PL Stock Report: Cummins India (KKC IN) - Management Meet Update - Near term domestic demand intact - HOLD

Cummins India (KKC IN) - Amit Anwani - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: HOLD | CMP: Rs1,727 | TP: Rs1,788

Management Meet Update - Near term domestic demand intact

We met with Mr. Ajay S. Patil (CFO) and Mr. Abhijit Sarkar (Head Treasury) of Cummins India Ltd. who highlighted that demand scenario continues to remain strong in domestic market with continued sales of CPCB-II (time extended till Jun’24) and CPCB-IV variant products from regions like NCR. However, in exports market demand remains healthy only in selected geographies. The imported components of CPCB-IV variant product will be localized and accordingly aid in improved product margins. Management maintained its guidance of 2x GDP growth over next couple of years (double digit sales growth in FY24) and guidance of 100bps improvement in margins, given sharp focus on cost management.

Cummins’ outlook remains intact given 1) strong domestic demand in power gen across sectors 2) improving margin profile, and 3) ample room for growth in the distribution business. We estimate FY23-25E Revenue/ PAT CAGR of 12%/11.4%. The stock is trading at PE of 38.1x/33.8x FY24/25E. Maintain ‘Hold’ rating on stock with TP of Rs1,788 (same as earlier), valuing it at 35x on FY25E EPS (same as earlier).

Key management meet takeaways

§ Demand scenarios continues to remain strong for domestic power gen market with continued sales of CPCB-II and CPCB-IV variant products in geographies like NCR. Demand is seen in sectors such as Data center, Infrastructure, Commercial & Residential Real Estate, Railways etc.

§ Extended timeline for sale of CPCB-II variant product till Jun-24: Witnessed healthy pre-buying of CPCB-II products in Q1FY24. Company is ready with new products (CPCB-IV) to meet demand.

§ Exports: Long term outlook continues to remain healthy, while in short term management remains cautiously optimistic for geographies like Africa, Middle East, Latin America and APAC. Initiatives such as Fit to Market is gaining traction. Except North America, Cummins supplies products across globe.

§ Guidance Maintained: Guiding for double digit sales growth in FY24; expecting top line to grow at 2x GDP growth for next 8-10 years. Maintaining guidance of 100bps improvement in margins, given sharp focus on cost management. Focus will be on increasing wallet share from existing customers and addition of new customers.

§ CPCB-IV products: Over a period of time will localize the components which are currently imported for CPCB-IV products, thereby improving margins. Some region such as NCR has adopted CPCB-IV products quickly.

§ Industrial Segment: Demand continues to remain healthy from sectors such as Railways, Mining’s, infrastructure etc.

§ Distribution & Services: Seeing strong traction from last 8 quarters, company will continue to focus on expanding its services business.

§ Pricing Action: Has taken price hikes in last 18-24 months to offset raw material price rise.

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