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Genset demand remains strong in 2QFY25

Genset channel checks

Our channel checks with genset players indicate that demand has remained strong in 2QFY25, barring initial few days of norm shift. Demand is driven by channel inventory filling, along with fresh demand from other user industries. The festive season from Sep’24 to mid-Nov’24 too will keep genset demand strong. Some part of the demand, which was earlier driven by pre-buying from the residential and commercial segments, moderated in Jul-Aug’24. Prices are higher by 20-40% and may remain high until the festive season, after which we can expect some moderation. Thus, our initial reading indicates that volumes have likely improved YoY but may have declined 10-12% QoQ. Overall revenue growth for 2QFY25 will be supported by price increases too. Export markets are growing selectively and an uptick will start reflecting in a few quarters. We maintain our positive stance on key players in the genset industry and see Cummins India (KKC) gaining market share in the current scenario, with strong demand in the below-800kVa and HHP segments. We maintain BUY on both KKC (TP: INR4,300) and KOEL (TP: INR1,540).

Key highlights from our interaction with genset players

Demand remains strong in 2QFY25

* Continuity of healthy demand in 2QFY25: 1QFY25 had seen strong pre-buying ahead of the implementation of CPCB 4+ norms, which resulted in bulk buying too in 1QFY25. With an increase in new genset pricing by nearly 20-40% across nodes, the initial expectation was that demand would cool off in the short term. However, contrary to our expectations, our channel checks suggest that demand has remained firm across regions even after these price hikes.

* Sub-segments going slow: Sub-segments, such as real estate, MSMEs etc., had done significant pre-buying during FY24, and hence these segments would remain weak and resume purchases closer to the completion date of their existing projects.

* Demand-supply mismatch: In some of the regions, demand was quite strong and supplies were not able to keep pace with the demand as it was earlier expected that demand could come off after price hikes. Along with this, some smaller players were late in their product launches, while bigger players like KKC and KOEL were ready with their products since last year.

* Sequential impact on volumes: Volumes are higher on YoY basis for players that are ready with their products. Sequentially, there can be a negative impact of 10-12% on volumes due to pre-buying. However, on both YoY and QoQ basis, prices are higher by 20-40%. Hence, it can offset the sequential decline in volumes for 2QFY25 with a net gain in powergen revenues for players like KKC.

* HHP demand is driven by fast-growing data center market: Data centers remain a key growth driver for HHP genset, which continued to grow at a faster rate than low- to mid-range gensets. KKC is a leader in the HHP segment and continues to gain from strong demand in this sub-segment.

Higher pricing of CPCB 4+ genset is accepted by the market currently

Higher prices in the CPCB 4+ regime seem to have been accepted by the market on account of the continuation of strong demand. Prices are currently higher by 20-40% across various nodes for CPCB 4+ and now the market comprises only CPCB 4+ products. A discount of 4-5% is currently being offered by dealers on bigger brands on pricing. With expectations of strong demand in the upcoming festive season too, prices can remain firm in the near term and may witness some moderation after Diwali.

Export markets to recover selectively in few quarters

KKC’s export revenues were down 22% YoY in 1QFY25 but were up by 13% QoQ. Sequential improvement in exports for KKC came from geographies like Middle East and Africa, while other regions such as Europe, South East Asia, and Latin America stood largely at the same levels of 4QFY24. These export markets are currently struggling with low demand in key countries, thereby witnessing dumping in select markets. For KOEL, exports in 1QFY25 grew YoY to INR1.1b. KOEL currently has a small base of exports and aims to increase them with a different approach for each country. The investment in the Wildcat brand is part of the strategy to gain entry in the US market.

Factors to watch out for in next few quarters

Demand has remained strong in most parts of the country despite price hikes of 20- 40% across nodes. In the coming quarters, we would be watching out for 1) demand sustainability at the current levels, 2) any furtherimprovement in genset demand during the festive season, 3) stability of price hikes, 4) continuity of HHP demand from the data center market, and 5) recovery in export markets.

Growth strategies of players in the current market

Based on our discussions with players and channel partners in the industry, market share gains will be visible for players that were well-timed in their launches and have already tested waters in the last one year. With a wide range of models across nodes, KKC seems to be gaining market share in the current transition period. KOEL is focusing on margin improvement and it has improved the share of sales from midhigh kVA nodes. Smaller players like Ashok Leyland, Eicher and Greaves are offering lower prices in LHP nodes and trying to gain market share, particularly in below250kVa nodes. Node availability is limited for MNC players like Baudouin and Perkins and they are targeting mostly nodes above 400kVa.

Valuation and recommendation

KKC is currently trading at 42.3x P/E and KOEL is trading at 26.2x P/E on Mar’26E EPS. We value KKC at 45x P/E on two-year forward estimates and KOEL at 29x P/E on two-year forward estimates for core business. We maintain BUY on both KKC (TP: INR4,300) and KOEL (TP: INR1,540) as they are ready to tide over the emission norm transition.

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