Shares of Cummins India Ltd have dropped 8% since the March quarter results (Q4FY24) despite a 48% year-on-year growth in Ebitda.
Key Points
- Domestic Revenue Growth: Domestic revenue grew by 38% across all segments.
- New Emission Norms: Upcoming emission norms starting in July have increased competition, affecting investor confidence. Orders for new products from exports could help boost growth.
- Product Segments: Cummins makes power generators and engines for various industries, including construction, real estate, and data centers. Data center revenue now accounts for about 10% of powergen revenue.
- Revenue Forecast: Management expects total revenue to grow by 12-16% in FY25.
Tailwinds and Risks
- Positive Factors: Cummins benefits from stringent emission norms, a recovering capex cycle, adoption of alternative fuels, and supportive manufacturing policies.
- New Emission Norms: The CPCB 4+ guidelines will enforce stricter emission standards starting next month. Cummins is ahead of the curve, with 33% of its sales in Q4FY24 from CPCB 4+ compliant products.
- Competition: This early advantage may be short-lived as competition increases. Price cuts to maintain market share could impact profitability.
Export Challenges
- Export Decline: Exports dropped 30% year-on-year in Q4FY24. Despite this, the management aims to generate 30-35% of revenue from exports, up from the current 20%.
- Future Growth: Cummins has started marketing CPCB 4+ compliant products globally and expects growth in the second half of the year.
Valuation and Forecast
- Stock Performance: The stock has gained about 96% over the past year and trades at a price-to-earnings ratio of 60 times FY24 earnings.
- Future Growth: JM Financial expects revenue and earnings per share to grow at an annual rate of 16% and 14%, respectively, over FY24-26.
