Shares of Cummins India Ltd have declined 8% since its March quarter results (Q4FY24) despite a significant Ebitda growth of 48% year-on-year.
Momentum across all segments led to a 38% growth in domestic revenue. However, investors appear to be more concerned about the increasing competition in the segments affected by the new emission norms that will come into effect from July. Orders for newer products from exports could provide the required push.
Cummins manufactures power generators (powergen) and engines, catering to the demand from the growth of user industries such as construction, commercial and residential realty, and data centres.
Data centre revenue, a new, high-growth segment, now accounts for about 10% of powergen revenue. Management has guided for total revenue growth of 12-16% in FY25.
“The company has multiple tailwinds, namely, stringent emission norms, capex cycle recovery, adoption of alternative fuels with lower carbon footprint, revival in industrials and support for manufacturing policies,” says a HDFC Securities report.
However, there are potential downside risks. The new guidelines issued by the Central Pollution Control Board (CPCB), called CPCB 4+, with more stringent emission norms, take effect next month. After that, companies cannot sell powergens that do not meet the new norms.
The good part is that Cummins is among the early movers. Products meeting the CPCB 4+ norms accounted for about 33% of sales in Q4FY24, up from around 25% in Q3FY24. These products are fetching better margins because of the complexity of design, higher usage of electronic components and limited number of players in this segment currently. A better product mix was a key factor behind the sharp uptick in last quarter’s Ebitda.
This advantage, though, is expected to be short-term until competition catches up. The management expects to gain clarity on the pricing level by October. If Cummins cuts prices to maintain its market share in anticipation of elevated competition, it could hurt profitability.
Additionally, export revival is delayed. Exports fell by 30% year-on-year in Q4FY24. Despite near-term adverse impacts from global economic uncertainties, the management remains hopeful of generating 30-35% of revenue from exports, which currently accounting for about 20%.
Cummins has already begun marketing CPCB 4+ compliant products in the global market and expects to see some growth in the second half of the year.
Meanwhile, with risks lingering, valuations appear rich after the stock’s striking run over the last one year, gaining about 95%. The stock trades at a price-to-earnings ratio of 60 times FY24 earnings. In comparison, JM Financial Institutional Securities expects revenue and earnings per share to grow at a compounded annual growth rate of 16% and 14%, respectively over FY24-26.
