Strong demand outlook likely to power Cummins India's growth

While valuation is not cheap, positive brokerage views to support stock

Engineering and capital goods major Cummins India (CIL) delivered a strong performance in the third quarter of the 2022-23 financial year (Q3FY23) with fairly upbeat guidance thrown in.

The Q3FY23 revenues of Rs 2,180 crore, coupled with operating profit of  Rs 410 crore and a net profit of Rs 360 crore beat estimates handsomely. Revenue was up 26 per cent year-on-year (YoY) and 12 per cent on a sequential basis.  Operating profit was up 52 per cent over the year ago quarter and 42 per cent sequentially. 

The bottomline was up 50 per cent YoY and up 42 per cent quarter-on-quarter (QoQ).

CIL says it continues to see strong demand, both in domestic and export markets, and it is likely to see revenues grow at twice the nominal GDP rate (GDP plus inflation). Exports amount to about 25 per cent of revenues.

The power-generation segment has users like hospitality, commercial realty, manufacturing and data centres driving growth which hit 37 per cent YoY. As new stringent Central Pollution Control Board (CPCB-IV +) norms are due to be applied in mid-2023, the company expects a positive impact as users are forced to upgrade to meet emission controls. The industrials segment (up 18 per cent YoY) and distribution (up 22 per cent YoY) also did well.

The operating profit margin of 19 per cent saw 400 basis points (bps) expansion QoQ and 330 bps expansion YoY.

Ther remain persistent challenges in the global supply chain, as electronic components and specialised casting parts are still in short supply. CIL’s factories are running at 70-80 per cent utilisation and the order book is good for about two years at this level. It is looking to improve the green product mix. China recovery and persistent supply chain issues may, however, result in higher commodity inflation.

Also, some markets of Africa and Europe are seeing slowdowns but guidance on exports remains cautiously optimistic.

CPCB changes could mean significant increase in pricing according to guidance as this transition would require new design and changes in technology.  Pricing could jump by 30 per cent or more due to higher production costs.

Apart from this, the continued government focus on infrastructure creation will drive demand.  Construction, for example, is driving demand. Marine & defence grew off a low base by five times. Valuations for the company are fairly high.

The share price has also risen steadily and the stock is up 72 per cent in the last year. 

However, analysts are unanimously positive on the outlook with multiple ‘buy’ recommendations. Targets and valuations range between Rs 1,635 (just above current price of Rs  1,600) and Rs 1,820.