industrial segment performance remains strong

Industrial segment revenues grew by 25% YoY in 3QFY25, driven by growth in construction, railways, and mining. The company witnessed good demand in the construction and rail segments, particularly from diesel-electric tower cars, and even witnessed a high velocity of demand in the mining segment. KKC believes that these are tender-based businesses and may be lumpy across quarters. However, the company is optimistic on growth across these segments. We believe that with relatively slower spending from the government across roads, railways, etc, the industrial segment growth can be impacted to some extent in the future. We, thus, estimate a 17% CAGR for this segment over FY24-27E vs a 19% CAGR seen over FY21-24.

Distribution growth driven by higher penetration and improved offerings

KKC’s distribution segment revenue grew by 13% YoY in 3QFY25. This segment is benefiting from improved demand in the powergen segment for spares, services, and RECD devices, as well as increasing penetration of its products. We bake in a CAGR of 25% in the distribution segment revenue over FY24-27.

Exports continuously improving sequentially

Export revenues were up 43% YoY, mainly due to the low base of 3QFY24. Sequentially, exports improved by 5%. Exports to the Middle East and Latin America improved, while other geographies are yet to show meaningful improvement. Given the current geopolitical situation and import tariffs, the company is continuously evaluating the situation and will accordingly decide to tap opportunities, particularly for North America. We expect export revenue of INR17.7b/ INR19.9b/INR22.5b for FY25/FY26/FY27.

EBITDA margin benefiting from cost-saving measures despite lower GM

KKC has maintained EBITDA margins of around 19.4% despite gross margins witnessing a 100bp QoQ contraction. Gross margins are a function of the product mix across powergen, industrial, distribution, and even exports. The company intends to maintain EBITDA margins in a similar range and is continuously focusing on cost-saving initiatives to reduce overall costs.

Financial outlook

We largely maintain our estimatesand expect revenue/PAT CAGR of 17%/19% over FY24-27. We build in EBITDA margin of 19.6%/20.1%/20.1% for FY25/26/27. Our estimates factor in gross margin of 35.7% versus 36% in 9MFY25 as we expect some gross margin contraction to come on the normalization of price levels for CPCB 4+.

Valuation and view

The stock is currently trading at 33.5x/28.4x on FY26/27E EPS. We maintain our TP of INR4,100 on KKC based on 42x two-year forward EPS. Reiterate BUY rating on the stock.

Key risks and concerns

Key risks to our recommendation would come from lower-than-expected demand for key segments, higher commodity prices, increased competitive intensity, and lower-than-expected recovery in exports.

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