Cummins India’s growth hinges on pricing trend, competitive intensity

The stock of Cummins India staged a recovery on Monday with over 6% gain after shedding nearly 7% since declaring the September quarter result on November 7. The company reported a strong double digit growth year-on-year in revenue and profit for the second quarter amid expansion in operating margin before depreciation and amortisation (EBITDA margin). However, uncertainty over the extent of demand, pricing of the diesel power generators under 800 Kilowatt-hour (kWh) capacity, which was buoyant in the first two quarters of the current fiscal year, and elevated valuation are some of the concerns for the stock.

The Central Pollution Control Board made CPCB IV plus compliance mandatory for generators under 800 KVA range since July 01. These standards, in a bid to improve air quality, prescribe the permissible levels of pollutants emitted by diesel generators. This regulatory push was a key driver in sales of gensets under 800 kWh during the first half of FY25 for Cummins India. In addition, the company also reported traction from data centre sector for its generators, which are in the above 800 kWh range and follow CPCB II norms.

On a standalone basis, revenue grew by 30.8% to Rs 2,448.4 crore while net profit rose by 37.2% to Rs 450.6 crore. The domestic business rose by a strong 47% to Rs 2,008 crore whereas exports dropped by 13% year-on-year to Rs 440 crore. Exports have shown sequential improvement over the past few quarters. The company reported improvement in orders from Latin America and Europe while the Middle East, Asia Pacific, and Africa regions remained muted.

The EBITDA margin expanded by 150 basis points to 19.3%. It however contracted sequentially by 100 basis points due to lower gross margin, which was in turn affected because of increased share of low-margin projects business. Under the projects segment, the company provides installation and commissioning of generators at data centre sites tailored to client demands. Growing exposure to this category of customers may increase the company’s scope for projects related revenue and in turn may affect the overall gross margins.

Cummins, which launched the gensets complying with the new emission norms a year ago, has so far built on the first mover advantage. But the competition is picking up, which is expected to affect the pricing of these products. In an analyst call after the result announcement, the company management cited that pricing will take at least three months to settle. This together with the product mix between above and below 800 kWh categories would be decisive factors.

Analysts are divided over the stock’s prospects. Elara Capital has an “accumulate” call on the stock with a target price of Rs 4,120 while IDBI Capital has a “buy” call with a target price of Rs 4,401. On the other hand, ICICI Securities has issued a “reduce” call and has revised the target price downwards to Rs 3,200 from Rs 3,280 earlier citing expensive valuation and downside risk to gross margin. The stock was traded at Rs 3,534 at the end of Monday’s trading on the BSE.