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Plant visit and interaction takeaways

Our recent interaction with the management of Cummins India Ltd (KKC) reinstated that demand has continued to remain strong for the powergen segment from key user industries. Additionally, other segments, such as distribution and industrial, continue to benefit from initiatives taken over the years to enhance customer reach and the overall positive macro environment. The company has transitioned well in the CPCB 4+ norm shift and expects the market to normalize in the coming quarters. With cost efficiencies and value addition in products, the company aims to maintain margins at similar levels as in 1HFY25. We continue to maintain our positive stance on the company and reiterate BUY with a TP of INR4,300, based on 45x two-year forward earnings.

Key investment thesis Powergen market pricing to mature in coming quarters while demand remains strong

KKC is well-positioned in the powergen market with its wide range of nodes across CPCB 4+ as well as the HHP portfolio. We expect the company to continue to benefit from 1) its leadership positioning in the genset market, where price discovery will play out in the coming quarters, with nearly 25-30% YoY higher prices seen so far for CPCB4+ products; 2) strong YoY demand momentum from areas such as residential, hospitality, manufacturing, healthcare as well as data center, which is witnessing multi-year growth; 3) the focus on controlling costs and maintaining margins, with incremental value addition despite a higher share of imported content and project business for certain nodes, particularly HHP; and 4) the normalization of channel inventory with market shift toward CPCB 4+. We maintain our estimates for KKC’s powergen segment and expect powergen revenues to clock a CAGR of 21% over FY24-27.

Industrial business witnessing healthy growth over past few quarters

The growth of the industrial segment has remained fairly strong of late. Infrastructure serves as the macro driver. The company provides engine solutions to construction equipment makers, compressors, and railways. In this segment, emission norms for construction engines (CEV-V regulations) will be implemented from 4QFY25 onwards, thereby creating pre-buying opportunities in 3QFY25 and potentially boosting demand further.

Distribution segment to continue witnessing stable and healthy growth

 The company’s distribution segment has posted a healthy 25% CAGR over the last three years. KKC has reoriented itself in this segment, which has started yielding results now. However, the company mentioned that there is still a lot more that can be done in this segment. As the installed base continues to rise, we expect KKC to benefit further with a stable 25% CAGR in its revenues over FY24-27.

Export markets recovering selectively

KKC’s exports were impacted in the last few years as Africa and Latin America slowed down after good growth. With exports already bottoming out since 3QFY24, we expect both YoY and QoQ growth to be visible in 3QFY25. KKC exports to the US, Europe, China, Latin America, and SE Asia and is witnessing the growth of select pockets in export markets.

Financial outlook

We maintain 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.

Valuation and recommendation

The stock is currently trading at 38.7x/32.9x on FY26E/FY27E EPS. We maintain our TP of INR4,300, based on 45x 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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