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Outperformance continues

Cummins India’s (KKC) 4QFY24 results exceeded ours and consensus estimates, with YoY growth of 20%/67%/76% in revenue/EBITDA/PAT. Revenue growth was driven by a sharp uptick in the industrial, powergen and distribution segments, while exports remained weak. Adjusted for one-off expenses of INR600m, EBITDA margin improved to 20.9%, driven by improved gross margin and consistent cost reductions. Domestic sales growth remained strong in powergen, with 30% YoY volume growth, sharp improvement was seen in the industrial segment on improved construction activity and continued momentum was witnessed in distribution segment. The company is cautious about exports and expects a recovery after 1-2 quarters. We remain positive on Cummins, considering 1) long-term demand drivers for the powergen segment, 2) its readiness for emission norm transition with a strong product portfolio, and 3) its ability to sustain margins. We raise our estimates to factor in improved sales and margin and revise our TP to INR4,100, based on 42x twoyear forward earnings. Continued re-rating in the valuation multiple is driven by strong demand and sharp margin improvement. Maintain BUY.

An all-round beat

KKC’s revenue of INR23.2b (+20% YoY) came in ahead of our and consensus estimates. The growth was entirely driven by domestic revenue (+38% YoY), while exports remained tepid (-30% YoY). Gross margin at 36% saw a healthy ~330bp YoY expansion, owing to a higher contribution of CPCB 4+ products in the revenue mix. EBITDA at INR5.4b grew 67% YoY/1% QoQ. Margin stood at a record 23.5% (+660bp YoY/230bp QoQ), aided by a sharp decline (of 32% YoY) in other expenses (4.4% vs. 7.7% of revenue YoY). The drop in other expenses was attributed to various factors such as rates and tax benefits, a favorable product mix, cost efficiency, commodity gains and a one-off benefit of INR600m pertaining to management cost charges. PAT grew 76% YoY/23% QoQ to INR5.6b, aided by a robust operating performance and 57% YoY growth in other income to INR2b. For FY24, revenue/EBITDA/PAT grew 18%/42%/46%, while OCF and FCF grew 58% and 53%, respectively.

Favorable demand environment for powergen segment

KKC has benefited from a strong demand environment in the powergen segment, with 30% YoY growth in volume. Demand was driven by data center, residential, commercial and manufacturing. Growth of Cummins was also ahead of the other players in the genset market. Nearly 33% of the sales in the powergen segment were led by CPCB 4+ products, which was less than 25% in 3QFY24. About 10% of powergen sales were driven by data centers. Inventory related to CPCB 2 is largely over in the system and, going ahead, sales will be driven by CPCB 4+ products. KKC is ready with its portfolio of CPCB 4+ products and would focus more on profitability than market share gains on the expected transition from Jul’24 onward.

Export recovery to take few more quarters

Export revenues remained weak during the quarter, with the biggest drop seen in Europe revenue, which halved, and other geographies like the Middle East, Africa, and Asia Pacific also declined. The demand environment could remain weak for another 1-2 quarters, as per the management, and will then start moving up. Among the main manufacturing hubs of Cummins Inc. – North America, China and India, we expect KKC to benefit from export-led demand from the parent. It will also continue to benefit from outsourcing opportunities from the parent for LHP genset requirements as well as customized products related to specific geographies such as South America.

Margin improvement to be driven by operating leverage benefit

EBITDA margin during the quarter stood at 23.5%. After adjusting for one-off in expenses of INR600m, EBITDA margin was strong at 20.9%, driven by gross margin improvement and operating leverage benefits. We expect a similar trend in gross margin going forward as the company intends to pass on higher costs of CPCB 4+ and would also focus on more localization which is currently at 70-75%. With various other cost optimization measures taken by the company, we expect other expenses to also come down. We expect EBITDA margin to improve to 20.4%/20.5% in FY25/FY26 vs. 19.7% in FY24.

Financial outlook

We expect a 19%/19% CAGR in revenue/PAT over FY24-26E. To account for improved gross margin and better operating leverage, we increase our margin estimates and expect EBITDA margin of 20.4%/20.5% over FY2025-26E

Valuations and view

The stock is currently trading at 48.5x/40.5x FY25E/FY26E EPS. We increase our estimates to factor in improved sales and margin. We revise the TP to INR4,100, based on 42x two-year forward EPS. The revision in the valuation multiple takes into account long-term sustainability of demand, nearly bottoming out exports, and better-than-expected margins. We maintain our BUY rating on the stock.

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