PL Stock Report: Cummins India (KKC IN) - Q2FY24 Result Update – Healthy Q2; eyes on exports, CPCB-IV transition - HOLD

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

Rating: HOLD | CMP: Rs1,767 | TP: Rs1,811

Q2FY24 Result Update – Healthy Q2; eyes on exports, CPCB-IV transition

Quick Pointers:

♦ Industrial segment witnessed revenue growth of ~20% YoY, driven by strong traction in road construction segment.

♦ CPCB-IV products accounted for ~30% of domestic power gen sales.

Cummins India (KKC) reported decent quarterly performance with revenue declining 2.6%, due to de-stocking of inventory at dealer level and EBITDA margins expanding by 294bps YoY to 17.8%. EBITDA margin expansion was mainly due to softening commodities prices, stable product pricing and favorable product mix. Management expects H2 to be better driven by 1) continued demand & normalizing inventory levels in domestic powergen segment, 2) pickup in industrial segments especially construction sector and 3) continued demand from sectors such as data center, manufacturing etc. Export market is likely to be muted in near term owing to demand slowdown from key geographies such as Europe, North America, Africa etc. Management guided for double digit revenue growth with 100bps EBITDA margin improvement for FY24.

We expect Cummins’ outlook to remain intact given 1) strong domestic demand in power gen across sectors with CPCB-IV product witnessing traction 2) improving margin profile and 3) ample room for growth in distribution business. The stock is trading at PE of 38.9x/34.2x/30.4x FY24/25/26E. We roll forward to Sep’25E and maintain ‘Hold’ rating on stock with revised TP of Rs1,811 (Rs1,788 earlier) valuing it at 33x Sep’25E (35x FY25E earlier).

Gross margins expansion and higher other income drives PAT growth: Standalone revenue grew 2.6% YoY to ~Rs19bn (PLe of Rs22.4bn), likely due to slow down after pre-Buying of CPCB-IV implementation. Gross margins expanded 487bps YoY to 36.7% in Q2FY24 on low base. EBITDA grew 16.5% YoY to Rs3.4bn (PLe ~Rs3.5bn) with EBITDA margins expanding 294bps to 17.8% in Q2FY24 (vs PL estimate of 15.5%), partly impacted due to higher employee cost as % of sales (10.2% vs 8.2% in Q2FY23). Adj. PAT grew 30.2% YoY to Rs3.3bn (PLe ~Rs3bn) aided by higher other income (up 54.7% YoY to Rs1.3bn).

Industrial and distribution segment witnessed healthy growth: Domestic sales declined 1.9% YoY to Rs13.6bn, owing to decline in powergen business (down ~28% YoY to Rs4.9bn). However it grew for Industrial (up 20% YoY to Rs3bn) and Distribution business (up ~23% YoY to Rs5.5bn). Exports declined 4.5% YoY to Rs5bn, due to slow down across geographies such as Europe, North America, Middle East, Latin America etc. Low HP exports declined ~14% YoY at Rs2.0bn, while High HP exports were up ~13% YoY to Rs2.6bn.

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