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Genset channel check

Our channel checks with genset players indicate that demand is fairly strong across key segments and that players are ready for the emission shift. Inventory levels for CPCB 2 based gensets will start coming down from Apr‘24 onward as production for CPCB 2 based gensets has already stopped. Demand may see minor disruption during election months; however, underlying long-term growth drivers remain intact even after minor disruption. Pricing is higher by 20-40% across nodes and we expect it to be passed on to customers fully from Jul’24 onward. Companies are already taking initiatives for exporting new products, which will start reflecting in few quarters. We maintain our positive stance on key players in the genset industry and prefer KOEL over Cummins at the current valuations.

Key highlights from our interaction with genset players

Demand remains strong

Our channel checks with genset industry players indicate that: 1) domestic demand momentum remains strong across low-to-mid kVA ranges, driven by strong activity across manufacturing, hospitality, residential and commercial construction; 2) some part of demand momentum is also contributed by pre-buying in low-to-mid kVA range ahead of the norm implementation, particularly from residential and commercial segments. Low-to-mid kVA range forms nearly 70-75% of overall genset market; 3) HHP range forms the remaining market, and data centres remain a key growth driver for HHP genset, which is growing at a faster rate than low- to midrange gensets; 4) Currently CPCB 2 products contribute to nearly 80% of the genset sales and the remaining comes from CPCB 4+, particularly from NCR. Inventory levels for CPCB 2 will start coming down from Apr’24 onward as production will then shift to CPCB 4+ ahead of the implementation timeline in Jul’24; 5) Most government contracts are already mandating the usage of gensets based on the latest norms; however, government contract-based demand may see minor disruption during election months.

Higher pricing takes into account technological shift

We see only limited possibility of a pricing war for CPCB 4+ products as the main motive of all players is to cover the costs first, which are up by nearly 20-40% owing to the technological shift. Hence, the buffer to take a hit in margins is limited. Secondly, volume market shares of KOEL, Cummins, and Mahindra Powerol have increased in the past few years, thereby negating the possibility of aggressive competition to gain market share. These three players form nearly 70% of volumes in the market. Thirdly, strong demand may continue to support higher pricing unlike the last transition when demand was weak.

Players with strong distribution network to benefit

New players or foreign players may not have as strong a distribution network as Cummins and KOEL have, and hence it will be an advantage for these players despite higher product prices. Aftermarket demand for CPCB 4+ will start kicking in over the next 6-9 months after the launch.

Export markets seem to have bottomed out

Cummins’ exports were impacted by a demand slowdown across its key export markets such as the US, Europe, Latin America and the Middle East. The company is trying to grow exports via fit-for-market products and the penetration of CPCB 4+ products. KOEL targets to grow its exports in MHP and HHP range and is setting up GOEMs in key regions. The export markets in less than 125 kVA range are highly commoditized, with a larger share of Chinese imports and thus, both these companies are focusing on higher ranges for exports.

Factors to watch out for in next few quarters

Genset market will remain mixed over the next few months owing to several events such as election impact, transition to new norms, and expected private capex recovery in select sectors. We would watch out for the following key factors in coming quarters: 1) the impact of election-related disruption in genset demand during May-Jun’24, 2) the implementation of CPCB 4+ norms in Jul’24 and demand shift from higher nodes of CPCB 4+ (700-750 kVA) to cheaper nodes of CPCB 2 in higher kVA categories such as 800-1000 kVA; 3) price stabilization in the next one year as operating leverage kicks in.

Valuation and recommendation

Cummins is currently trading at 35x P/E and KOEL is trading at 19x P/E on Mar’26 estimates. We maintain our positive stance on key players in the genset industry and prefer KOEL over Cummins at the current valuations.

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