PL Stock Report: Cummins India (KKC IN) - Q1FY24 Result Update - Healthy performance; pre-buying drives growth - HOLD

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

Rating: HOLD | CMP: Rs1,796 | TP: Rs1,788

Q1FY24 Result Update - Healthy performance; pre-buying drives growth

Quick Pointers:

§ Domestic Power Gen sales grew 76% YoY to Rs8.7bn, driven by pre-buying.

§ Export growth was muted at ~3% YoY due to softening of global demand.

We revise our FY24/25E EPS estimates by +7.0%/+2.2%, factoring in strong domestic & pre-buying demand, and revised guidelines on CPCB IV+ transition, which has been shifted to June 2024. Cummins India (KKC) reported strong revenue growth of 31.0% and EBITDA margin expansion of 274bps YoY to 15.4%, due to commodity softening and operating leverage. Robust demand is seen across the board, such as in data centers, realty, pharma, manufacturing, and hospitality. Meanwhile, export markets such as Europe, Americas, and Asia Pacific have slowed down.

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/EBITDA/PAT CAGR of 12.0%/14.1%/11.4%. The stock is trading at PE of 39.6x/35.2x FY24/25E. We downgrade the rating to ‘Hold’ from Accumulate with a TP of Rs1,788 (Rs1,750 earlier), valuing it at 35x on FY25E EPS (same as earlier), given the recent run-up in the stock price.

Strong sales drive operating leverage and profitable growth: Standalone revenue grew 31.0% YoY to Rs22.1bn (PL estimate of Rs19.2bn), driven by pre-buying. Gross margin expanded 143bps YoY to 32.5% due to softening commodity prices. EBITDA grew 59.3% YoY to Rs3.4bn (PL estimate of Rs2.7bn), with EBITDA margin rising by 274bps to 15.4% (PL estimate of 14.3%), on account of operating leverage (employee costs and other expenses as a % of sales fell 44bps and 87bps YoY respectively). Adj. PAT grew 50.6% YoY to Rs3.2bn (PL estimate of Rs2.5bn) owing to a strong operational performance, but was slightly dragged down by higher interest costs at Rs77mn (vs Rs19mn in Q1FY23).

Power gen and distribution businesses record robust growth: Domestic sales grew 43.0% YoY to Rs16.4bn (76.7% of total sales), driven by power gen (up 76.0% YoY to Rs8.7bn) and distribution (up 28.4% YoY to Rs5.3bn). Industrial sales were flat YoY at Rs2.4bn. Exports rose only 2.7% YoY to Rs5.0bn (23.3% of total sales), as Europe, North & Latin America, and Asia Pacific have started to decline while Middle East and Africa have flattened. Low HP exports were almost flat YoY at Rs2.0bn, while High HP exports were up 5.2% YoY to Rs2.4bn.

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