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Beneficiary of strong data center growth

Our recent meeting with Cummins management suggests a strong data center-led demand scenario for HHP gensets. This will continue to support growth despite the nonHHP segment growing at a slower pace. Volatility in RM prices suggests more price hikes will be needed in the coming months over and above the recent price hike taken by the company in Jul’26. We believe the growth drivers for Cummins remain: 1) data centers for powergen, 2) railways, mining, defense, and marine for industrial despite construction being weak, 3) higher installed base and customized offerings in distribution, and 4) Europe and Asia Pacific regions for exports despite the weak Middle East market. We trim our estimates by 4.7%/2.5%/2.2% for FY27/FY28/FY29 to factor in the near-term pressure on margins. We reiterate our BUY rating with a revised TP of INR6,400 (vs. INR6,500) based on an average of 45x P/E and DCF on two-year forward estimates.

Powergen segment growth boosted by data centers

Powergen sector demand is being led by residential, commercial, manufacturing, rental, dark stores, and data centers. Data center demand is surging, and Cummins is one of the preferred players in the data center space. Cummins caters to this demand via 1) QSK60 engines, which are made locally and cater to colocation-based data centers, and 2) QSK78/95 engines for hyperscalers, particularly for 2MW and 3MW requirements via procurement from the parent entity. The company does not see the need to expand capacities for higher-range QSK78/95 engines, as the parent entity is already doubling up on capacity. Within the powergen segment, the company has taken a price hike to pass on higher RM pressure and is constantly evaluating cost components for more such actions, as the recent price hike did not fully cover the cost pressures. We maintain our estimates and expect the powergen segment revenue CAGR of 19% over FY26-29. This is mainly driven by higher growth in the DC-led share of revenue.

Mixed outlook for the Industrial segment

Industrial segment demand is led by railways, mining, defense, and marine, while construction activity is a bit subdued. The company has already delivered propulsion packages for DETCs and associated systems for power car applications in passenger coaches and is working on complex projects in the marine segment for shipyards. In the mining segment, the company is getting orders from large OEMs (ex-BEML too) and is actively working on the defense segment for various products. The construction segment remains relatively slow and monsoon-dependent, although tunnel construction and infrastructure activity should support a gradual pickup. The compressor is currently going through a down cycle. The company expects slower growth in construction and compressors to be partly offset by higher growth in other segments. We overall expect the industrial segment to clock a 12% CAGR of FY26-29.

Distribution segment to grow on higher installed base

The distribution segment benefits from 1) a large and increasing installed base, 2) customized services through the DBU unit, 3) spare parts, retrofit solutions, repowering programs, and 4) inbuilt telematics offerings for CPCB4+ gensets. The company also launched its Battery Energy Storage System (BESS) solution in FY26, expanding its portfolio into energy storage applications and enabling participation in opportunities related to grid resilience and renewable integration. We expect the distribution segment to clock a CAGR of 21% over FY26-29.

Exports recovering, although exports to the Middle East remain volatile

The company has deepened its presence in Africa, the Middle East, and Europe through low-horsepower solutions, while HHP growth in exports is led by strong demand from the realty and manufacturing segments for markets like Europe, Latin America, the Asia Pacific, and China. While other geographies are doing well, KKC has maintained a cautious stance on exports to the Middle East, which forms nearly 2%/3% of total revenue in FY26/1QFY27. KKC is also preparing for the evolving global emission requirements, with product offerings already aligned to Euro 6 standards, and the company gearing up for Stage 7. The company has clarified that related party approvals are to take into account any future requirement for a lumpy order. It does not indicate a guaranteed order or assured sales. We project export revenue to clock a 16% CAGR over FY26-29.

Valuation and recommendation

The stock currently trades at 52.8x/41.5x/35.1x P/E on FY27/FY28/FY29E EPS. We reiterate our BUY rating on the stock with a revised TP of INR6,400 (vs. INR6,500), based on an average of 45x P/E and DCF on two-year forward estimates.

Key risks and concerns

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

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