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Moving in the right direction across segments

Cummins India’s (KKC) 2QFY25 results exceeded our and consensus estimates, with 31%/42%/37% YoY growth in revenue/EBITDA/PAT. Revenue growth was driven by strong YoY growth in the powergen, industrial and distribution segments, while exports remained weak. EBITDA margin expanded to 19.3%. Revenue growth improvement in powergen and industrial segments was far ahead of our estimates, driven by strong demand and price hikes. Export markets have been consistently improving QoQ for the last four quarters. We maintain our positive stance on KKC, led by: 1) its strong market positioning across segments, 2) positive underlying demand drivers, 3) the ability to sustain margins at higher levels, and 4) the ability to benefit from the fast-growing data center market. We fine tune our estimates and reiterate BUY on the stock with an unchanged TP of INR4,300.

Results ahead of our estimates

KKC reported a strong result in 2QFY25, with a beat on all parameters. Revenue came in at INR24.9b, up 31% YoY/8% QoQ (our est. INR22.4b). Domestic revenue at INR20b grew 47% YoY, whereas exports at INR4.4b declined 13% YoY but improved 13% QoQ. Powergen/Industrial/Distribution grew by 84%/35%/20%. Gross margin at 35.8% contracted 90bp YoY/200bp QoQ. This was offset by lower-than-expected employee costs, which led to EBITDA growth of 42% YoY to INR4.8b (8% beat). Margin came in at 19.3%, up 150bp YoY but down 100bp QoQ. PAT stood at INR4.5b (+37% YoY), 10% ahead of our estimates, aided by revenue and EBITDA outperformance and 22% YoY growth in other income to INR1.6b. For 1HFY25, revenue/EBITDA/ PAT grew 16%/40%/35%, while FCF increased by 6% YoY to INR5.9b. For 2HFY25, we expect revenue/EBITDA/PAT to clock 22%/13%/5% growth.

Powergen segment benefiting from strong demand and price hikes

KKC has been benefiting from its strong market positioning in the powergen market and has gained market share in the current transition. With a range of nodes already available in the market for the last one year, the company has gained versus other smaller players, which faced range availability concerns during the quarter. We expect the current revenue run rate of INR8-9b in the powergen segment to improve in the coming quarters, driven by the benefit of improved demand, price hikes as well as the fast-growing data center market. In the near term, we can see increasing supplies in the powergen market from other players as well as its impact on pricing. However, over the medium to long term, we expect improved demand and increased indigenization to support revenues and margin.

Distribution segment benefiting from increased penetration

KKC’s distribution segment revenue grew by 20% YoY during 2QFY25. This segment is benefiting from improved demand in the powergen segment and consequently increased requirements for spares and warranties. The company is also benefiting from increasing penetration of its products. We bake in a CAGR of 25% in distribution segment revenue over FY24-27.

Industrial segment to witness emission norm change from 4QFY25

Industrial segment revenue continued to clock robust performance, with 35% YoY growth in 2Q, driven by sustained traction in the construction space. Notably, emission norms for construction engines (CEV-V regulations) will be implemented 4QFY25 onward, thereby creating pre-buying opportunities in 3QFY25, which will further boost demand. We estimate a 14% CAGR for this segment over FY24-27E.

Exports have been continuously improving sequentially

Export revenues, though down 13% YoY, were up 13% sequentially. Europe and Latin America saw healthy demand, while other geographies such as APAC, Africa, and the Middle East were muted. Given that CPCB 4+ products are technologically advanced, the company is well-prepared as and when emission norms in these geographies become more stringent. We expect export revenue of INR17.4b/ INR19.6b/INR22.1b for FY25/FY26/FY27.

Financial outlook

We fine tune our estimates and expect a CAGR of 18%/20% in revenue/PAT over FY24-27. We build in EBITDA margin of 20.4%/20.5%/20.5% for FY25/FY26/FY27. Our estimates factor in gross margin of 35.6% (vs. 36.7% in 1HFY25), as we expect some gross margin decline owing to the normalization of price levels for CPCB 4+.

Valuation and view

The stock is currently trading at 41x/35x on FY26E/FY27E EPS. We maintain our TP of INR4,300, based on 45x two-year forward EPS. Maintain 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 commo

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