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Demand aids transition; normalization next

Sales up 16%; revenue growth guidance in double digits in FY24-25

Cummins India (KKC IN) management reaffirmed FY24-25 revenue growth target in the double digits (2x of India’s GDP growth), backed by pickup in domestic infra spend. Q3 net revenue rose 16% YoY to INR 25.3bn, well ahead of estimates, led by robust domestic demand across sectors, such as data centers (DC), commercial & residential real estate, infra, and manufacturing. Top line beat was partly due to execution of a non-recurring large order in DC.

Domestic revenue up 36%, led by powergen volume and pricing

Domestic revenue rose 36% YoY to INR 21.8bn. Segment-wise, powergen revenue surged 51% YoY, led by ~20% volume growth amid robust realization of primary pre-orders during the energy transition phase, better pricing from CPCB IV+ gensets, up 20-30%, and higher contribution from high horse power (HHP) gensets. Distribution revenue rose 26% and industrials by 20%. KKC sold 3,000 CPCB IV+ gensets in Q3, contributing ~25% to powergen revenue. End-markets, such as compressors, construction, and rail aided growth in Industrials.

Exports down 40% YoY in Q3; weakness likely to bottom

The slowdown in the global economy amid geopolitical conflicts and inflation dented international business across regions. Revenue from the EU fell 59% YoY, the Middle East by 53%, the US by 47%, the AU by 41%, and Asia-Pacific & Latin America by 20% each. Exports revenue fell 40% YoY to INR 3.3bn in Q3. The Red Sea crisis led to a 2-4 week delay in deliveries. However, early signs of recovery are visible post Q3, as per management, and weakness could bottom.

Valuation: downgrade to Reduce with a higher TP of INR 2,320

We raise our EPS by 15%/10%/12% for FY24E/FY25E/FY26E, respectively, due to rise in domestic powergen and margin expansion, led by product mix and pricing, with lower exports demand. We downgrade to Reduce from Accumulate with a higher TP of INR 2,320 from INR 1,835 on 35x (from 32x) December 2025E P/E, as the stock has outperformed the Nifty by 19% in the past month. Expect an earnings CAGR of 19% during FY23-26E with a ROE of 24% and a ROCE of 23% during FY24-26E. Downgrade risk exists if the government focuses on clean energy rather than diesel gensets.

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