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Demand remains strong across segments

Cummins India (KKC)’s 1QFY25 results exceeded our and consensus estimates, with 4%/37%/33% YoY growth in revenue/EBITDA/PAT. Revenue growth was driven by strong growth in the industrial and distribution segments, while powergen and exports remained weak. EBITDA margin expanded to 20.3%, driven by improved gross margin and consistent cost reductions. The decline in powergen revenue was in line with our estimate; however, industrial and distribution segments outperformed our estimates. Export markets too appear to have bottomed out with a sequential recovery seen during 1QFY25. We continue to maintain our positive stance on Cummins, led by: 1) its strong market positioning across all 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 maintain our estimates and reiterate BUY on the stock with a TP of INR4,300.

Beat across all parameters

Cummins reported a better-than-expected performance in 1QFY25, with revenue/EBITDA/PAT growth of 4%/37%/33% YoY. The company’s revenue was 11% ahead of our estimates. The strong EBITDA margin trajectory is maintained with margins at 20.3%, witnessing a jump of nearly 490 bps YoY. This was driven by 520bp gross margin improvement. We had estimated an EBITDA margin of 19.9% for the quarter. This resulted in a PAT outperformance too at INR4.2b. Domestic sales grew 12% YoY, while exports declined 22% YoY.

Demand remains positive for powergen, with near-term caution on transition

KKC is positive on the long-term demand scenario for the powergen market, as it continued to benefit from the power deficit situation in the country and increasing demand for backup power. Several segments, such as manufacturing, data center, infrastructure, and commercial realty continued to provide support to demand. The decline in powergen segment’s revenue in 1Q was due to the high base of last year because of pre-buying. During the quarter, CPCB 4+ contributed nearly 30-40% of powergen sales. With channel inventory of CPCB 2 nearly over, KKC can benefit from its wide range of product portfolio in the CPCB 4+ market, which is in effect from 1st Jul’24. KKC has an edge over other smaller players in the LHP category in terms of technology, offerings, and distribution network. It is already a leader in the HHP category, where demand is improving from the fast-growing data center market. We expect 2QFY25 to be a little sluggish in demand on account of the transition to CPCB 4+, while we anticipate the genset market to stabilize from 3QFY25.

Strong growth in the industrial segment driven by improved construction activities

The industrial segment has continued its growth momentum and saw a sharp growth of 55% YoY during 1QFY25. This was fueled by growth seen in all key segments such as construction, railways, mining, marine, and defense. Demand continues to remain strong for these segments. Growth in the construction segment is linked to road infrastructure, the railways segment is linked to improved traction of new products introduced by the company, and the mining segment is linked to overall growth in metals and mining sector. Defense is a long gestation segment but is witnessing strong demand.

Distribution segment has the potential to continue growing at a fast pace

The distribution segment reported a growth of 23% YoY, led by higher demand for services, spare parts, warranty, and AMCs. This segment reported a CAGR of nearly 25% over FY21-24, and the company expects a similar growth trajectory to continue for nearly a decade. This is because KKC is gaining from improved penetration across Tier 2 and Tier 3 cities, better services, and better quality. We expect it to gain further on the demand for CPCB 4+ related services, which would start getting reflected after two years. We expect the distribution segment to continue reporting 25% CAGR over FY24-27.

Exports started recovering sequentially

Export revenues, though down 22% YoY, were up 13% YoY. Sequential improvement in exports has come from geographies like the Middle East and Africa, while other regions such as Europe, South East Asia, and Latin America stood largely at the same levels of 4QFY24. Export markets are currently struggling with low demand in key countries and thereby witnessing dumping in the select markets. KKC is trying to position its products well in each market so as to capitalize as and when demand recovers. We expect export revenues of INR17.4b/INR19.6b/INR22.1b for FY25/FY26/FY27.

Financial outlook

We maintain our estimates and expect revenue/PAT CAGR of 18%/21% over FY24- 27. We maintain our margin estimates of 20.4%/20.5%/20.5% for FY25/26/27. Our estimates factor in a gross margin of 35.6% vs. 37.8% in 1QFY25, as we expect some part of the benefit of low-cost RM inventory to wane with the increase in commodity prices of late, particularly copper and aluminum.

Valuation and view

The stock is currently trading at 42x/35x on FY26/27E EPS. We maintain our target price of INR4,300 on KKC based on 45x Jun’26E EPS. Reiterate BUY.

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 a lower-than-expected recovery in exports.

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