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Mixed Q1; Price hike to cushion margin headwinds

We revised our EPS estimates by +0.4%/+3.7% for FY27E/FY28E factoring in healthy domestic demand, strong data centre momentum and improving pricing actions, partially offset by near-term margin headwinds. Cummins India (KKC) reported a mixed quarterly performance, with revenue growing 18.1% YoY to Rs33.7bn, driven by robust domestic Power Generation demand (+35% YoY) to Rs14.2bn. However, EBITDA margins remained under pressure (-346 bps YoY to 18%) due to elevated commodity inflation, higher freight costs and supply chain disruptions, with the benefit of price hikes taken in Q2 expected to support gradual margin recovery over the coming quarters. Domestic Power Generation remained supported by manufacturing, infrastructure, mining and robust hyperscaler-led data centre demand, while Distribution expected to grow ~20% YoY , aided by rising service penetration and an expanding installed base. Industrial demand remained broad-based across railways, construction, marine and mining. Management remain cautious on exports due to weakness in the Middle East; however, enquiry momentum across Europe and AsiaPacific remains encouraging. With healthy enquiry momentum, expanding service opportunities, improving localisation and sustained investments across data centres, railways and mining, Cummins remains well positioned for profitable long-term growth despite near-term commodity and geopolitical headwinds. The stock is currently trading at a P/E of 54.7x/45.7x for FY27/28E. We upgrade our rating from ‘Reduce’ to ‘Hold’ given the recent correction in stock price and the medium-term demand outlook remaining encouraging, aided by the growing data centre opportunity, healthy demand in domestic powergen, and a higher mix of distribution segment. We value the stock at a PE of 45x Mar’28E (same earlier) with revised TP of Rs 5,323 (Rs5,133 earlier).

Long-term view intact:

We expect KKC’s outlook to remain intact given the

1) strong domestic demand in Powergen across sectors with CPCB 4+ and Data Center products witnessing traction

2) stable margin profile

3) ample room for growth in the Distribution business.

Weak Gross Margins impact profitability:

Standalone revenue Standalone revenue increased by 18.1% YoY to Rs33.7bn (PLe: Rs33bn). Gross margin contracted by 351bps YoY to 33.5% (PLe: 36.4%) due to higher input cost. EBITDA decreased by 1% YoY to Rs6.2bn (PLe: Rs7.1bn) with EBITDA margin contracted by 346bps YoY to 18% (PLe: 21.6%) due to lower gross margin. PBT(ex. Extra ordinaries) decreased by ~1% YoY to Rs7.2bn (PLe: Rs8.4bn) due to higher interest cost (+47% YoY to Rs39mn). Adj.PAT decreased by 2.2% YoY to Rs5.4bn (PLe: Rs6.3bn) due to higher effective tax rate of 24.7% (+120bps YoY)

Strong Powergen momentum drives overall revenue:

Domestic sales decreased by 22.2% YoY to Rs28.4bn primarily due to growth in Powergen (+35% YoY). Distribution business (+14% YoY) and the Industrial business sales grew (+10% YoY). Domestic Powergen revenue mix stood at 68%/9%/17%/5% for HHP/HHD/MHP/LHP. Exports sales remained flat YoY at Rs5.2bn. Export mix stood at 35%/57%/9% for LHP/HHP/Spares.

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